Global Economics q4

Global
ECONOMICS Macro
Global Economics
Q4 2010
Principal contributors
Emerging elation, Western stagnation

Stephen King
Chief Economist
HSBC Bank plc
+44 20 7991 6700
stephen.king@hsbcib.com
Stephen is the HSBC Group’s Global Head of Economics and Asset Allocation research. He joined the company
in 1988, having previously worked as an economic adviser at the UK Treasury. Stephen is a regular economics
High debts and excessively low inflation...
commentator on television and radio and has written a weekly column for The Independent, one of the UK’s leading
newspapers, since 2001. Stephen’s first book, Losing Control: the Emerging Threats to Western Prosperity is now ...point to Western stagnation...
available from Yale University Press.
Karen Ward
...with the debt-lite emerging nations in the driving seat of global growth
Senior Global Economist
HSBC Bank plc
+44 20 7991 3692
karen.ward@hsbcib.com
Karen joined HSBC in 2006 as UK economist. In 2010 she was appointed Senior Global Economist with responsibility
for monitoring challenges facing the global economy and their implications for financial markets. Before joining
HSBC in 2006 Karen worked at the Bank of England where she provided supporting analysis for the Monetary Policy
Committee. She has an MSc Economics from University College London.
Global Economics
Madhur Jha
Global Economist
HSBC Bank plc
+44 20 7991 6755
madhur.jha@hsbcib.com
Madhur is HSBC’s Global Economist. She joined HSBC London in 2007 as an ABS generalist to cover the EMEA
markets. She has gained experience in emerging markets economics research from her stints as Fixed income/FX
strategist at a leading research consultancy in London and at the largest private sector bank in India, where she also
worked in FX derivative sales.
By Stephen King, Karen Ward and Madhur Jha
Disclosures and Disclaimer This report must be read with the disclosures and analyst
Q4 2010
certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it
Macro
Global Economics abc
Q4 2010
Summary
Emerging boom, western headache

For those who’ve turned a blind eye to Japan’s ongoing difficulties, the challenge now facing western
policymakers may seem unfamiliar. The West is suffering not from recession but, instead, from ongoing
stagnation. All the talk about double-dips misses this crucial point. Despite the massive economic
stimulus in recent years, the level of economic activity remains disturbingly depressed. As a result, there
is no prospect of any monetary tightening in the foreseeable future. Indeed, the debate has now returned
to the prospect of further easing. That, in turn, creates a challenge for the far-more-buoyant emerging
nations, where policymakers will have to work out what to do with the massive capital inflows triggered
by very low interest rates in the West.
HSBC growth and inflation forecasts

GDP ____Wrestling with debt (2 July 2010) ____ ______________ Latest _______________
2010 2011 2010 2011
World 3.5 3.0 3.5 2.9
Developed 2.4 1.9 2.4 1.8
Emerging 6.9 6.2 7.2 6.2
US 3.1 2.6 2.7 2.5
UK 1.2 1.9 1.4 1.4
Eurozone 1.2 1.3 1.6 1.3
Japan 3.0 1.0 3.0 0.7
Brazil 7.2 5.1 7.5 5.1
Russia 4.7 3.0 3.8 3.5
India 8.8 8.6 8.8 8.6
China 10.0 8.9 10.0 8.9
Inflation ____Wrestling with debt (2 July 2010) ____ ______________ Latest _______________
2010 2011 2010 2011
World 2.3 2.2 2.3 2.2
Developed 1.2 1.2 1.3 1.2
Emerging 5.6 5.4 5.6 5.4
US 1.4 1.1 1.6 0.9
UK 3.0 3.4 3.2 2.9
Eurozone 1.5 1.4 1.6 1.6
Japan -1.0 -0.4 -1.1 -0.5
Brazil 5.3 5.1 4.9 5.4
Russia 6.4 9.9 7.0 9.5
India 10.2 4.7 10.7 5.4
China 3.1 2.5 2.9 2.5
Source: HSBC
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Macro
Q4 2010
The lack of any decent economic response in the western world reflects the unusual nature of the economic
challenges facing policymakers. This is proving to be more a nominal rather than real economic crisis. With
interest rates at zero, further declines in inflation will lead to undesirable increases in real interest rates. For
debtors, life threatens to become a lot less comfortable. The rational response to excessively low inflation at
the household or corporate level is to repay debt with even greater urgency. The consequent loss of demand,
however, will increase the risks of outright deflation, making a sustained recovery even less likely.
The absence of inflation is the key reason why policymakers continue to emphasise the fragile nature of
economic recovery and why unconventional policies remain at the top of the agenda. Central bankers need
to persuade the public that (i) they have the tools to avoid deflation and (ii) the tools will be used. However,
should the public remain intent on repaying debt, it’s difficult to see quantitative easing and the other
sources of monetary magic achieving a great deal. The western world is falling into a “Japan-lite” trap.
Let battle commence

In all the hype about unconventional policies, a crucial part of the deleveraging story is oft-forgotten.
This is ultimately a battle between creditors, debtors and different interest groups within society. In
Europe, the battle is between Mediterranean debtors and Northern European creditors. Globally, there’s a
huge gulf between the interests of American debtors (who demand a renminbi appreciation) and Chinese
creditors (who worry about a dollar depreciation). And, within the US, companies have only been able to
cope with debts by slashing costs, thereby shifting the burden of economic adjustment onto households.
The political aspects of this story cannot be underestimated. It may be that high US unemployment stems
from the trigger happy “hire and fire” approach of the US corporate sector, but it is politically convenient to
blame the US labour market’s difficulties on foreign powers. China is now seen in parts of Washington as
public enemy number one, a perception which can only increase the chances of a protectionist nightmare
unfolding in the coming months. Meanwhile, although US companies are now awash with cash, few seem
intent on converting that cash into productive investment. Surviving is now more important than thriving.
We need to think in levels - it will require much stronger growth than we are forecasting to get the US economy back on its previous path
USDbn USDbn
18000 18000
15000 15000
12000 12000
9000 9000
6000 6000
97 00 03 06 09 12
Nominal GDP Trend
Source: Thomson Reuters Datastream, HSBC calculations

‘Trend’ is proxied by the average growth between 1997 and 2007.
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Q4 2010
Oh to be debt-free…
While the western world is struggling to cope with the multi-year hangover stemming from its earlier
excesses, the emerging world remains very buoyant, seemingly able to decouple from the West’s
economic traumas. Having borrowed far too much in the 1990s, most emerging nations have now learnt
their lesson. Absent the need for aggressive deleveraging, emerging nations are revelling in a world of
strong supply-side growth prospects and a very low global cost of capital. Moreover, the spread of
deflation pressures in the western world appears to have limited the rise of inflation pressures in the
emerging world.
Is this too good to be true? In a word, yes. The challenge for emerging nations lies in preventing
economic success from turning into an uncontrollable boom. We examine some of the options available
to emerging nation policymakers, ranging from currency appreciation through to the widening use of
capital controls. None of the options is perfect but at least policymakers are aware of the dangers and
keen to avoid a repeat of the errors made in the 1990s.
Betting on the emerging world

With the West suffering from Japanese-style stagnation, emerging nations appear to offer by far the best
prospects for economic growth in the years ahead, a conclusion very much reflected in our forecasts. But
while we are enthusiastic about emerging nation equities, there are other way to take advantage of the
growing discrepancy between the west and the rest. China’s dominant position in commodities suggests
energy, metals and food prices are more likely to rise than fall in the years ahead. Pressure on real
exchange rates should lead to continued out-performance from emerging currencies. Western companies
either outsourcing to cut costs or investing in emerging consumer demand should also stand to benefit in
the years ahead. All the while, however, the risks cannot be ignored: excessive inflation, asset price
bubbles and western protectionism could all upset the emerging market applecart, even if only on a
temporary basis.
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Q4 2010
4
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Q4 2010
Contents
Key forecasts 6 Country and territory sections
US 40
Monetary & fiscal policy Canada 42
Mexico 43
assumptions 7 Brazil 44
Argentina 46
Emerging elation, Western Chile 47
Eurozone 48
stagnation 8 Germany 50
Economics upended 8
France 52
Bernanke’s closer to the helicopters… but will it help? 11
Italy 54
Sharing the pain 12
Spain 56
The recent US recession in context 13
UK 58
This isn’t making deleveraging easy 15
Norway 60
An emerging inflation problem? 16
Sweden 61
Headline inflation has been below expectations in the East 18
Switzerland 62
Excess liquidity may find its way into asset prices again 19
Hungary 63
Conclusions 21
Poland 64
Romania 65
Global economic forecasts 23 Russia 66
GDP 24 Turkey 68
Consumer prices 26 Egypt 70
Short rates 28 Saudi Arabia 71
Long rates 29 UAE 72
Exchange rates vs USD 30 South Africa 73
Exchange rate vs EUR & GBP 31 Japan 74
Consumer spending 32 Australia 76
Investment spending 33 New Zealand 77
Exports 34 China 78
Industrial production 35 India 80
Wage growth 36 Hong Kong 82
Budget balance 37 Indonesia 83
Current account 38 Malaysia 84
Philippines 85
Singapore 86
South Korea 87
Taiwan 88
Thailand 89
Vietnam 90
Disclosure appendix 94
Disclaimer 95
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Q4 2010
Key forecasts
Key forecasts
__________________ GDP_________________ _______________ Inflation _________________
2009 2010f 2011f 2012f 2009 2010f 2011f 2012f
World (nominal GDP weights) -2.2 3.5 2.9 3.3 1.0 2.3 2.2 2.2
World (PPP weights) -0.5 4.8 4.0 4.2 1.9 3.2 2.8 2.8
Developed -3.5 2.4 1.8 2.3 0.0 1.3 1.2 1.2
Emerging 1.9 7.2 6.2 6.2 4.7 5.6 5.4 5.3
North America -2.6 2.8 2.4 3.2 -0.3 1.6 1.0 1.1
US -2.6 2.7 2.5 3.2 -0.3 1.6 0.9 1.1
Canada -2.5 3.1 2.1 2.3 0.3 1.7 1.6 2.0
Latin America -3.4 6.0 4.5 4.6 6.2 7.7 7.6 6.9
Mexico -6.5 4.3 3.8 4.5 5.3 4.2 4.0 3.4
Brazil -0.2 7.5 5.1 4.5 4.9 4.9 5.4 4.6
Argentina -2.7 7.8 4.5 5.0 14.8 26.5 21.7 18.7
Chile -1.5 5.0 5.5 4.5 0.3 1.6 3.3 3.2
Western Europe -4.1 1.6 1.3 1.6 0.6 1.8 1.8 1.7
Eurozone -4.0 1.6 1.3 1.6 0.3 1.6 1.6 1.7
Germany -4.7 3.3 1.9 1.8 0.2 1.1 1.2 1.3
France -2.5 1.6 1.5 1.8 0.1 1.8 1.8 1.6
Italy -5.1 1.0 0.7 1.0 0.8 1.6 1.9 1.7
Spain -3.7 -0.4 0.6 1.5 -0.2 1.6 1.5 1.7
Other Western Europe -4.3 1.7 1.5 1.8 1.5 2.4 2.3 1.8
UK -4.9 1.4 1.4 1.8 2.2 3.2 2.9 1.8
Norway -1.3 0.5 1.4 2.1 2.2 2.3 1.7 2.5
Sweden -5.1 4.0 2.9 2.5 -0.3 1.1 2.1 2.5
Switzerland -1.9 2.9 1.7 1.8 -0.5 0.7 0.7 1.5
EMEA -3.4 3.8 3.8 3.8 7.4 5.9 6.8 6.7
Czech Republic -4.0 2.1 2.7 2.8 1.0 1.5 2.4 2.4
Hungary -6.2 1.0 2.7 3.0 4.2 4.8 3.2 3.4
Poland 1.8 3.2 3.9 3.4 3.5 2.5 2.9 3.3
Russia -7.9 3.8 3.5 3.0 11.7 7.0 9.5 8.5
Turkey -4.7 6.8 3.9 4.3 6.3 8.7 7.7 7.0
Ukraine -15.1 5.5 4.0 5.1 16.0 8.5 8.4 9.0
Romania -7.1 -2.2 0.1 2.2 5.6 6.0 5.5 4.6
Egypt* 4.7 5.1 6.0 6.1 10.0 10.7 10.4 11.0
Israel 0.7 3.9 3.4 3.6 3.9 2.3 3.0 2.7
Saudi Arabia 0.1 3.6 4.4 4.8 5.1 5.5 6.6 7.0
UAE -2.9 2.0 3.9 4.5 1.8 1.0 2.7 4.0
South Africa -1.8 2.6 3.5 3.1 7.2 4.7 5.5 6.0
Asia-Pacific 0.7 6.1 4.7 5.0 0.8 2.0 1.8 2.0
Japan -5.2 3.0 0.7 1.5 -1.3 -1.1 -0.5 -0.4
Australia 1.2 3.4 4.1 3.9 1.8 3.0 3.1 2.9
New Zealand -0.5 1.4 2.6 3.7 2.1 2.3 4.0 2.3
Asia ex Japan 5.7 8.8 7.6 7.4 2.6 4.6 3.7 3.8
China 9.1 10.0 8.9 8.6 -0.7 2.9 2.5 2.2
Asia ex Japan & China 2.4 7.4 6.1 6.1 5.1 5.8 4.4 4.9
Hong Kong -2.8 5.4 4.7 4.5 0.6 2.4 2.9 3.3
India 6.7 8.8 8.6 8.0 10.9 10.7 5.4 7.1
Indonesia 4.5 6.1 6.4 6.3 4.8 5.2 6.0 5.2
Malaysia -1.7 7.3 5.2 5.0 0.6 1.9 2.7 2.2
Philippines 1.1 5.9 4.6 5.6 3.3 4.2 4.5 4.7
Singapore -1.3 13.2 4.6 6.0 0.6 2.2 2.7 2.8
South Korea 0.2 6.0 4.0 4.6 2.8 2.7 2.9 3.0
Taiwan -1.9 7.3 4.9 3.8 -0.9 1.2 1.6 1.6
Thailand -2.2 7.9 5.3 4.1 -0.8 3.5 3.6 3.0
Vietnam 5.3 7.0 7.5 7.8 7.1 8.7 8.5 8.0
Notes: Calendar year; except for * which is based upon Egyptian fiscal year (July-June); Global and regional aggregates are calculated using chain nominal GDP (USD) weights
Source: HSBC
6
Macro
Q4 2010
Monetary & fiscal policy

assumptions
Monetary policy
Q1 2010 Q2 2010 Q3 2010f Q4 2010f Q1 2011f Q2 2011f Q3 2011f Q4 2011f
US
Targeted Fed funds 0.00 to 0.25 0.00 to 0.25 0.00 to 0.25 0.00 to 0.25 0.00 to 0.25 0.00 to 0.25 0.00 to 0.25 0.00 to 0.25
Japan
Overnight call rate 0.10 0.10 0.10 0.00 0.00 0.00 0.00 0.00
Eurozone
Repo rate 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00
UK
Bank rate 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50
Canada
Overnight rate 0.25 0.50 1.00 1.00 1.25 1.75 2.00 2.00
Source: HSBC.
Fiscal policy
Country 2010 2011
US The 2010 fiscal year ends in September. The deficit for the year is likely to be USD1.30tn, Public resistance to fiscal stimulus programs that might increase the federal budget
only slightly lower than the USD1.42tn recorded in 2009. The deterioration in federal deficit has grown steadily in the past year. Still, there is little political appetite for
finances has been split almost evenly between an increase in expenditures and a shortfall taking action to reduce the deficit. Tax increases are widely resisted while program
in revenues. In 2007, prior to the recession, expenditures were running at about 20% of spending cuts are opposed by the parties that would be directly affected. We expect
GDP while revenues were close to 19%. In the current fiscal year, expenditures are close a deficit of about USD1.2tn for fiscal year 2011. That should amount to about 7.8%
to 24% of GDP while revenues have dropped to 15%. of GDP, down only modestly from the 9.0% expected for 2010.
Japan The economic policy of the new government will proceed as planned in the initial Given the new strategies for economic growth and fiscal consolidation by Kan’s new
budget which should raise real GDP growth by 0.3ppt in FY2010. Kan declared that administration, we expect the impact of these strategies would be almost neutral in
he intends to make a supplementary budget against the downside risks of the 2011 as the expected spending would be mainly financed by cutting other spending
economy, but scale and contents are still uncertain. or by increasing taxes.
Eurozone Despite the increasingly austere budgets being delivered by countries such as Fiscal tightening in the Eurozone as a whole will begin in 2011 with even the less
Greece, Spain and Ireland, fiscal policy will be roughly neutral in 2010 as a result of fiscally-challenged countries such as Germany starting to rein in spending.
the ongoing stimulus in other countries, Germany in particular. Together with the Tightening is currently expected to amount to about 1% of Eurozone GDP in 2011
ongoing weakness in nominal GDP growth, this implies a further deterioration in the but more aggressive tightening will be required if the debt-to-GDP ratio is to stabilise
budget deficit to about 7% of GDP. in the next four years or so.
Germany The fiscal burden arising from the recent recession will peak in 2010, driving the No major tax reform/ tax relief will take place due to the need for a continued fiscal
deficit to 3.9% of GDP. The structural deficit of the federal government should be consolidation. Approved austerity measures and the strength of the upswing should
around 3.5% in 2010 (2011: 2.9%); this development is in line with new established scale the budget deficit back to 3.2% of GDP. The economic burden following from the
German debt break rule. consolidation measures for 2011 will not exceed 0.5% of GDP.
France Our upward revision to GDP raises our forecast of fiscal revenues, and job creation Our upward revision to inflation raises nominal GDP and the government is planning
could limit the rise in unemployment benefits. Therefore the public deficit could be to reduce the tax credit of EUR10bn. As a result, the public deficit could narrow to
smaller than expected at 7.7% of GDP ( 8.6% initially forecasted). Public debt could 6.1%. But the public debt should continue to rise to 86% in 2011 after 82.4% in
reach 82.4% of GDP incl. the part of “grand loan” planned for 2010, ie EUR5bn. 2010. Announcements about a public spending decline could not be enough to
stabilize the debt-to-GDP ratio before 2013.
Italy A number of micro measures, financed by the revenue delivered by a tax amnesty, Tough new measures amounting to EUR24bn (1.6% of GDP) are planned for 2011-
are scheduled for 2010, but fiscal policy will be roughly neutral. 12.These include a three-year public-sector pay freeze, a gradual reduction in public
sector headcount and cuts in local government spending. There are also plans for a
gradual increase in the retirement age.
UK Taking into account the plans inherited by the new government and those outlined in The pace of fiscal consolidation will quicken appreciably in FY2012 with an overall
the 22 June emergency budget, a fiscal tightening of close to half a percentage point tightening of GBP41bn being implemented, helping net borrowing fall to an
of GDP will be implemented in the current fiscal year. The most visible measure will estimated 7.5% of GDP from the expected 10 per cent in the previous year. Tax
be a hike in the rate of VAT to 20% in January 2011. increases are expected to account for more than 40% of this fiscal effort.
Canada Canada’s Ministry of Finance is on track for a CAD49.2bn deficit for FY2010/11 in For FY2011/12, the deficit is expected to have shrunk to just slightly less than
line with projections laid out in the March budget for 2010 and down from the CAD28bn.The MOF expects the debt-to-GDP ratio to peak at slightly more than 35%
CAD54bn projected for FY2009/10. We expect to see fiscal balance return by in FY2011 and decline to 32% by FY2015. Overall, Canada’s debt-to-GDP ratio is
FY2014/15. running at half the average of the G7 nations.
Source: HSBC
7
Macro
Q4 2010

 High debts and excessively low inflation…
 …point to Western stagnation…
 …with debt-lite emerging nations in the driving seat of global growth
Economics upended economic activity, thereby pushing inflation down Stephen King
Economist
even more. The process then repeats itself. HSBC Bank Plc
It’s not just time for unconventional policies. The +44 207 991 6700
moment has arrived for unconventional thinking. In the US and much of Europe, inflation is now stephen.king@hsbcib.com
Standard economic theory suggests changes in too low. Indeed, the Federal Reserve confirmed Karen Ward
Economist
economic policy lead to changes in real economic as much following the Federal Open Markets HSBC Bank Plc
activity – employment, retail sales, investment and Committee Meeting on 21 September, saying that +44 207 991 3692
so on – within the space of a year or so. Then, “Measures of underlying inflation are currently at
Madhur Jha
after a further 12 months, changes in the real levels somewhat below those the Committee Economist
HSBC Bank Plc
economy begin to have an impact on inflation. judges most consistent, over the longer run, with +44 207 991 6755
its mandate to promote maximum employment and madhur.jha@hsbcib.com
1. Core inflation is trending lower in the US and Germany
price stability.”
%Yr Core inflation %Yr
6 6
Admittedly, the UK is an exception to this overall
5 5
trend, in our view a reflection of the lagged impact
4 4
of sterling’s 2008 collapse in pushing up domestic
3 3
2 2
prices. For the most part, however, central bankers
1 1 are confronted with similar challenges. Against a
0 0 background of high debts, acute deleveraging and
90 92 94 96 98 00 02 04 06 08 10 incipient deflation, how can they help generate a
US Germany sustained economic recovery?
Note:West Germany prior to 1997. This challenge is remarkably reminiscent of the

Source: Thomson Reuters Datastream
problems facing the Japanese economy over the
For the Western world, this chain of events is last twenty years. After years of denial, western
policymakers are finally accepting that their
being turned upside down. With policy rates at
zero, further declines in inflation (Chart 1), by economies are showing Japanese-style symptoms.
James Bullard, President of the St Louis Federal
driving up real interest rates, will have serious
consequences for real economic activity. Reserve, for example, has admitted that the US is
at risk of settling into a low growth, low inflation
Households and companies will be incentivised to
repay debt with even greater enthusiasm.
Accelerated deleveraging will, in turn, constrain
8
Macro
Q4 2010
and low interest rate steady state akin to Japan’s inflation a little too high whereas, for the
multi-year economic stagnation.1 developed world, the rebound is disappointing and
inflation worryingly low.
This is all the more surprising given the scale of
the policy stimulus on offer over the last three These divergent trends create varying policy
years. Unlike the Japanese, who were slow to challenges. Keeping a lid on the effects of
stimulate their economy at the beginning of their excessive capital inflows will occupy the minds of
stagnation, western policymakers have delivered policymakers in the emerging world while, in the
massive interest rate cuts, huge increases in developed world, policymakers will have to work
government borrowing and increasingly out how to engineer a period of deleveraging
unconventional monetary measures. Yet, despite without succumbing to deflation. It won’t be easy.
all their efforts, the outcome has been
We’ll look at the challenges facing emerging
disappointing, at least when benchmarked against
nations a little later. For now, we’ll focus on the
post-war economic cycles.
ongoing problems in the developed world. These
Typically, deep recessions are followed by steep are as much political as they are economic,
recoveries while mild recessions are followed by because both creditors and debtors have reasons to
shallow recoveries. By any standards, the worry. And it is these concerns which, arguably,
2008/09 recession was remarkably steep. The are contributing to heightened risk aversion in
subsequent recovery has, unfortunately, been very financial markets, reflected most obviously in the
shallow. Put another way, the level of economic extraordinarily-elevated price of gold and the yen.
activity in the western world remains very
2. Deficits are extraordinary…
depressed, despite all the stimulus measures
% GDP Gov ernment bala nces in 2010 % GDP
provided in recent years. 0 0
The most obvious explanation for the failure of -3 -3

western economies to achieve “lift-off” after the
-6 -6
Great Recession is that debt levels are still too
high. An easy way to demonstrate this is to -9 -9
consider the much better response of many of the -12 -12

Portugal
Ireland
Italy
UK
US
France
Greece
Spain
Japan
emerging economies during this crisis. Their

Germany
rebounds have been much more dynamic, largely

because they haven’t been encumbered by the
Source: OECD
debt problems of old. Indeed, it’s almost as if the
economic world has been turned upside down: the
scourge of excessive borrowing, once considered
to be the preserve of the emerging nations, is now
very much a problem for the western world. This
reversal of fortune is reflected in our forecasts: for
the emerging world, growth is buoyant and
1
‘Seven Faces of “The Peril”’, James Bullard, Federal
Reserve Bank of St. Louis Review September-October Issue.
9
Macro
Q4 2010
3. …though for countries in peripheral Europe this reflects levels seen at the height of the sovereign crisis
funding pressures that are forcing extreme fiscal tightening
earlier in the year, governments may be forced into
% GDP Primary balances in 2010 % GDP
even greater fiscal tightening if only to repay the
2 2
now-higher interest on existing government debt.
0 0
-2 -2 5. Problems in the European periphery have resurfaced
-4 -4
% 5y r gov ernment bond y ields %
-6 -6 6 15
-8 -8
-10 -10 4 10
Portugal
Ireland
Italy
UK
France
Greece
Spain
Japan
Germany
2 5
Note: Calculated from underlying primary balance and underlying balance data. 0 0
Primary balance is deficit excluding interest payments
Source: OECD Jan-10 Apr-10 Jul-10
Ireland Spain
Portugal Italy
4. It’s still yet to be seen whether fiscal cuts do significantly Greece (RHS)
improve debt-to-GDP ratios (or simply declines in GDP)
Source: Reuters
% GDP Gov ernment net debt in 2010 % GDP
125 125
Unfortunately as Janet Henry, our Chief European
100 100
Economist, notes in Eurozone periphery: And now
75 75
for the hard part (21 September 2010), life is
50 50 about to get significantly tougher for Ireland and
25 25 the Mediterranean countries. This year’s big
0 0 deficit reductions in Portugal, Greece, Ireland and
Portugal
Ireland
Italy
UK
US
France
Greece
Spain
Japan
Germany
Spain have been achieved mostly by cutting

capital spending. The more politically challenging
Source: OECD cuts are those which impinge on public sector
staff. And all of this is yet to come. Moreover, as
The pressures vary depending on reserve currency their economies weaken, there’s a growing chance
status and access to a monetary printing press. that inflation in the periphery will sink to still
For example, both the US and Greece have lower rates, reducing nominal GDP and, thus,
terrible fiscal positions but only Greece is under boosting ratios of deficits and debt to GDP.
immediate pressure to deliver swingeing budget
Meanwhile, despite the fact that the government
cuts, largely because creditors know that, in the
bond yields in parts of the Eurozone periphery are
absence of cuts, the alternative is a default (Charts
back near previous peaks, purchases of
2-4). Should Greece deliver the cuts required to
government debt by the ECB have dwindled.
stabilise its government debt/GDP ratio in the
years ahead, the burden of adjustment will mostly It might simply be that the ECB is so fearful of
have fallen on domestic debtors rather than imminent inflation that is does not deem such
(mostly foreign) creditors. intervention consistent with meeting its inflation
target. More likely, however, is that the ECB
And what is true of Greece is also a problem for
recognises the increasingly political nature of
many other European nations. With funding costs
such actions (how can a monetary authority easily
for parts of the periphery now back above the
decide how much of each country’s bonds to
10
Macro
Q4 2010
buy?). The European Financial Stability Fund seems now they could be willing to take further
(EFSF) is nearly up and running to support action merely if things don’t get any better.
governments short of funds, allowing the
As yet it is unclear what form a new dose of QE
eurozone politicians to decide who has access and
will take. But whilst this may provide some short
importantly on what conditions. But this is likely
term support to financial markets, a more worthy
to involve considerable political wrangling,
question is whether ‘QE2’ will solve the
adding to uncertainty in financial markets.
economy’s fundamental problems. Our view is
Of course the other consequence of the ECB’s that by pushing treasury and mortgage rates
unwillingness to utilise the printing press lower, QE2 would merely ease the burden of
aggressively is euro strength. By limiting the deleveraging, rather than curing the underlying
supply of euros, the risk of renewed euro ailment. If your mortgage is a little cheaper each
appreciation against a tarnished dollar cannot be month, it helps you pay off that debt, but it’s still
ruled out. Unfortunately, as peripheral bond going to take some time.
yields return to crisis levels, European economies
One way around this – discussed in Stephen
no longer have the safety valve of a falling
King’s recent “An Unconventional Truth”
currency to encourage their growth prospects.
(September 2010) – is for central banks to shift
The ECB appears reluctant to alter its stance. This away from inflation targeting towards price level
may eventually have to change, following Japan’s targeting. By doing so, central banks would
recent experience. With economic prospects effectively promise to raise interest rates only
looking as stagnant as ever; the upward march in when inflation had moved above target following
the yen against the dollar has become too much to a period of excessively low inflation (thereby
bear, forcing the Ministry of Finance to intervene. implying that real interest rates would fall in the
In these circumstances, the world is at risk of future, encouraging more longer term borrowing
descending into a “beggar-thy-neighbour” today). But, as King admits, there are two
outbreak of currency wars (a risk referred to by problems with this approach. First, most central
Guido Mantega, Brazil’s finance minister as bankers are reluctant to make such a step.
reported by the Financial Times on 28 September). Second, the benefits of persistently-low interest
rates have an irritating habit of leaking abroad.
Bernanke’s closer to the
helicopters… but will it help? Of course one of the other effects of quantitative
easing in the US is that by increasing money supply,
But what about the US? Relative to individual
the burden of adjustment is shifted from US
eurozone nations, there’s a much wider range of
domestic debtors to foreign creditors via a much
available options.
weaker dollar. While the US is happy to talk about
The minutes from the latest Fed meeting suggest the need for a stronger renminbi on trade grounds,
that certain members of the Federal Reserve are it’s probably more accurate to think instead about a
growing impatient with the lack of vigour so far weaker dollar on “quasi-default” grounds.2 A
demonstrated by the recovery and by the
persistence of disinflationary pressures. Whereas
previously they had indicated that things would 2
Interested readers should look at Stephen King’s article in the
have to get materially worse for further action, it
Financial Times on 20 September 2010, “Beijing is right to
ignore the currency pleas” along with follow-up letters from
11
Macro
Q4 2010
weaker dollar makes foreign creditors to the US Sharing the pain

worse off for the simple reason that they will mostly
Taking a closer look at the recent US experience
have lent to the US in dollars and not in their own
shows that the rise in unemployment has little to
currency. If quantitative easing is to work without
do with exchange rates and much more to do with
raising domestic inflation in the US, it will have to
the aggressive behaviour of US companies during
perform its magic through the currency. Turning on
this latest economic downswing. In Japan,
the printing press is, therefore, an attempt to shift the
companies bore the brunt of the economic
burden of adjustment from domestic US debtors to
adjustment. Their high debts led to persistent
foreign creditors. It works both by making the
deleveraging, starving Japan of the investment
creditors worse off (the renminbi value of assets
that might have triggered a stronger economic
denominated in dollars goes down) and by
revival. US companies, in contrast, have coped
improving conditions for domestic debtors (a weaker
with their debts relatively easily, largely because
dollar should lift US nominal GDP and, thus, raise
they have used the recession to slash costs and,
the denominator in the key deficit and debt ratios.)
thus, boost their margins. Their gains, however,
The political narrative accompanying this story is have been matched by losses for American
simple enough. Both the Administration and households. Like Japan, the US will have to
Congress argue that China and others are unfairly deliver plenty of deleveraging but, in the years
using undervalued exchange rates to deliver ahead, the adjustment will come
mercantilist objectives. This unfair competition, the disproportionately from the household sector,
US argues, is leading to the loss of American jobs. creating a febrile environment for protectionist
Thus the US has every right to demand the sentiment up and down the country.
revaluation of the renminbi. Should the Chinese not
Charts 6 to 11 compare the recent downturn to
play ball, the US could then be justified in shifting
previous US recessions. What is striking about
relative prices via the imposition of tariffs.
this recession is not just the scale of the downturn
It’s a beguiling message, at least from the but, as we have already noted, the lack of a
perspective of a domestic US electorate, but is it subsequent rebound. The age old rule of “the
really accurate? Is it really the case that the loss deeper the drop the greater the rebound” simply
of American jobs in recent years – which has been hasn’t proved true.
on a truly enormous scale – is due to the
Looking at nominal activity the picture is even
manipulation by others of their exchange rates?
more extraordinary. For the first time in more than
fifty years, nominal GDP contracted and has only
now managed to claw back to the level seen
almost two years ago (Chart 12).
And whilst corporate profits fell sharply in the

downturn they have staged a remarkable recovery
having risen by 65% since the trough in 2008
(Chart 13).
Dr John Williamson (22 September) and Stephen King

(24 September)
12
Macro
Q4 2010
The recent US recession in context

6. GDP has not only fallen by more than a normal recession, the recovery has also been weaker
Index , T=100 Real GDP Index , T=100

120 120
115 115
110 110
105 105
100 100
95 95
90 90
T-4 T-3 T-2 T-1 T T+1 T+2 T+3 T+4 T+5 T+6 T+7 T+8 T+9 T+10 T+11 T+12 T+13 T+14 T+15 T+16
53Q3 57Q3 60Q2 69Q4 73Q4 80Q1 81Q3 90Q3

01Q1 07Q4
Source: Thomson Reuters Datastream, ECRI, HSBC
7. In nominal terms…the position is dismal
Index , T=100 Nominal GDP Index , T=100

150 150
140 140
130 130
120 120
110 110
100 100
90 90
80 80
T-4 T-3 T-2 T-1 T T+1 T+2 T+3 T+4 T+5 T+6 T+7 T+8 T+9 T+10 T+11 T+12 T+13 T+14 T+15 T +16
53Q3 57Q3 60Q2 69Q4 73Q4 80Q1 81Q3 90Q3

01Q1 07Q4
8. And yet profits have staged a remarkable recovery
Index , T=100 Real corporate profits Index , T=100
180 180
160 160
140 140
120 120
100 100
80 80
60 60
T-4 T-3 T-2 T-1 T T+1 T+2 T+3 T+4 T+5 T+6 T+7 T+8 T+9 T+10 T+11 T+12 T+13 T+14 T+15 T+16
57Q3 60Q2 69Q4 73Q4 80Q1 81Q3 90Q3 01Q1 07Q4
13
Macro
Q4 2010
9. But this has been at the expense of household sector jobs…
Index , T=100 Employ ment Index , T=100

110 110
105 105
100 100
95 95
90 90
T-4 T-3 T-2 T-1 T T+1 T+2 T+3 T+4 T+5 T+6 T+7 T+8 T+9 T+10 T+11 T+12 T+13 T+14 T+15 T +16
53Q3 57Q3 60Q2 69Q4 73Q4 80Q1 81Q3 90Q3

01Q1 07Q4
10. …and income
Index , T=100 Real household income Index , T=100
120 12 0
110 11 0
100 10 0
90 90
80 80
T-4 T-3 T-2 T-1 T T+1 T +2 T+3 T+4 T+5 T+6 T+7 T+8 T+9 T+10 T+11 T+12 T+13 T+14 T+15 T+16
57Q3 60Q2 69Q4 73Q4 80Q1 81Q3 90Q3 01Q1 07Q4
11. And firms have been trying to squeeze as much as possible out of their current workforce.
Index , T=100 Labour productiv ity Index , T=100

120 120
115 115
110 110
105 105
100 100
95 95
T-4 T-3 T-2 T-1 T T+1 T +2 T+3 T+4 T+5 T+6 T+7 T+8 T+9 T+10 T+11 T+12 T+13 T+14 T+15 T+16
53Q3 57Q3 60Q2 69Q4 73Q4 80Q1 81Q3 90Q3

01Q1 07Q4
14
Macro
Q4 2010
The rise in corporate profits has only been achieved From an overall growth perspective (if not from a
by pushing the burden of the downturn onto the political perspective) this doesn’t matter so long
household sector. US corporates have been bearing as corporates go out and spend. The problem is
down on pay and aggressive in job shedding. With that whilst there has been some recovery in
precious little rehiring, total nominal household corporate spending, it hasn’t been enough to
income is still 2% below that seen in 2008. It’s no offset the drag from the consumer. The profit
wonder households are still feeling miserable. share of GDP has risen but investment spending
While business confidence has rebounded in 2010, has not (Chart 13). Corporates seem far more
consumer confidence remains close to rock bottom. intent on repaying debt. Given the murky outlook
Indeed, the gap between the ISM survey and for consumer demand, and the failure of fiscal
consumer confidence is the biggest on record, stimulus to deliver a decent economic recovery,
emphasising the extent to which the crisis has had a who can blame them? Yet if the marginal
much bigger effect on the household sector than on propensity to invest is low, the redistribution of
the corporate sector (Chart 12). income from the household to the corporate sector
is not going to help the US economy to rebound.
12. An unusual gap has opened between household and
corporate sentiment
This isn’t making deleveraging
Index Index
80 160
easy
70 Depressed incomes are only hindering households
120
60
as they try to repay debt to mend their battered
50 80
40 balance sheets, leaving consumer spending
40 unusually weak. It’s the classic fallacy of
30
20 0 composition: if all corporates try to be cautious
67 71 75 79 83 87 91 95 99 03 07 11 and prudent at once, unless exports fill the gap,
ISM manufacturing (LHS)
US consumer confidence (RHS)
demand will fall making such efforts futile. We
are thus in danger of a vicious cycle developing
whereby household and corporate prudence leads
13. Corporates have grabbed a larger slice of the pie…but
to a stagnant economy.
aren’t spending
14. German workers have done a better job of maintaining
% % their share of the pie
15 20
% Germa ny %
13 18 48 28
11 16 46
26
9 14 44
24
7 12 42
22
5 10 40
51 55 59 63 67 71 75 79 83 87 91 95 99 03 07 11 38 20
Profit share Inv estment spending 00 01 02 03 04 05 06 07 08 09 10
Labour share Profit share
15
Macro
Q4 2010
Looking across the Atlantic we see an entirely of households while, in Germany, workers have
different picture. In Germany, workers have benefited at the expense of government and,
managed to claw back their share of GDP to pre- hence, taxpayers and recipients of public services.
crisis levels (Chart 14). By contrast, the corporate The re-distributional aspects of the crisis deliver
sector has lost out. Why have we seen such political problems but in no way do they provide
contrasting behaviour between corporate economic solutions.
behaviour in the US and Germany? Astrid
An emerging inflation problem?
Schilo’s latest piece “What drives German jobs?”
(29 September 2010) suggests that there are two Despite all the signs of deleveraging, the amplified
main reasons why German corporates have been hum of the printing press has led some to include
hoarding labour. The first is that firms, for a that an inflationary disaster awaits some way down
number of years, had been complaining about the road. Yet, in the developed world, the opposite
skills shortages making them reluctant to let go of seems true. Putting VAT aside, core inflation rates
staff on the basis that should activity pick up, it are trending ever lower, hardly surprising given
might be hard to rehire. The second is that large amounts of spare capacity.
government support, through what was know as
However, attention also needs to be paid to more
the ‘short-shift’ scheme, helped companies to bear
buoyant developments in the emerging world
the cost through the downturn. And so in contrast
where strong rebounds in economic activity
to the US, we saw a sharp fall in productivity as
(Charts 15 and 16) suggest that output gaps which
firms (on the whole) kept hold of staff. This
emerged as a result of the 2008 downswing have
protected the household sectors share of income
largely been closed out. In Decoupling Revisited
considerably more than in the US.
(14 September 2010), Frederic Neumann, Pablo
For the western economies as a whole, debt Goldberg, and Song Yi Kim highlight why the
remains a serious problem. At the very least, emerging markets have bounced back, and why
deleveraging will rule out interest rate increases they expect activity to remain buoyant.
for the foreseeable future. Most of the debt
adjustments seen so far are the equivalent of re-
arranging the chairs on the deck of the Titanic: in
the US, companies have benefited at the expense
15. GDP growth in emerging markets... 16. ...has broadly been better than market expectations
% pts Malaysia % pts Philippines

2 2 4 4
3 3
1 1
2 2
0 0 1 1
-1 -1 0 0
-1 -1
-2 -2
-2 -2
-3 -3 -3 -3
Feb-08 Aug-08 Feb-09 Aug-09 Feb-10 Aug-10 Feb-08 Aug-08 Feb-09 Aug-09 Feb-10 Aug-10
Difference between actual and consensus GDP forecasts Difference between actual and consensus GDP forecasts
Source: Bloomberg, HSBC Source: Bloomberg, HSBC
16
Macro
Q4 2010
Despite the closure of output gaps, however, The argument rested on the idea that the West was
inflation in the emerging markets has been able to set its own inflation rate and that inflation
relatively well behaved certainly when compared rates in the emerging world would be, as a
to consensus expectations (see charts 17 to 23). consequence, far too high. But, for the emerging
With a few notable exceptions like India, the world, this now seems to be too pessimistic a
emerging world at present appears to be enjoying conclusion. The adjustment in real exchange rates is
a ‘goldilocks scenario’ of high growth and taking place less because of excessively elevated
benign inflation. inflation in the emerging world and more because
inflation in the developed world is too low. The
Much of this reflects the passing of the global
relative adjustment is roughly the same, but more of
growth baton from the US to China. Strong Chinese
the heavy lifting is being done by the deflation-
demand for commodities has kept prices relatively
prone western nations.
elevated notwithstanding the problems in the
western world. As a consequence, many of the
world’s major commodity producers have,
unusually, emerged relatively unscathed. Whether
it’s Brazil, South Africa, the Middle East or
Australia, the western recession has done little
damage to their terms of trade, allowing decent
growth rates to be maintained. Meanwhile, despite
remarkably low interest rates, inflation hasn’t picked
up as quickly as had been feared, largely because the
West’s problems have limited inflationary pressures
virtually everywhere in the world.
Earlier in the year, it was commonly thought that

loose monetary conditions in the West would lead to
excessive inflation in the emerging world. The
argument was partly based on the idea that, over
time, real exchange rates in the emerging world
should rise, a reflection of their economic success
and, hence, their enhanced buying power over the
world’s scarce resources. If nominal exchange rates
were fixed against the dollar, the only way in which
real exchange rates would be able to shift was via
relatively high inflation in the emerging world,
which would increase the buying power of emerging
nations over goods and services priced in dollars.
17
Macro
Q4 2010
Headline inflation has been below expectations in the East

17. Inflation has come in weaker than expected in the US… 18. …and also across some countries in the Latam space…
% pts US headline inflation % pts % pts Mexico headline inflation % pts

0.6 0.6 0.1 0.1
0.4 0.4 0.05 0.05
0.2 0.2 0 0
0 0 -0.05 -0.05
-0.2 -0.2 -0.1 -0.1
-0.4 -0.4 -0.15 -0.15
-0.6 -0.6 -0.2 -0.2
Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10
Difference between actual and consensus forecast Difference between actual and consensus forecast
19. …as well as the main African economies… 20. … such as South Africa and Egypt…
% pts South Africa headline inflation % pts % pts Egypt headline inflation % pts
0.8 0.8 5 5
0.6 0.6 4 4
3 3
0.4 0.4 2 2
0.2 0.2 1 1
0 0 0 0
-1 -1
-0.2 -0.2
-2 -2
-0.4 -0.4 -3 -3
-0.6 -0.6 -4 -4
Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10
Difference between actual and consensus forecast Difference between actual and consensus
21. With the main exception of India, inflation in Asia… 22. …has also surprised largely to the downside
% pts South Korea headline inflation % pts % pts Philippines headline inflation % pts
0.8 0.8 1.5 1.5
0.6 0.6
1 1
0.4 0.4
0.2 0.2 0.5 0.5
0 0
-0.2 -0.2 0 0
-0.4 -0.4
-0.5 -0.5
-0.6 -0.6
-0.8 -0.8 -1 -1
Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10
Difference between actual and consensus forecast Difference between actual and consensus forecast
18
Macro
Q4 2010
23. Core inflation remains soft in the emerging world 24. Productivity gains per employee have been much
stronger in the developing world than in the west
% Yr Core inflation % Yr Index, 2000=100 Index, 2000=100

10 10 350 350
8 8 300 300
6 6 250 250
4 4 200 200
2 2 150 150
0 0 100 100
-2 -2 2000 2002 2004 2006 2008
85 87 89 91 93 95 97 99 01 03 05 07 09 China United States
South Korea Taiwan Thailand Unit ed Kingdom Korea
Source: Thomson Reuters Datastream, HSBC Source: Thomson Reuters Datastream, HSBC
Nevertheless, with robust growth, capacity Excess liquidity may find its
constraints and labour market shortages, wage way into asset prices again
settlements have come in well ahead of the
But it’s also possible that traditional inflation
prevailing inflation rate in many countries (for
metrics are not fully capturing the underlying
example, minimum wage settlements in China are
inflation dynamics in emerging nations.
averaging around 15%, much higher than the
Focussing only on CPI/WPI metrics could be
3.0% average inflation). Might this be a
misleading as inflationary pressures are starting to
harbinger of higher future inflation?
show up in other places, in particular asset prices.
One reason for faster wage growth is continued
25. Stock markets have performed better in the EM world
and rapid increases in productivity per employee
Index, Jan 08=100 Index, Jan 08=100
in the emerging world. In countries such as China
120 120
output per worker is rising rapidly enough to 110 110
100 100
offset the increase in compensation levels. People 90 90
80 80
are being paid more because they are producing 70 70
60 60
more (Chart 24). 50 50
40 40
May-08
Sep-08
Nov-08
May-09
Sep-09
Nov-09
Jan-10
May-10
Jul-10
Jan-08
Mar-08
Jul-08
Jan-09
Mar-09
Jul-09
Mar-10
Japan US India Korea
Source: Thomson Reuters Datastream, HSBC
19
Macro
Q4 2010
26. As have corporate bonds In other words, whilst deflationary pressures in

Index Corporate Bond Index es Index the West are clearly inhibiting consumer prices
120 120 across the globe, excess liquidity appears to be
110 110 finding its way into asset prices.
100 100
In the last edition of Global Economics (Wrestling
90 90
with debt) we argued that loose monetary
80 80
conditions in the western world might simply fuel
70 70 a credit boom in the emerging world as investors
05 05 06 06 07 07 08 08 09 09 10 10 hunted for yield. While this flow of capital will
EM DM certainly help growth prospects in the emerging
Source: Thomson Reuters Datastream world in the near future, we know from yen carry
trade effects over the last 20 years that low
27. And there are fears of property bubbles in Asia interest rates in one part of the world can fuel
House pric es asset and credit booms in other parts of the world.
Index, 2005=100 Index, 2005=100
130 130 In the 1990s, cheap capital fuelled the Mexican
120 120 boom, the Asian boom and the TMT bubble.
110 110 Over the last decade, cheap capital helped fuel
100 100 housing bubbles in the US, the UK and Spain.
90 90
What should emerging nations do today to stop
80 80
them suffering the same fate?
70 70
05
06
07
08
09
10
There are five options:

USA China Korea
Source: Thomson Reuters Datastream, HSBC

1 Allow currencies to appreciate, thereby
severing the link with the US dollar once
Equity and corporate bond markets and house and for all and allowing some independence
prices are still reasonably buoyant to accelerate in in domestic monetary policy. The problem
the emerging world (see Charts 25-27). Partly, with this, however, is that currency
this can be attributed to growing wealth and appreciation may lead to even greater hot
access to credit in the emerging world, on the money inflows, leading to bigger domestic
back of huge supply-side improvements and financial distortion.
legitimate financial reforms. However, in the face
2 Tighten fiscal policy to offset the effects of
of near-zero interest rates in the developing
loose monetary conditions. This is easier said
markets, QE-induced excess liquidity has found
than done: fiscal policy, being so politically-
its way into the emerging world. While some
charged, has never been a good way of
emerging market countries such as China are
stabilising cyclical economic pressures.
becoming more concerned about the dangers of
credit driven asset bubbles (restrictions on the 3 Impose counter-cyclical capital ratios on
housing sector are already in place in China), the financial institutions to stop them lending
search for better returns on behalf of fund too much during periods of low interest rates.
managers all over the world continues to have the Although promising, it’s not obvious how
potential to fuel further credit expansions in such policies might work in reality. At what
emerging nations. point should ratios be changed?
20
Macro
Q4 2010
4 Increase collateral terms for domestic process is the US dollar which we expect to soften
borrowers. Even if banks are happy to lend a further in the months ahead. The euro will also
lot, these policies will prevent borrowers from come under pressure from time to time, not helped
taking full advantage. by the problems in the periphery. Amid all this
uncertainty, the gold price is likely to remain high.
5 Impose capital and exchange controls to
prevent excessive capital inflows. In Should the Federal Reserve resort to quantitative
contrast to the late-1990s, the IMF and other easing later in the year, it is difficult to avoid the
international bodies now accept that controls conclusion that risky assets would, for a while,
are not wholly negative, partly because of the perform relatively well. However, Japan’s
relative success of China and Malaysia over experience with QE earlier in the decade suggests
the last decade or so. that any benefits might fade as renewed
scepticism about economic recovery returns: with
None of these are ideal but, in an uncertain world,
heavy deleveraging, we expect inflation to remain
some mixture of these approaches will increasingly
too low in the years ahead.
be adopted as countries seek to prevent another
outbreak of the capital market instability which has Most of the good news is focused on the emerging
proved so devastating to different parts of the world nations. There are plenty of ways of exploiting
over the last twenty years. this story – through currency appreciation,
commodity investments, investments in western
Conclusions
companies with heavy or growing emerging
Debt, deleveraging and deflation will be the market exposure. But it will be important to keep
recurrent themes in the western world in the a watchful eye on inflation developments, whether
months ahead. Having borrowed too much, in goods, labour or asset markets, for signs that
western nations are in danger of being caught in a capital inflow from abroad might be threatening
Japan-lite trap. Policy may be loose, but it is not economic and financial stability.
being very effective. The best that central bankers
And, finally, the relative success of the emerging
will be able to do is to commit to low short-term
world and the failure of the developed world will
interest rates for a very long period of time –
only serve to heighten protectionist sentiment.
probably years rather than months.
Many investors focus only on market
Success will ultimately rest not on the occasional developments. Today, more than ever, they will
uptick in the real economy but, instead, on the also need to focus on political reality. Some of
return to health of the nominal economy. That the biggest financial risks come not from market
means an end to the disinflationary process which failures but, instead, from the growing political
has proved so corrosive to recovery prospects. pressures between the old and new superpowers.
Inflation needs to move back up again. In the
meantime, we expect bond yields to decline
further, notwithstanding poor fiscal positions.
The incentive to shift the burden of adjustment

onto other countries is strong, not just because of a
desire to boost exports via currency weakness but
also because of the geographical distribution of
debtors and creditors. One likely casualty of this
21
Macro
Q4 2010
22
Macro
Q4 2010
Global economic
forecasts
23
Macro
Q4 2010
GDP
Annual
% Year 2003 2004 2005 2006 2007 2008 2009 2010f 2011f 2012f
World (Nominal GDP weights) 2.5 3.7 3.2 3.7 3.6 1.3 -2.2 3.5 2.9 3.3
World (PPP weights) 3.9 5.0 4.6 5.3 5.4 2.9 -0.5 4.8 4.0 4.2
Developed 1.8 2.9 2.4 2.7 2.3 0.0 -3.5 2.4 1.8 2.3
Emerging 5.7 7.0 6.5 7.6 7.9 5.6 1.9 7.2 6.2 6.2
North America 2.4 3.5 3.1 2.7 2.0 0.0 -2.6 2.8 2.4 3.2
US 2.5 3.6 3.1 2.7 1.9 0.0 -2.6 2.7 2.5 3.2
Canada 1.9 3.1 3.0 2.8 2.2 0.5 -2.5 3.1 2.1 2.3
Latin America 2.1 5.2 3.9 5.0 5.0 3.4 -3.4 6.0 4.5 4.6
Mexico 1.4 4.0 3.2 5.1 3.2 1.5 -6.5 4.3 3.8 4.5
Brazil 1.1 5.7 3.2 4.0 6.1 5.1 -0.2 7.5 5.1 4.5
Argentina 8.8 9.0 9.2 8.5 8.7 4.9 -2.7 7.8 4.5 5.0
Chile 3.9 6.0 5.6 4.6 4.7 3.7 -1.5 5.0 5.5 4.5
Western Europe 1.1 2.1 1.9 2.9 2.7 0.3 -4.1 1.6 1.3 1.6
Eurozone 0.8 1.8 1.7 2.9 2.6 0.3 -4.0 1.6 1.3 1.6
Germany -0.2 0.7 0.9 3.6 2.8 0.7 -4.7 3.3 1.9 1.8
France 1.1 2.3 2.0 2.4 2.3 0.1 -2.5 1.6 1.5 1.8
Italy 0.1 1.4 0.8 2.1 1.4 -1.3 -5.1 1.0 0.7 1.0
Spain 3.1 3.3 3.6 4.0 3.6 0.9 -3.7 -0.4 0.6 1.5
Other Western Europe 2.1 3.0 2.3 3.0 2.8 0.1 -4.3 1.7 1.5 1.8
UK 2.8 3.0 2.2 2.8 2.7 -0.1 -4.9 1.4 1.4 1.8
Norway 0.8 3.3 1.8 1.7 2.7 0.6 -1.3 0.5 1.4 2.1
Sweden 2.5 3.7 3.1 4.6 3.4 -0.6 -5.1 4.0 2.9 2.5
Switzerland -0.2 2.5 2.6 3.6 3.6 1.9 -1.9 2.9 1.7 1.8
EMEA 5.6 6.4 5.9 6.3 5.9 4.1 -3.4 3.8 3.8 3.8
Czech Republic 3.6 4.3 6.4 7.0 6.1 2.3 -4.0 2.1 2.7 2.8
Hungary 4.2 4.6 4.1 3.8 1.0 0.4 -6.2 1.0 2.7 3.0
Poland 3.8 5.4 3.4 6.2 6.8 5.0 1.8 3.2 3.9 3.4
Russia 7.3 7.2 6.4 7.7 8.1 5.6 -7.9 3.8 3.5 3.0
Turkey 5.3 9.4 8.4 6.9 4.7 0.7 -4.7 6.8 3.9 4.3
Ukraine 9.6 12.1 2.6 7.1 7.9 2.1 -15.1 5.5 4.0 5.1
Romania 5.3 8.5 4.1 7.9 6.2 7.1 -7.1 -2.2 0.1 2.2
Non-European EMEA 4.7 4.9 5.6 5.5 5.3 4.9 0.2 3.5 4.3 4.3
Egypt* 3.2 4.1 4.5 6.8 7.1 7.2 4.7 5.1 6.0 6.1
Israel 2.3 5.2 5.1 5.3 5.2 4.0 0.7 3.9 3.4 3.6
Saudi Arabia 7.7 5.3 5.6 3.1 3.4 4.4 0.1 3.6 4.4 4.8
UAE 11.9 7.4 10.5 9.4 5.2 7.0 -2.9 2.0 3.9 4.5
South Africa 3.0 4.6 5.3 5.6 5.5 3.7 -1.8 2.6 3.5 3.1
Asia/Pacific 4.0 5.0 4.6 5.3 6.0 3.0 0.7 6.1 4.7 5.0
Japan 1.5 2.7 1.9 2.0 2.3 -1.2 -5.2 3.0 0.7 1.5
Australia 3.2 3.6 3.2 2.6 4.8 2.2 1.2 3.4 4.1 3.9
New Zealand 4.4 4.0 3.2 2.3 3.3 -0.6 -0.5 1.4 2.6 3.7
Asia-ex-Japan 7.2 7.9 7.7 9.1 9.9 7.0 5.7 8.8 7.6 7.4
China 10.0 10.1 10.4 11.6 13.0 9.6 9.1 10.0 8.9 8.6
Asia ex-Japan & China 5.0 6.2 5.5 7.0 7.0 4.5 2.4 7.4 6.1 6.1
Hong Kong 3.0 8.5 7.1 7.0 6.4 2.2 -2.8 5.4 4.7 4.5
India** 7.3 6.7 6.2 9.8 9.5 7.5 6.7 8.8 8.6 8.0
Indonesia 4.8 5.0 5.7 5.5 6.3 6.0 4.5 6.1 6.4 6.3
Malaysia 5.4 7.3 5.3 5.8 6.5 4.7 -1.7 7.3 5.2 5.0
Philippines 4.9 6.4 5.0 5.3 7.1 3.7 1.1 5.9 4.6 5.6
Singapore 4.6 9.2 7.4 8.6 8.5 1.8 -1.3 13.2 4.6 6.0
South Korea 2.8 4.6 4.0 5.2 5.1 2.3 0.2 6.0 4.0 4.6
Taiwan 3.7 6.2 4.7 5.4 6.0 0.7 -1.9 7.3 4.9 3.8
Thailand 7.0 6.4 4.7 5.1 4.9 2.5 -2.2 7.9 5.3 4.1
Vietnam 7.3 7.8 8.4 8.2 8.5 6.3 5.3 7.0 7.5 7.8
Notes: * = based upon Egyptian fiscal year (July-June); ** = calendar year. We now calculate the weighting system using chain nominal GDP (USD) weights
Source: HSBC
24
Macro
Q4 2010
Quarterly
% Quarter & % Year Q3 09 Q4 09 Q1 10 Q2 10f Q3 10f Q4 10f Q1 11f Q2 11f Q3 11f Q4 11f
North America
US* % Quarter 1.6 5.0 3.7 1.6 2.5 1.8 2.5 2.7 3.2 2.9
% Year -2.7 0.2 2.4 3.0 3.2 2.4 2.1 2.4 2.5 2.8
Canada* % Quarter 0.9 4.9 5.8 2.0 2.2 1.9 2.6 1.9 1.7 2.0
% Year -3.1 -1.1 2.2 3.4 3.7 3.0 2.2 2.2 2.0 2.1
Latin America
Mexico % Quarter 2.5 2.4 -0.6 3.2 -1.6 1.0 1.8 2.0 -0.8 1.0
%Year -6.1 -2.3 4.3 7.6 3.0 2.4 4.2 3.6 4.0 3.5
Brazil % Quarter 2.1 2.4 2.7 1.2 0.3 1.4 2.1 1.7 0.3 1.9
% Year -1.2 4.3 9.0 8.8 6.8 5.8 4.2 4.7 5.3 6.1
Argentina % Quarter 2.2 1.7 2.5 2.1 1.3 1.1 0.9 0.9 1.1 1.2
% Year -2.5 1.4 7.5 9.9 6.8 7.1 5.4 4.1 4.2 4.2
Chile % Quarter 1.8 1.6 -1.5 4.3 1.9 1.4 1.4 1.3 1.3 1.5
% Year -1.4 2.1 1.5 6.5 5.8 6.2 9.6 4.4 4.1 4.2
Western Europe
Eurozone % Quarter 0.4 0.2 0.3 1.0 0.4 0.2 0.2 0.3 0.4 0.4
% Year -4.0 -2.0 0.8 1.9 1.9 1.9 1.8 1.1 1.0 1.3
Germany % Quarter 0.7 0.3 0.5 2.2 1.0 0.1 0.2 0.4 0.4 0.4
% Year -4.4 -2.0 2.0 3.7 4.0 3.7 3.5 1.6 1.1 1.4
France % Quarter 0.3 0.6 0.2 0.6 0.4 0.4 0.2 0.3 0.5 0.5
% Year -2.7 -0.5 1.2 1.7 1.9 1.7 1.7 1.3 1.5 1.5
Italy % Quarter 0.4 -0.1 0.4 0.5 0.3 0.1 0.1 0.2 0.2 0.2
% Year -4.7 -2.8 0.5 1.3 1.1 1.3 0.9 0.6 0.5 0.6
Spain % Quarter -0.3 -0.2 0.1 0.2 -0.2 -0.2 0.1 0.4 0.5 0.6
% Year -3.9 -3.0 -1.3 -0.1 0.0 -0.1 -0.2 0.1 0.7 1.6
Other Western Europe
UK % Quarter -0.3 0.4 0.3 1.2 0.2 0.1 0.3 0.4 0.4 0.5
% Year -5.3 -2.9 -0.2 1.7 2.2 2.0 1.8 1.0 1.2 1.6
Norway % Year -1.1 -1.1 -0.4 0.9 0.7 0.9 1.0 1.4 1.6 1.8
Sweden % Year -5.9 -1.5 2.8 4.5 4.6 4.2 3.4 2.2 2.5 3.4
Switzerland % Year -1.9 -0.1 1.9 3.4 3.2 3.0 2.2 1.7 1.5 1.5
EMEA
Czech Republic % Year -5.0 -2.9 1.0 3.0 2.8 1.7 1.9 2.4 2.9 3.5
Hungary % Year -7.1 -4.0 0.1 1.0 1.7 1.2 1.4 2.2 3.2 3.7
Poland % Year 1.8 3.3 3.0 3.5 3.2 3.0 3.2 3.6 4.0 4.7
Russia % Year -8.6 -2.9 3.1 5.2 4.0 3.0 3.5 3.0 3.5 2.5
Turkey % Year -2.9 6.0 11.7 10.3 4.2 2.5 2.5 2.4 4.0 6.5
Ukraine % Year -16.0 -6.8 4.8 7.0 7.0 4.1 4.0 4.0 4.0 4.0
Romania % Year -6.5 -2.6 -0.5 -3.1 -2.5 -3.1 -2.0 1.6 2.2 3.0
Israel % Year 0.1 1.6 3.2 4.1 4.0 3.7 3.5 3.2 3.2 3.4
South Africa %Year -2.2 -1.4 1.6 3.0 3.1 2.7 3.5 3.6 3.4 3.5
Asia/Pacific
Japan % Quarter -0.1 0.9 1.2 0.4 0.5 -0.2 0.3 0.1 0.2 0.2
% Year -5.2 -1.0 4.7 2.4 3.0 1.9 1.0 0.7 0.4 0.9
Australia % Quarter 0.3 1.1 0.5 0.3 0.9 0.8 1.1 1.2 0.9 1.0
% Year 0.9 2.8 2.7 2.2 3.9 3.7 4.1 4.1 4.0 4.2
New Zealand % Year -0.5 1.1 2.5 2.1 1.9 1.3 0.4 0.6 1.7 3.5
China % Year 9.1 10.7 11.9 10.5 9.5 8.9 8.2 8.8 9.0 9.3
Hong Kong % Year -2.4 2.5 8.0 6.5 4.1 3.3 5.0 2.3 7.0 4.5
India % Year 8.6 6.5 8.6 8.8 8.2 9.7 8.9 9.0 8.5 8.1
Indonesia % Year 4.2 5.4 5.7 6.2 6.0 6.5 6.2 6.2 6.3 6.8
Malaysia % Year -1.2 4.4 10.1 8.9 6.2 4.6 3.5 5.6 6.2 5.3
Philippines % Year 0.2 2.1 7.8 7.9 5.1 3.2 3.9 4.0 5.2 5.1
Singapore % Year 1.8 3.8 16.9 18.8 8.2 9.4 7.4 2.2 5.2 3.8
South Korea % Year 1.0 6.0 8.1 7.2 4.6 4.6 3.7 3.3 3.8 5.2
Taiwan % Year -1.0 9.1 13.7 12.5 4.0 0.8 2.0 2.5 6.7 8.1
Thailand % Year -2.7 5.9 12.0 9.1 7.1 3.8 2.5 6.0 6.5 6.2
Note: * = quarter-on-quarter data has been annualised; ** = based up[on Egyptian fiscal year (July – June)
Source: HSBC
25
Macro
Q4 2010
Consumer prices
Annual
% Year 2003 2004 2005 2006 2007 2008 2009 2010f 2011f 2012f
World 2.3 2.5 2.7 2.8 2.8 4.3 1.0 2.3 2.2 2.2
Developed 1.8 1.9 2.3 2.3 2.1 3.3 0.0 1.3 1.2 1.2
Emerging 4.6 4.6 4.5 4.5 5.4 8.1 4.7 5.6 5.4 5.3
North America 2.3 2.6 3.3 3.1 2.8 3.7 -0.3 1.6 1.0 1.1
US 2.3 2.7 3.4 3.2 2.9 3.8 -0.3 1.6 0.9 1.1
Canada 2.7 1.9 2.2 2.0 2.1 2.4 0.3 1.7 1.6 2.0
Latin America 7.8 5.3 5.8 4.5 5.6 7.6 6.2 7.7 7.6 6.9
Mexico 4.5 4.7 4.0 3.6 4.0 5.1 5.3 4.2 4.0 3.4
Brazil 14.7 6.6 6.9 4.2 3.6 5.7 4.9 4.9 5.4 4.6
Argentina* 3.7 6.1 12.3 9.8 20.1 22.9 14.8 26.5 21.7 18.7
Chile 1.1 1.1 3.2 3.4 4.4 7.8 0.3 1.6 3.3 3.2
Western Europe 2.0 1.9 2.1 2.1 2.1 3.3 0.6 1.8 1.8 1.7
Eurozone 2.1 2.2 2.2 2.2 2.1 3.3 0.3 1.6 1.6 1.7
Germany 1.0 1.8 1.9 1.8 2.3 2.7 0.2 1.1 1.2 1.3
France 2.2 2.3 1.9 1.9 1.6 3.2 0.1 1.8 1.8 1.6
Italy 2.8 2.3 2.2 2.2 2.0 3.5 0.8 1.6 1.9 1.7
Spain 3.1 3.1 3.4 3.6 2.8 4.1 -0.2 1.6 1.5 1.7
Other Western Europe 1.5 1.1 1.7 2.0 2.0 3.5 1.5 2.4 2.3 1.8
UK 1.4 1.3 2.0 2.3 2.3 3.6 2.2 3.2 2.9 1.8
Norway 2.5 0.5 1.5 2.3 0.7 3.8 2.2 2.3 1.7 2.5
Sweden 1.9 0.4 0.5 1.4 2.2 3.5 -0.3 1.1 2.1 2.5
Switzerland 0.6 0.8 1.2 1.1 0.7 2.4 -0.5 0.7 0.7 1.5
EMEA 7.4 6.0 6.4 6.2 7.2 11.2 7.4 5.9 6.8 6.7
Czech Republic 0.0 2.8 1.9 2.6 2.8 6.4 1.0 1.5 2.4 2.4
Hungary 4.7 6.8 3.6 3.9 7.9 6.1 4.2 4.8 3.2 3.4
Poland 0.8 3.5 2.1 1.0 2.5 4.2 3.5 2.5 2.9 3.3
Russia 13.7 10.9 12.7 9.7 9.0 14.1 11.7 7.0 9.5 8.5
Turkey 25.3 8.6 8.2 9.6 8.8 10.4 6.3 8.7 7.7 7.0
Ukraine* 5.2 9.0 10.3 9.1 12.8 25.2 16.0 8.5 8.4 9.0
Romania 15.3 11.9 9.0 6.6 4.8 7.9 5.6 6.0 5.5 4.6
Egypt** 4.0 10.6 4.7 7.3 8.5 20.2 10.0 10.7 10.4 11.0
Israel* -1.9 1.2 2.4 -0.1 3.4 3.8 3.9 2.3 3.0 2.7
Saudi Arabia 0.6 0.3 0.4 2.3 4.1 9.9 5.1 5.5 6.6 7.0
UAE 3.1 7.0 9.0 10.5 11.1 13.5 1.8 1.0 2.7 4.0
South Africa 5.4 1.4 3.4 4.6 7.1 11.0 7.2 4.7 5.5 6.0
Asia/Pacific 1.0 1.8 1.4 2.0 2.2 4.1 0.8 2.0 1.8 2.0
Japan -0.2 0.0 -0.3 0.2 0.0 1.5 -1.3 -1.1 -0.5 -0.4
Australia 2.8 2.3 2.7 3.5 2.3 4.3 1.8 3.0 3.1 2.9
New Zealand 1.8 2.3 3.0 3.4 2.4 4.0 2.1 2.3 4.0 2.3
Asia-ex-Japan 2.2 3.7 3.1 3.6 4.5 6.7 2.6 4.6 3.7 3.8
China 1.2 3.9 1.8 1.5 4.8 5.9 -0.7 2.9 2.5 2.2
Hong Kong -2.5 -0.4 0.9 2.0 2.1 4.3 0.6 2.4 2.9 3.3
India* 3.7 3.9 4.0 6.3 6.4 8.3 10.9 10.7 5.4 7.1
Indonesia 6.7 6.1 10.5 13.1 6.4 10.2 4.8 5.2 6.0 5.2
Malaysia 1.1 1.5 3.0 3.6 2.0 5.4 0.6 1.9 2.7 2.2
Philippines 3.5 6.0 7.7 6.3 2.8 9.3 3.3 4.2 4.5 4.7
Singapore 0.5 1.7 0.5 1.0 2.1 6.6 0.6 2.2 2.7 2.8
South Korea 3.4 3.6 2.8 2.2 2.5 4.7 2.8 2.7 2.9 3.0
Taiwan -0.3 1.6 2.3 0.6 1.8 3.5 -0.9 1.2 1.6 1.6
Thailand 1.8 2.8 4.5 4.6 2.2 5.5 -0.8 3.5 3.6 3.0
Vietnam 3.1 7.8 8.3 7.5 8.3 23.0 7.1 8.7 8.5 8.0
Note: * = end-year values. We now calculate the weighting system using chain nominal GDP (USD) weights
Source: HSBC
26
Macro
Q4 2010
Quarterly
% Year Q3 09 Q4 09 Q1 10 Q2 10 Q3 10f Q4 10f Q1 11f Q2 11f Q3 11f Q4 11f
North America
US -1.6 1.4 2.4 1.8 1.2 0.8 0.7 1.1 1.0 1.0
Canada -0.9 0.8 1.6 1.4 1.8 1.9 1.8 1.6 1.5 1.7
Latin America
Mexico -3.6 -0.4 4.8 4.0 3.7 4.3 3.5 4.1 4.4 3.8
Brazil 4.3 4.3 5.2 4.8 4.7 5.3 5.0 5.5 5.8 5.0
Argentina 13.5 14.8 20.0 22.5 24.4 26.5 23.8 23.5 23.4 21.7
Chile -2.3 -2.6 0.3 1.2 2.2 3.8 3.7 3.8 3.3 3.4
Western Europe
Eurozone -0.4 0.4 1.1 1.5 1.7 2.0 1.9 1.6 1.6 1.4
Germany -0.5 0.4 0.8 1.0 1.2 1.3 1.4 1.3 1.2 1.1
France -0.5 0.4 1.5 1.8 1.8 2.0 1.8 1.7 2.1 1.8
Italy 0.1 0.7 1.3 1.6 1.8 1.9 2.2 1.9 1.8 1.7
Spain -1.0 0.2 1.2 1.6 1.8 1.6 1.7 1.5 1.2 1.5
UK 1.5 2.1 3.2 3.4 3.1 3.0 3.3 3.0 2.8 2.5
Norway 1.7 1.4 2.9 2.6 1.9 1.9 1.6 1.6 1.7 2.0
Sweden -1.2 -0.4 1.0 1.0 1.1 1.3 1.5 2.0 2.3 2.5
Switzerland -1.0 -0.2 1.1 1.0 0.4 0.2 -0.1 0.5 1.1 1.3
EMEA
Czech Republic 0.1 0.4 0.6 1.1 2.0 2.2 2.1 2.3 2.6 2.8
Hungary 5.0 5.1 6.0 5.4 4.0 4.0 3.2 2.9 3.2 3.5
Poland 3.5 3.3 3.0 2.3 2.1 2.4 2.7 2.7 3.0 3.3
Russia 11.4 9.2 7.2 5.9 6.4 8.0 9.1 9.9 9.9 9.4
Turkey 5.3 6.5 9.6 8.4 9.5 8.1 6.4 8.1 8.1 7.4
Ukraine 15.3 13.3 11.2 9.0 6.9 6.9 7.0 7.9 9.1 9.8
Romania 4.6 4.6 4.4 7.5 7.6 6.5 6.8 4.2 4.4 4.3
Egypt 12.1 9.9 10.8 13.2 12.2 10.7 9.3 10.9 10.5 10.4
Israel 2.8 3.9 3.2 3.0 2.2 2.3 3.3 3.4 3.2 3.0
South Africa 6.1 6.3 5.1 4.5 4.5 4.7 5.5 6.0 6.0 5.5
Asia/Pacific
Japan -2.3 -1.7 -1.2 -1.2 -1.0 -0.8 -0.5 -0.4 -0.7 -0.6
Australia 1.3 2.1 2.9 3.0 3.0 3.2 3.1 3.2 3.1 3.1
New Zealand 1.7 2.0 2.0 1.9 1.8 1.4 3.9 4.1 4.9 4.5
China -1.3 0.7 2.2 2.8 3.3 3.2 2.9 2.8 2.4 2.1
Hong Kong 2.6 1.3 1.9 2.6 2.1 3.0 2.5 3.0 3.0 3.0
India 11.8 13.3 15.3 13.7 8.7 5.8 3.7 5.0 6.0 7.0
Indonesia 2.8 2.6 3.7 4.4 6.3 6.3 6.4 6.1 5.7 5.7
Malaysia -2.3 -0.2 1.3 1.6 2.2 2.4 2.7 2.8 2.6 2.6
Philippines 0.3 2.9 4.3 4.2 4.0 4.2 4.4 4.6 4.6 4.5
Singapore -0.3 -0.8 0.9 3.1 2.2 2.8 2.8 2.3 3.0 2.8
South Korea 2.0 2.4 2.7 2.6 2.5 2.9 2.8 2.9 3.0 2.9
Taiwan -1.3 -1.3 1.3 1.1 0.9 1.6 1.4 1.8 1.6 1.6
Thailand -2.2 1.9 3.7 3.2 3.5 3.6 3.6 3.7 3.7 3.5
Vietnam 3.2 4.5 8.0 9.1 8.7 8.8 8.7 8.5 8.4 8.3
Source: HSBC
27
Macro
Q4 2010
Short rates
3 month money
End period 2006 2007 2008 2009 ____________ 2010 ______________ _____________2011 _____________
Q4 Q4 Q4 Q4 Q1 Q2 Q3f Q4f Q1f Q2f Q3f Q4f
North America
US (USD) 5.3 4.7 1.4 0.3 0.3 0.5 0.3 0.3 0.3 0.3 0.3 0.4
Canada (CAD) 4.2 4.5 1.9 0.5 0.4 0.8 1.2 1.3 1.9 2.2 2.2 2.5
Latin America
Mexico (MXN) 7.2 7.3 8.2 4.6 4.6 4.5 4.6 4.6 4.8 4.8 5.0 5.2
Brazil (BRL) 12.8 11.2 13.0 8.7 9.1 10.8 10.7 10.8 11.9 12.8 12.7 12.7
Argentina (ARS)* 7.1 10.0 17.1 10.4 9.1 9.1 9.2 9.5 9.6 9.7 9.7 9.6
Chile (CLP)* 5.0 7.1 8.5 1.8 1.2 1.9 4.0 5.0 5.8 6.5 7.0 7.0
Western Europe
Eurozone 3.7 4.6 2.9 0.7 0.6 0.7 0.8 1.0 1.0 1.0 1.0 1.2
UK (GBP) 5.3 5.9 2.8 0.6 0.6 0.7 0.7 0.7 0.7 0.7 0.7 0.9
Sweden (SEK) 3.3 4.7 2.5 0.5 0.5 0.6 1.0 1.4 1.6 1.9 2.1 2.4
Switzerland (CHF) 2.1 2.6 0.6 0.3 0.2 0.1 0.2 0.3 0.3 0.4 0.8 0.8
Norway (NOK) 3.9 5.9 4.0 2.2 2.3 2.8 2.6 2.7 2.8 2.9 3.2 3.4
EMEA
Hungary (HUF) 8.1 7.6 10.0 6.2 5.5 5.3 5.4 5.4 5.4 5.4 5.6 6.2
Poland (PLN) 4.2 5.1 5.8 4.2 4.0 3.8 3.7 3.7 4.3 4.2 4.8 4.7
Russia (RUB)* 6.5 6.3 20.6 6.6 4.2 3.4 4.0 7.0 7.5 8.0 8.0 7.8
Turkey (TRY) 17.6 16.0 15.5 7.5 7.6 7.7 7.5 7.5 7.8 8.1 8.5 9.0
Ukraine (UAH) 7.6 6.6 20.0 16.1 8.0 5.6 5.5 9.0 8.0 7.0 7.0 9.0
South Africa (ZAR) 9.2 11.3 11.4 7.1 6.5 6.6 6.6 6.6 6.6 6.6 6.6 6.6
Asia/Pacific
Japan (JPY) 0.4 0.6 0.6 0.3 0.2 0.2 0.2 0.3 0.3 0.3 0.3 0.3
Australia (AUD) 6.5 7.3 4.1 4.1 4.4 4.9 4.9 5.1 5.4 5.6 5.9 6.0
New Zealand (NZD) 7.7 8.9 6.0 3.0 2.8 3.3 3.3 3.5 3.5 3.6 3.9 4.1
Asia-ex-Japan
China (CNY) 1.8 3.3 1.7 1.7 1.7 1.7 1.7 1.7 1.7 1.7 1.7 1.7
Asia ex-Japan & China
Hong Kong (HKD) 3.9 3.5 1.0 0.1 0.1 0.6 0.3 0.3 0.3 0.3 0.3 0.5
India (INR) 7.0 8.3 9.2 5.1 4.6 5.5 6.3 6.2 6.0 6.4 6.8 7.0
Indonesia (IDR) 9.5 7.8 12.0 6.6 6.6 6.6 7.0 7.6 7.1 7.3 7.3 7.3
Malaysia (MYR) 3.7 3.6 3.4 2.3 2.6 2.8 2.9 2.9 2.9 2.9 2.9 2.9
Philippines (PHP) 4.8 3.7 6.1 3.9 3.9 3.9 4.5 5.0 5.3 5.3 5.3 5.3
Singapore (SGD) 3.4 2.5 1.4 0.7 0.7 0.6 0.4 0.7 0.8 0.8 0.9 1.0
South Korea (KRW) 4.8 5.7 4.7 2.8 2.8 2.5 3.1 3.3 3.6 3.8 3.8 4.1
Taiwan (TWD) 1.8 2.2 1.0 0.5 0.5 0.7 0.7 0.7 0.7 0.7 0.9 1.0
Thailand (THB) 5.3 3.7 3.6 1.4 1.4 1.4 1.7 2.2 2.3 2.3 2.3 2.3
Note: * = 1-month money
Source: HSBC
28
Macro
Q4 2010
Long rates
10-year bond yields
End period Q4 06 Q4 07 Q4 08 Q4 09 Q1 10 Q2 10 Q3 10f Q4 10f Q1 11f Q2 11f Q3 11f Q4 11f
Americas
US 2.7 3.5 3.3 3.8 3.8 2.9 2.6 2.3 2.0 2.0 2.2 2.5
Canada 2.7 3.4 3.3 3.6 3.6 3.1 2.8 2.7 2.5 2.5 2.7 3.0
Chile 5.9 6.3 7.4 5.9 6.4 6.4 6.1 6.5 6.8 6.9 7.0 7.0
Western Europe
Eurozone 3.6 3.8 3.5 3.6 3.5 3.3 3.0 2.9 2.7 2.6 2.7 2.9
Germany 3.0 3.4 3.2 3.4 3.1 2.6 2.3 2.1 1.9 1.8 2.0 2.2
France 3.6 3.7 3.5 3.6 3.4 3.1 2.7 2.5 2.4 2.4 2.5 2.6
Italy 4.4 4.3 4.0 4.0 3.9 4.1 3.9 3.7 3.6 3.5 3.6 3.7
Spain 3.8 4.0 3.7 3.9 3.8 4.6 4.2 4.2 3.8 3.7 3.8 3.9
UK 3.2 3.7 3.7 4.1 3.9 3.3 3.2 2.7 2.5 2.3 2.5 2.8
Sweden 3.0 3.5 3.3 3.3 3.1 2.6 2.4 2.4 2.3 2.4 2.7 3.0
Switzerland 1.9 2.3 2.0 1.9 1.8 1.5 1.4 1.4 1.5 1.7 1.8 2.0
Norway 3.8 4.2 4.1 4.1 3.7 3.2 3.1 3.2 3.4 3.5 3.7 3.8
EMEA
Hungary 8.1 7.6 10.0 7.9 6.9 7.7 7.0 6.8 6.6 6.5 6.6 7.0
Poland 5.2 5.7 5.4 6.3 5.5 5.9 5.5 5.4 5.8 5.7 6.1 5.8
Russia 6.5 6.3 11.3 8.7 6.9 7.0 7.3 7.4 7.9 8.2 7.7 7.7
South Africa 7.7 8.4 7.3 9.0 8.3 8.3 8.3 8.4 8.5 8.5 8.6 8.6
Asia/Pacific
Japan 1.3 1.4 1.3 1.3 1.4 1.1 1.0 1.0 0.9 0.9 0.9 1.0
Australia 4.4 5.5 5.4 5.7 5.8 5.1 5.1 5.2 5.3 5.5 5.6 5.7
New Zealand 4.8 6.0 5.6 6.0 5.9 5.5 6.1 6.1 6.1 6.1 6.1 6.2
Asia-ex-Japan
Hong Kong 4.4 2.9 2.4 2.6 2.8 2.3 2.0 1.7 1.4 1.6 1.8 1.8
India 7.6 7.8 5.3 7.7 7.8 7.8 8.0 8.1 8.3 8.4 8.5 8.4
Indonesia* 9.4 9.2 11.8 8.9 8.3 7.7 7.4 7.7 8.0 8.2 8.4 8.4
Philippines 6.4 6.4 7.3 7.9 7.9 7.6 6.4 6.5 6.7 6.9 7.0 7.0
Singapore* 3.0 2.3 1.4 1.3 1.3 0.8 0.6 0.7 0.7 0.7 0.7 0.7
Note: * = 5-year bond yield
Source: HSBC
29
Macro
Q4 2010
Exchange rates vs USD

Exchange rates vs USD
End period 2006 2007 2008 2009 ____________ 2010 ______________ _____________2011 _____________
Americas
Canada (CAD) 1.16 0.99 1.23 1.05 1.01 1.06 1.05 1.10 1.10 1.10 1.10 1.10
Mexico (MXN) 10.80 10.92 13.69 13.10 12.36 12.94 12.45 12.25 12.25 12.25 12.50 12.50
Brazil (BRL) 2.14 1.77 2.31 1.74 1.78 1.80 1.70 1.74 1.78 1.82 1.85 1.90
Argentina (ARS) 3.06 3.15 3.45 3.80 3.88 3.93 3.97 4.10 4.15 4.20 4.25 4.30
Chile (CLP) 532 498 637 533 533 546 520 505 495 480 480 480
Western Europe
Eurozone (EUR) 1.32 1.46 1.39 1.43 1.35 1.22 1.27 1.35 1.35 1.35 1.35 1.35
UK (GBP) 1.96 1.99 1.44 1.61 1.52 1.50 1.53 1.62 1.65 1.65 1.65 1.65
Sweden (SEK) 6.84 6.46 7.91 7.14 7.20 7.78 7.48 6.96 6.96 6.96 6.96 6.96
Norway (NOK) 6.23 5.43 7.00 5.78 5.94 6.50 6.06 5.63 5.56 5.56 5.56 5.56
Switzerland (CHF) 1.22 1.13 1.06 1.03 1.05 1.08 1.02 0.96 0.98 0.99 1.01 1.02
EMEA
Czech Republic (CZK) 20.87 18.19 19.31 18.40 18.78 20.97 19.69 18.37 18.33 18.15 17.96 17.78
Hungary (HUF) 190.6 172.9 191.3 188.3 196.4 232.7 224.4 203.7 200.0 200.0 196.3 196.3
Poland (PLN) 2.90 2.46 2.96 2.86 2.85 3.38 3.15 2.89 2.85 2.81 2.78 2.74
Russia (RUB) 26.4 24.5 29.4 30.2 29.4 30.1 30.7 30.8 29.7 30.8 31.2 33.4
Turkey (TRY) 1.42 1.17 1.54 1.50 1.52 1.58 1.54 1.52 1.55 1.58 1.53 1.54
Ukraine (UAH) 5.1 5.1 7.8 8.0 7.9 7.9 8.2 8.5 8.2 8.0 8.2 8.5
Israel (ILS) 4.17 3.95 3.78 3.75 3.80 3.85 3.75 3.68 3.62 3.58 3.55 3.52
Egypt (EGP) 5.71 5.52 5.52 5.48 5.50 5.55 5.55 5.60 5.60 5.60 5.55 5.50
South Africa (ZAR) 7.05 6.83 9.25 7.36 7.34 7.67 7.50 7.45 7.45 7.40 7.50 7.50
Asia/Pacific
Japan (JPY) 119 112 91 93 93 88 85 90 95 95 95 95
Australia (AUD) 0.79 0.88 0.70 0.90 0.92 0.84 0.89 0.85 0.85 0.85 0.85 0.85
New Zealand (NZD) 0.71 0.77 0.58 0.73 0.71 0.69 0.69 0.72 0.72 0.72 0.72 0.72
China (CNY) 7.81 7.31 6.82 6.83 6.83 6.80 6.72 6.67 6.63 6.60 6.57 6.54
Hong Kong (HKD) 7.77 7.80 7.75 7.80 7.80 7.80 7.80 7.80 7.80 7.80 7.80 7.80
India (INR) 44.2 39.4 48.6 46.4 44.8 47.0 46.0 45.5 45.0 44.5 44.0 43.5
Indonesia (IDR) 8996 9393 11027 9425 9090 9200 8900 8800 8750 8700 8700 8700
Malaysia (MYR) 3.53 3.31 3.46 3.42 3.26 3.30 3.10 3.05 3.00 2.99 2.98 2.97
Philippines (PHP) 49.05 41.28 47.47 46.50 45.18 46.50 44.00 43.00 42.50 42.00 41.50 41.00
Singapore (SGD) 1.53 1.44 1.43 1.41 1.40 1.41 1.34 1.32 1.30 1.29 1.28 1.27
South Korea (KRW) 930 936 1263 1166 1133 1250 1150 1130 1110 1090 1080 1080
Taiwan (TWD) 32.6 32.4 32.9 32.1 31.8 32.0 31.5 31.0 30.5 30.0 30.0 29.5
Thailand (THB) 36.05 33.72 34.90 33.33 32.32 32.50 31.50 31.00 31.00 30.50 30.50 30.00
Vietnam (VND) 16050 16217 16900 18200 19050 19000 19600 19800 19800 19800 19800 19800
Note: Turkish currency (until then coded TRL) shed 6 zeros of its exchange rate in January 2005
Source: HSBC
30
Macro
Q4 2010
Exchange rate vs EUR & GBP

Exchange rate vs EUR & GBP
End period 2006 2007 2008 2009 ____________ 2010 ______________ _____________2011 _____________
vs EUR
Americas
US (USD) 1.32 1.46 1.39 1.43 1.35 1.22 1.27 1.35 1.35 1.35 1.35 1.35
Canada (CAD) 1.53 1.44 1.72 1.50 1.37 1.30 1.33 1.49 1.49 1.49 1.49 1.49
Europe
UK (GBP) 0.67 0.73 0.97 0.89 0.89 0.82 0.83 0.83 0.82 0.82 0.82 0.82
Sweden (SEK) 9.02 9.45 10.99 10.24 9.74 9.53 9.50 9.40 9.40 9.40 9.40 9.40
Switzerland (CHF) 1.61 1.66 1.48 1.48 1.42 1.32 1.30 1.30 1.32 1.34 1.36 1.38
Norway (NOK) 8.21 7.94 9.73 8.29 8.03 7.97 7.70 7.60 7.50 7.50 7.50 7.50
Czech Republic (CZK) 27.5 26.6 26.8 26.4 25.4 25.7 25.0 24.8 24.8 24.5 24.3 24.0
Hungary (HUF) 251 253 266 270 266 285 285 275 270 270 265 265
Poland (PLN) 3.83 3.60 4.12 4.11 3.86 4.14 4.00 3.90 3.85 3.80 3.75 3.70
Russia (RUB) 34.78 35.88 40.84 43.39 39.73 36.87 38.99 41.58 40.10 41.58 42.12 45.09
Asia/Pacific
Japan (JPY) 157.1 163.3 126.0 133.6 126.4 108.4 108.0 121.5 128.3 128.3 128.3 128.3
Australia (AUD) 1.67 1.67 1.99 1.60 1.47 1.45 1.43 1.59 1.59 1.59 1.59 1.59
New Zealand (NZD) 1.87 1.90 2.38 1.97 1.91 1.78 1.84 1.88 1.88 1.88 1.88 1.88
Africa
South Africa (ZAR) 9.30 9.99 12.85 10.56 9.94 9.39 9.53 10.06 10.06 9.99 10.13 10.13
vs GBP
Americas
US (USD) 1.96 1.99 1.44 1.61 1.52 1.50 1.53 1.62 1.65 1.65 1.65 1.65
Canada (CAD) 2.28 1.96 1.77 1.69 1.54 1.59 1.60 1.78 1.81 1.81 1.81 1.81
Europe
Eurozone (EUR) 0.67 0.73 0.97 0.89 0.89 0.82 0.83 0.83 0.82 0.82 0.82 0.82
Sweden (SEK) 13.39 12.86 11.37 11.53 10.92 11.64 11.41 11.29 11.49 11.49 11.49 11.49
Norway (NOK) 12.19 10.81 10.07 9.33 9.00 9.73 9.25 9.13 9.16 9.16 9.16 9.16
Switzerland (CHF) 2.39 2.25 1.53 1.67 1.60 1.61 1.56 1.56 1.61 1.64 1.66 1.69
Asia/Pacific
Japan (JPY) 233 222 130 150 142 132 130 146 157 157 157 157
Australia (AUD) 2.48 2.27 2.06 1.80 1.65 1.77 1.71 1.91 1.94 1.94 1.94 1.94
New Zealand (NZD) 2.78 2.59 2.46 2.22 2.14 2.18 2.21 2.25 2.29 2.29 2.29 2.29
Africa
South Africa (ZAR) 13.80 13.60 13.29 11.89 11.14 11.47 11.44 12.08 12.29 12.21 12.37 12.37
Source: HSBC
31
Macro
Q4 2010
Consumer spending
Consumer spending
% Year 2003 2004 2005 2006 2007 2008 2009 2010f 2011f 2012f
World 2.4 3.2 3.3 3.3 3.2 1.2 -0.7 2.4 2.4 2.8
Developed 2.1 2.7 2.5 2.4 2.2 0.1 -1.2 1.4 1.4 1.9
Emerging 4.4 5.8 6.8 7.1 7.5 6.0 1.2 6.0 5.7 6.2
North America 2.8 3.4 3.4 3.0 2.5 -0.1 -1.1 1.6 2.2 2.5
US 2.8 3.5 3.4 2.9 2.4 -0.3 -1.2 1.5 2.2 2.5
Canada 3.0 3.3 3.7 4.2 4.6 2.9 0.4 3.4 2.5 2.3
Latin America 1.8 5.5 5.2 5.8 5.4 4.2 -1.5 5.7 4.1 5.4
Mexico 2.2 5.6 4.8 5.6 4.0 1.9 -6.1 3.7 2.8 6.3
Brazil -0.8 3.8 4.5 5.2 6.1 7.0 4.1 6.7 5.2 4.4
Argentina 8.2 9.5 8.9 7.8 9.0 6.5 0.5 8.7 4.6 5.0
Chile 4.7 7.2 7.4 7.1 7.0 4.6 0.9 9.9 7.1 5.8
Western Europe 1.6 1.9 1.8 1.9 1.8 0.4 -1.4 0.9 1.0 1.3
Eurozone 1.2 1.5 1.6 1.8 1.5 0.4 -1.1 0.7 0.8 1.1
Germany 0.1 -0.2 0.4 1.5 -0.2 0.6 -0.1 -0.1 0.7 0.9
France 2.1 2.4 2.5 2.6 2.5 0.5 0.6 1.3 1.4 2.0
Italy 1.0 0.8 1.2 1.3 1.1 -0.8 -1.7 0.5 0.4 0.8
Spain 2.9 4.2 4.2 3.8 3.7 -0.6 -4.2 1.5 0.7 0.9
UK 3.0 3.1 2.2 1.8 2.2 0.4 -3.3 1.1 1.5 1.9
Norway 2.5 5.1 3.9 4.8 5.3 1.4 0.3 2.4 2.4 2.6
Sweden 2.3 2.6 2.8 2.8 3.8 -0.2 -0.8 3.2 2.4 2.3
Switzerland 0.9 1.6 1.7 1.6 2.3 1.3 1.0 1.6 1.1 1.5
EMEA 5.9 8.4 8.1 8.6 8.8 7.6 -2.0 4.2 4.4 4.8
Czech Republic 6.0 2.9 2.5 5.0 4.8 3.6 -0.3 0.9 1.3 1.9
Hungary 8.0 3.1 3.4 1.9 -1.6 -0.6 -6.7 -2.5 1.8 2.6
Poland 2.6 4.0 2.7 5.0 4.9 5.9 2.3 2.3 3.3 2.8
Russia 7.5 12.1 11.8 11.3 13.7 10.8 -7.7 5.0 4.3 3.8
Turkey 10.2 11.0 7.9 4.6 5.5 -0.3 -2.2 5.9 3.5 3.7
Ukraine 12.6 12.2 16.6 14.4 17.1 11.8 -14.2 3.0 2.0 5.0
Romania 8.3 15.9 10.0 12.8 11.6 9.1 -10.8 -3.3 0.0 2.0
Egypt* 2.3 2.1 4.8 6.4 4.2 5.7 4.5 4.6 4.8 5.0
Israel 1.3 5.0 3.5 4.3 6.3 3.6 1.5 4.5 4.1 4.3
Saudi Arabia** 3.7 5.8 9.5 13.4 18.7 18.0 8.1 9.0 11.0 12.0
UAE** 10.5 29.1 22.5 24.0 12.0 21.4 2.0 3.0 5.2 8.7
South Africa 2.8 6.2 6.1 8.3 5.5 2.4 -3.1 1.7 2.9 2.0
Asia/Pacific 2.4 3.1 3.7 3.8 4.5 2.4 1.6 4.5 3.5 4.1
Japan 0.4 1.6 1.3 1.5 1.6 -0.6 -1.0 1.9 -0.4 0.7
Australia 3.7 5.4 3.7 3.0 5.1 1.9 1.6 3.5 4.1 3.7
New Zealand 5.9 5.4 4.7 2.2 3.9 -0.3 -0.6 1.8 1.3 3.0
Asia-ex-Japan 4.7 4.5 6.9 6.8 7.8 5.9 4.3 7.2 7.0 7.2
China 6.5 7.2 8.5 8.7 9.0 8.9 8.0 9.5 9.4 9.3
Hong Kong -1.3 7.0 3.0 5.9 8.5 2.4 -0.4 5.0 4.0 4.1
India 8.1 1.3 9.0 8.2 9.8 6.8 4.3 7.0 6.5 6.5
Indonesia 3.9 5.0 4.0 3.2 5.0 5.3 4.9 4.7 5.0 5.0
Malaysia 6.6 10.5 9.1 6.8 10.5 8.5 0.7 6.8 6.7 5.7
Philippines 5.3 5.9 4.8 5.5 5.8 4.7 4.1 5.1 5.3 5.6
Singapore 1.6 6.1 3.6 3.1 6.5 2.7 0.4 6.1 6.0 5.9
South Korea -0.4 0.3 4.6 4.7 5.1 1.3 0.2 4.1 3.5 4.5
Taiwan 2.9 5.2 2.9 1.5 2.1 -0.6 1.4 2.5 4.9 5.0
Thailand 6.4 6.1 4.9 3.2 1.7 2.7 -1.1 5.0 3.6 3.8
Vietnam 8.0 7.1 7.3 8.3 9.6 7.6 3.4 5.7 6.6 7.8
Note: * = based upon Egyptian financial year (July-June). We now calculate the weighting system using chain nominal GDP (USD) weights
Source: HSBC
32
Macro
Q4 2010
Investment spending
Investment spending
% Year 2003 2004 2005 2006 2007 2008 2009 2010f 2011f 2012f
World 4.3 7.5 7.9 7.4 7.1 3.6 -3.2 9.9 10.1 10.2
Developed 1.9 4.5 4.8 3.6 1.5 -3.1 -14.0 1.9 4.5 4.7
Emerging 12.4 16.8 16.4 16.8 19.5 16.1 13.8 19.5 15.9 15.2
North America 3.5 7.4 6.7 2.7 -1.3 -5.7 -17.7 4.6 7.5 7.8
US 3.2 7.3 6.5 2.3 -1.8 -6.4 -18.3 4.3 7.5 8.3
Canada 6.2 7.8 9.3 7.1 3.5 1.4 -11.8 7.3 7.2 3.9
Latin America 1.1 10.6 8.6 10.2 10.2 8.7 -10.4 11.8 9.6 9.5
Mexico 0.4 8.0 7.5 9.9 6.9 4.4 -10.1 3.5 7.5 7.9
Brazil -4.6 9.1 3.6 9.8 13.9 13.4 -9.9 22.0 13.0 10.0
Argentina 38.2 34.4 22.7 18.2 13.6 9.1 -10.2 11.8 1.9 10.5
Chile 5.7 10.0 23.9 2.3 11.2 18.6 -15.3 18.7 18.1 15.0
Western Europe 1.2 2.8 3.4 5.8 5.0 -1.5 -11.5 0.2 3.2 2.8
Eurozone 1.3 2.0 3.1 5.3 4.1 -1.1 -11.3 -0.1 3.6 2.8
Germany -0.3 -1.3 1.1 8.7 4.9 1.8 -10.0 5.7 5.1 2.6
France 2.2 3.3 4.5 4.5 5.9 0.3 -7.0 -1.6 4.4 4.2
Italy -0.9 1.5 1.4 3.1 1.3 -4.0 -12.2 2.1 1.8 2.9
Spain 5.2 5.2 6.5 8.3 4.2 -4.3 -15.8 -6.2 0.0 2.4
Other Western Europe 0.7 5.3 4.2 7.6 7.6 -2.9 -12.0 1.3 1.9 2.9
UK 1.1 5.1 2.4 6.4 7.8 -5.0 -15.0 1.3 0.2 3.1
Norway 0.7 10.1 12.7 11.7 12.5 2.0 -9.1 -3.0 6.6 3.4
Sweden 1.8 5.0 8.0 9.7 9.1 1.3 -15.9 4.0 6.6 4.1
Switzerland -1.2 4.5 3.8 4.7 5.1 0.5 -4.9 3.1 2.9 2.3
EMEA 7.6 11.0 11.6 14.9 22.2 8.7 -10.4 5.4 7.3 8.2
Czech Republic 0.4 3.9 1.8 6.0 10.8 -1.5 -9.2 -2.7 4.2 4.6
Hungary 2.1 7.9 5.7 -3.6 1.6 0.4 -6.5 -1.5 2.8 4.1
Poland -0.1 6.4 6.3 14.9 17.6 8.2 -0.8 -1.2 7.3 4.2
Russia 12.8 12.6 10.6 18.0 21.1 10.6 -15.7 3.0 5.5 7.0
Turkey 14.2 28.4 17.4 13.3 3.1 -6.2 -19.1 13.6 4.7 3.0
Ukraine 12.2 -2.2 -0.3 18.7 24.8 1.6 -46.2 0.0 6.0 6.0
Romania 8.7 11.0 15.3 19.9 28.9 19.3 -25.3 -6.0 2.0 6.5
Egypt* -6.2 6.3 10.3 13.3 31.8 15.5 -9.1 4.5 8.0 10.0
Israel -10.7 4.0 4.0 11.3 15.3 4.4 -6.0 4.4 3.8 4.0
Saudi Arabia** 15.6 5.6 25.1 19.1 26.7 17.8 -0.1 11.0 14.0 17.0
UAE** 17.1 11.1 15.7 28.9 105.2 20.8 -15.0 6.0 7.2 10.5
South Africa 9.1 8.9 8.9 12.1 14.2 11.7 4.0 6.2 8.1 7.0
Asia/Pacific 8.3 11.3 12.4 11.2 12.9 12.4 12.5 17.6 14.5 14.2
Japan -0.5 1.4 3.1 0.5 -1.2 -2.6 -14.0 -0.5 0.4 1.8
Australia 9.6 7.0 8.8 4.5 9.8 9.0 -1.1 5.5 5.3 6.5
New Zealand 10.4 12.8 5.1 -0.9 5.5 -2.7 -13.3 -0.7 8.0 7.5
Asia-ex-Japan 16.7 19.8 19.2 18.4 20.4 19.1 22.7 22.6 17.7 16.6
China 27.7 27.6 27.2 24.5 25.8 26.1 30.5 26.0 20.0 18.5
Hong Kong 0.9 2.5 4.1 7.1 3.4 0.8 -1.8 9.0 7.0 2.0
India* 9.7 20.9 15.3 14.3 15.2 4.0 7.2 16.0 14.0 12.0
Indonesia 0.6 14.7 10.9 2.6 9.3 11.9 3.3 8.7 10.0 10.0
Malaysia 2.7 3.1 5.0 7.5 9.4 0.7 -5.6 8.4 6.5 5.2
Philippines 3.6 2.8 -6.6 3.9 10.9 2.7 -0.4 13.9 5.8 6.4
Singapore -4.9 10.1 0.4 14.6 19.9 13.6 -3.3 5.0 6.2 7.5
South Korea 4.4 2.1 1.9 3.4 4.2 -1.9 -0.2 5.8 2.9 3.0
Taiwan -0.1 14.0 2.7 0.1 0.6 -11.2 -11.1 13.4 5.2 3.1
Thailand 12.1 13.2 10.5 3.9 1.5 1.2 -9.0 10.1 4.6 5.0
Vietnam 11.9 10.4 9.7 9.9 23.0 13.2 3.2 8.5 7.5 8.0
Source: HSBC
33
Macro
Q4 2010
Exports
Export volume growth (GDP basis)
% Year 2003 2004 2005 2006 2007 2008 2009 2010f 2011f 2012f
World 5.2 10.6 8.2 10.0 8.4 3.7 -12.5 12.5 6.9 6.8
Developed 1.7 7.5 5.5 8.1 5.8 1.7 -12.8 10.8 5.9 6.3
Emerging 13.7 17.3 13.7 13.6 13.0 7.2 -12.2 15.2 8.3 7.7
North America 0.6 8.4 5.6 7.1 7.6 3.9 -10.4 11.1 7.1 8.5
US 1.6 9.5 6.7 9.0 9.3 6.0 -9.5 11.8 7.1 8.9
Canada -2.3 5.0 1.9 0.6 1.2 -4.6 -14.2 7.8 7.1 6.4
Latin America 5.3 12.3 7.9 8.5 6.4 0.5 -12.0 10.6 5.0 6.1
Mexico 2.7 11.5 6.8 10.9 5.7 0.5 -14.8 9.8 1.0 4.8
Brazil 10.4 15.3 9.3 5.0 6.2 -0.6 -10.3 16.5 13.0 8.0
Argentina 6.0 8.1 13.5 7.3 9.1 1.2 -6.4 9.5 5.1 8.0
Chile 6.5 13.3 4.3 5.1 7.6 3.1 -5.6 -1.0 4.0 5.0
Western Europe 1.2 6.4 5.4 8.4 4.9 0.8 -12.2 8.9 5.4 5.6
Eurozone 1.2 6.7 4.9 8.1 6.0 0.6 -12.9 9.9 5.7 6.1
Germany 2.4 9.2 8.0 13.5 7.9 2.0 -14.3 16.4 9.4 7.0
France -1.2 3.5 3.5 5.0 2.5 -0.8 -12.2 8.6 4.1 6.4
Italy -1.5 3.6 2.0 6.5 3.9 -3.9 -19.1 7.4 3.6 5.4
Spain 3.7 4.2 2.5 6.7 6.7 -1.1 -11.6 8.5 3.7 4.3
UK 1.8 5.0 7.9 11.1 -2.6 1.0 -10.6 4.3 4.2 4.4
Norway -0.3 0.6 -0.1 -0.4 2.1 1.0 -4.0 -0.5 2.6 2.5
Sweden 4.4 10.0 6.6 9.4 5.9 1.0 -12.3 11.7 7.6 4.0
Switzerland -0.5 7.9 7.8 10.3 9.6 3.3 -8.7 10.9 4.4 6.5
EMEA 10.1 11.4 7.1 8.4 7.7 5.1 -9.5 7.2 6.3 6.7
Czech Republic 7.2 20.7 11.6 15.8 15.0 6.0 -10.8 11.9 8.7 8.4
Hungary 6.2 15.0 11.3 18.6 16.2 5.6 -9.1 14.1 9.3 8.8
Poland 14.2 14.0 8.0 14.6 9.1 7.1 -7.9 12.1 8.8 8.5
Russia 12.5 11.8 6.5 7.3 6.3 0.5 -6.5 6.0 2.0 3.0
Turkey 6.9 11.2 7.9 6.6 7.3 2.7 -5.3 6.0 8.9 8.0
Ukraine 10.3 13.8 -11.2 -4.9 3.2 5.2 -25.6 15.0 10.0 10.0
Romania 9.2 14.3 7.2 9.8 7.8 18.9 -5.5 14.9 9.3 8.7
Egypt* 13.8 25.3 20.2 21.3 23.3 28.8 -12.8 -2.8 9.5 8.5
Israel 8.2 18.2 4.3 6.0 9.3 5.2 -12.1 13.0 5.2 6.1
Saudi Arabia 14.5 3.2 4.9 -2.7 -5.5 5.4 -11.2 1.6 2.9 3.4
UAE** 10.7 5.5 6.9 8.4 4.0 4.3 -6.4 -2.9 2.0 3.6
South Africa 0.1 2.8 8.6 6.0 7.5 1.7 -16.5 10.0 11.0 12.5
Asia/Pacific 14.2 18.5 14.3 14.4 13.9 7.2 -14.6 19.1 8.7 7.5
Japan 9.2 14.0 7.0 9.7 8.4 1.7 -24.1 25.6 5.9 4.6
Australia -1.8 3.7 2.3 3.4 3.4 3.1 0.9 5.7 7.8 6.7
New Zealand 2.3 6.1 -0.4 1.7 3.8 -1.4 0.0 4.0 5.8 6.7
Asia-ex-Japan 17.3 21.0 17.4 16.3 15.9 8.8 -13.0 18.4 9.3 8.2
China 32.0 32.0 29.0 25.0 23.8 11.2 -17.9 23.0 12.5 8.0
Asia ex-Japan & China 11.9 16.2 11.7 11.4 10.9 7.0 -9.4 15.4 7.1 8.3
Hong Kong 12.8 15.4 10.6 9.4 8.3 2.5 -10.1 16.5 12.0 13.3
India* 19.0 28.0 31.1 21.1 24.3 29.1 -15.3 20.7 11.7 12.3
Indonesia 5.9 13.5 16.6 9.4 8.5 9.5 -9.7 14.0 8.0 8.0
Malaysia 5.7 2.3 8.3 6.6 4.1 1.6 -10.4 13.0 8.3 7.9
Philippines 4.8 15.0 4.8 13.4 5.5 -2.0 -13.4 18.3 6.8 9.9
Singapore 14.2 19.1 12.4 11.2 8.9 4.1 -9.0 14.4 3.7 6.1
South Korea 14.5 19.7 7.8 11.4 12.6 6.6 -0.8 11.6 6.0 6.4
Taiwan 10.2 15.4 7.8 11.4 9.6 0.6 -9.1 22.8 6.6 7.9
Thailand 7.0 9.6 4.2 9.1 7.8 5.1 -12.7 12.7 5.5 5.9
Vietnam 20.6 31.4 22.5 22.1 22.7 29.9 -5.4 13.9 11.8 10.5
Source: HSBC
34
Macro
Q4 2010
Industrial production
Industrial production
% Year 2003 2004 2005 2006 2007 2008 2009 2010f 2011f 2012f
World 4.6 6.2 5.3 6.3 6.1 1.2 -5.9 9.4 5.4 5.6
Developed 1.0 2.5 1.9 2.9 2.7 -2.7 -12.6 6.9 2.7 3.5
Emerging 9.3 10.8 9.2 10.3 10.1 5.7 2.0 12.4 8.6 8.2
North America 1.2 2.3 3.1 2.0 2.5 -3.4 -9.3 5.4 3.2 2.9
US 1.3 2.3 3.2 2.2 2.7 -3.3 -9.3 5.4 3.0 2.9
Canada 0.2 1.5 1.7 -0.3 0.1 -4.2 -10.0 6.0 5.4 2.8
Latin America 2.6 7.3 4.0 4.7 4.9 1.4 -7.1 9.1 5.7 4.8
Mexico -0.2 3.7 2.8 5.7 2.0 -0.6 -7.3 5.9 4.1 4.8
Brazil 0.1 8.3 3.1 2.8 6.0 3.1 -7.4 12.3 7.0 5.0
Argentina 16.2 10.7 8.0 8.4 7.5 1.1 -6.0 8.8 4.8 4.0
Chile 5.3 10.2 6.0 3.3 6.0 -0.2 -6.7 1.9 7.0 6.0
Western Europe 0.2 2.0 0.9 3.3 2.9 -1.9 -13.8 6.0 3.2 4.1
Eurozone 0.3 2.1 1.4 4.0 3.4 -1.7 -14.9 6.7 3.4 4.8
Germany 0.2 2.4 2.9 5.7 6.0 -0.1 -15.4 10.3 5.9 5.8
France -1.1 1.3 0.2 1.3 1.2 -2.7 -12.1 5.3 1.4 1.4
Italy -0.6 -0.3 -0.5 3.6 1.9 -3.8 -18.2 5.4 2.6 4.6
Spain 1.3 1.8 1.0 3.9 1.9 -7.3 -15.7 0.6 0.8 3.6
Other Western Europe -0.3 1.5 -0.4 1.1 1.3 -2.5 -10.2 3.8 2.6 1.9
UK -0.6 1.0 -1.3 0.1 0.1 -3.1 -10.1 3.4 1.8 1.5
Norway -1.9 -1.2 -0.3 -2.3 -1.2 0.2 -3.6 -5.2 0.4 1.4
Sweden 1.8 4.1 2.4 3.7 4.1 -3.7 -17.3 10.1 7.9 2.7
Switzerland 0.4 4.0 2.7 7.8 9.5 1.3 -7.9 6.5 4.1 3.9
EMEA 6.8 7.7 4.3 6.4 6.1 1.4 -9.4 7.4 4.9 4.5
Czech Republic 1.6 10.4 3.9 8.3 10.6 -1.8 -13.4 8.5 5.8 6.2
Hungary 6.4 8.3 7.0 10.6 8.2 -1.6 -16.9 9.8 5.9 6.2
Poland 8.7 12.7 4.0 12.0 9.4 4.6 -3.6 10.9 7.7 5.9
Russia 7.0 6.6 4.0 4.4 4.1 0.0 -11.3 7.4 3.1 2.5
Turkey 8.8 9.8 5.4 7.8 6.9 -0.9 -9.6 9.5 6.2 6.0
Ukraine 15.8 12.5 3.1 6.2 10.2 -3.1 -21.9 9.7 6.0 6.0
Romania -0.1 1.6 -2.5 9.4 10.1 2.6 -4.4 3.8 3.4 4.6
Non-European EMEA 3.9 4.7 4.4 5.2 5.0 4.4 -5.1 4.4 4.6 4.8
Egypt* 2.3 1.8 4.4 5.8 7.3 8.0 3.7 5.0 6.2 6.5
Israel -0.3 6.9 3.6 8.5 4.3 6.9 -6.2 10.4 5.4 5.5
Saudi Arabia 13.4 6.6 6.4 2.0 2.9 4.3 -2.1 2.8 3.5 3.9
UAE 12.7 6.7 5.6 10.3 8.0 6.4 -4.5 1.5 4.3 4.1
South Africa -1.9 4.0 3.0 4.8 4.6 0.9 -12.5 3.8 4.2 4.4
Asia/Pacific 9.4 10.7 9.4 10.7 10.2 5.5 1.5 14.3 8.0 8.6
Japan 3.3 5.5 1.1 4.8 2.8 -3.4 -21.9 15.2 -0.4 3.9
Australia 0.4 0.5 1.6 1.8 2.9 3.0 -2.4 5.4 1.9 2.1
New Zealand 3.4 4.2 0.5 -3.7 1.4 -0.8 -7.7 0.8 0.6 3.0
Asia-ex-Japan 11.4 12.4 11.6 12.5 12.2 7.7 7.0 14.4 10.2 9.9
China 16.7 16.3 15.9 16.2 17.1 12.9 12.9 15.5 13.2 12.5
Asia ex-Japan & China 6.0 8.9 6.5 6.5 6.1 2.2 -3.2 15.5 7.5 7.5
Hong Kong -9.2 2.9 2.5 2.2 -1.5 -6.6 -8.3 0.7 5.0 3.1
India 7.0 8.4 8.2 11.5 8.5 2.7 6.5 10.6 6.6 6.9
Indonesia 5.3 6.4 4.6 4.6 4.7 3.7 2.1 5.5 6.0 5.0
Malaysia 8.4 11.3 5.2 6.7 2.8 1.4 -9.0 12.0 6.3 5.0
Philippines 4.2 5.0 5.3 4.2 3.3 4.2 -4.4 13.1 9.2 8.5
Singapore -30.3 13.9 9.5 11.9 5.9 -4.2 -4.2 31.3 8.2 10.7
South Korea 5.5 10.4 6.3 8.4 6.9 3.4 -0.8 17.0 6.9 6.0
Taiwan 9.1 9.3 3.8 4.7 7.8 -1.8 -8.1 24.6 8.1 10.0
Thailand 10.4 8.3 9.1 7.3 8.2 5.3 -5.1 18.3 7.8 8.6
Vietnam 19.8 17.6 25.5 16.0 11.6 11.8 7.2 12.9 13.0 13.0
Source: HSBC
35
Macro
Q4 2010
Wage growth
Wage growth
% Year 2003 2004 2005 2006 2007 2008 2009 2010f 2011f 2012f
World 6.2 5.5 6.2 6.3 6.8 6.8 3.2 5.1 4.6 4.7
North America 3.6 3.7 3.3 3.1 3.4 2.9 1.7 2.0 2.0 2.2
US 3.7 3.8 3.2 3.1 3.3 2.9 1.7 1.9 2.0 2.2
Canada 2.7 2.7 3.9 2.5 4.3 2.9 1.6 3.4 2.3 2.6
Latin America 7.1 6.1 10.9 8.9 9.3 10.6 8.1 10.7 10.4 9.1
Mexico 4.9 4.4 4.5 4.3 4.3 4.5 4.0 4.5 4.2 3.5
Brazil - 4.6 7.6 7.2 7.3 9.9 8.4 9.3 9.0 7.0
Argentina 12.1 11.0 26.0 19.4 20.0 23.4 17.3 26.0 25.0 22.0
Chile 6.6 2.9 5.0 5.4 7.3 8.5 5.0 3.0 4.0 4.0
Western Europe 3.0 2.8 2.8 3.0 3.5 3.7 2.7 1.8 1.7 2.0
Eurozone 2.9 2.4 2.3 2.5 3.0 3.6 2.7 1.5 1.6 1.8
Germany 2.0 1.3 1.0 1.3 1.3 2.9 2.3 1.7 1.8 2.0
France 2.4 2.5 2.8 2.8 2.7 2.9 2.2 1.8 2.0 2.2
Italy 2.2 2.8 3.1 3.0 2.2 3.5 3.1 2.3 2.2 2.2
Spain 4.9 4.1 2.9 3.1 4.5 5.2 4.3 1.9 2.0 2.6
UK 3.2 4.2 4.6 4.7 4.9 3.5 2.0 2.0 1.3 1.8
Norway 4.4 4.1 3.9 4.1 6.3 5.6 4.3 4.1 4.1 4.4
Sweden 0.0 0.0 0.0 0.0 0.0 0.0 2.9 2.3 2.4 2.5
EMEA 11.6 9.7 12.4 13.1 14.9 13.7 2.4 6.2 6.4 7.3
Czech Republic 5.8 6.3 5.0 6.6 7.2 8.3 4.0 2.5 3.0 4.5
Hungary 12.1 6.2 8.7 8.2 8.0 7.9 0.5 2.7 4.0 5.0
Poland 4.7 -8.1 3.2 5.0 9.1 10.3 4.4 4.0 5.3 5.8
Russia 10.4 10.6 12.6 13.5 17.2 11.5 -2.8 3.0 2.0 4.0
Turkey 17.4 11.7 12.5 11.5 9.2 8.5 2.0 6.0 8.5 7.0
Ukraine 22.8 27.6 36.7 29.2 31.9 33.7 9.8 11.5 10.4 14.0
Romania 23.6 22.6 17.1 18.9 22.6 23.6 8.5 2.0 6.0 8.0
Israel -3.0 2.5 1.0 1.6 2.1 -0.8 -2.8 1.5 2.5 2.7
South Africa 8.1 7.5 6.5 9.1 8.8 12.4 6.9 8.7 8.5 8.0
Asia/Pacific 10.3 8.6 9.6 13.1 13.7 14.0 6.6 12.7 10.5 10.3
Japan -0.8 -0.7 0.6 0.2 -1.0 -0.3 -3.9 1.0 0.5 0.5
Australia 3.6 3.6 4.0 4.0 4.1 4.1 3.6 3.2 3.9 3.9
New Zealand 2.3 2.3 2.8 3.2 3.2 3.6 2.6 2.4 3.1 3.5
Asia-ex-Japan 13.4 11.1 11.9 12.6 13.5 13.6 7.2 12.0 10.0 9.8
China 13.6 12.3 12.3 14.0 16.2 15.8 9.0 13.0 11.5 11.0
Asia ex-Japan, China & India 9.4 5.8 7.7 6.4 4.6 5.6 1.8 6.8 4.4 4.9
Hong Kong -1.9 -1.2 1.1 1.7 2.5 3.4 -1.0 2.0 2.5 3.0
Philippines 0.4 3.6 8.5 7.9 4.5 5.3 3.8 4.5 5.5 6.5
Singapore 3.6 2.6 4.3 3.5 4.1 5.0 0.3 3.0 4.0 0.0
South Korea 9.4 6.5 6.4 5.6 5.9 3.1 -0.7 6.3 4.9 6.0
Taiwan 19.7 9.7 11.2 8.0 4.7 6.3 6.5 10.8 3.6 5.0
Thailand 2.2 2.3 6.9 6.2 3.0 10.2 -2.5 5.1 5.0 3.4
Note: Global and regional aggregates are calculated using the World Bank's 2004 PPP weights
Source: HSBC
36
Macro
Q4 2010
Budget balance
Budget balance
% GDP 2003 2004 2005 2006 2007 2008 2009 2010f 2011f 2012f
North America -3.1 -3.2 -2.3 -1.7 -1.1 -3.0 -9.5 -8.5 -7.4 -6.1
US -3.4 -3.5 -2.6 -1.9 -1.2 -3.2 -10.0 -9.0 -7.9 -6.5
Canada* 0.7 0.7 0.8 1.0 0.7 -0.4 -3.4 -3.0 -1.6 -0.9
Latin America -2.5 -0.8 -1.0 -0.9 -0.6 -0.4 -2.6 -2.2 -2.3 -2.4
Mexico -0.6 -0.2 -0.1 0.1 0.0 -0.1 -2.3 -2.7 -2.4 -2.1
Brazil -5.1 -2.8 -3.4 -3.5 -2.8 -2.0 -3.3 -2.6 -2.5 -3.5
Argentina 0.5 2.6 1.8 1.8 1.1 1.4 -0.6 -0.1 -1.9 -0.6
Chile -0.8 2.4 4.7 7.5 8.6 5.0 -4.7 -1.7 -0.2 0.0
Western Europe -2.8 -2.7 -2.2 -1.1 -0.5 -2.4 -6.6 -6.9 -5.8 -4.7
Eurozone -3.1 -3.0 -2.6 -1.4 -0.6 -2.0 -6.3 -6.7 -5.8 -4.9
Germany -4.0 -3.8 -3.2 -1.6 0.2 0.0 -3.3 -3.9 -3.2 -2.6
France -4.1 -3.6 -3.0 -2.3 -2.7 -3.3 -7.5 -7.7 -6.1 -4.7
Italy -3.5 -3.5 -4.2 -3.3 -1.5 -2.7 -5.3 -5.4 -5.0 -4.5
Spain -0.2 -0.4 1.0 2.0 1.9 -4.1 -11.2 -10.3 -7.1 -6.8
Other Western Europe -1.9 -1.7 -1.0 -0.2 -0.2 -3.7 -7.4 -7.4 -5.9 -4.2
UK* -2.9 -3.3 -2.9 -2.3 -2.4 -6.7 -9.9 -9.9 -8.2 -6.4
Norway 7.3 11.1 15.1 18.5 17.7 19.1 9.7 10.0 11.0 13.0
Sweden -1.2 0.6 1.9 2.2 3.5 2.2 -1.1 -1.8 -1.1 -0.5
EMEA -2.1 -0.3 2.6 3.2 2.1 2.7 -5.4 -4.3 -3.9 -3.4
Hungary -7.2 -6.4 -7.9 -9.4 -5.0 -3.8 -4.0 -4.0 -3.7 -3.5
Poland -6.2 -5.4 -4.1 -3.6 -1.9 -3.7 -7.1 -6.8 -5.9 -4.5
Russia 1.7 4.3 7.5 7.4 5.4 4.1 -5.9 -4.7 -4.1 -3.7
Turkey -8.8 -5.4 -1.3 -0.5 -1.6 -1.8 -5.5 -4.4 -5.2 -3.3
Ukraine 0.2 -3.3 -1.1 -0.7 -1.4 -1.3 -6.6 -6.4 -4.2 -3.3
Romania -1.5 -1.2 -1.2 -2.2 -2.5 -5.4 -8.3 -7.8 -6.1 -5.5
Non-European EMEA -2.2 0.3 3.8 5.6 3.6 7.4 -4.8 -3.0 -2.8 -3.4
Egypt* -9.1 -9.1 -9.4 -9.2 -5.6 -6.8 -6.6 -8.1 -7.7 -7.5
Israel -5.5 -3.9 -1.9 -0.9 0.0 -2.1 -5.2 -3.9 -3.7 -3.5
Saudi Arabia 4.5 11.4 18.4 21.7 12.4 31.8 -3.2 2.3 1.9 -2.0
UAE 3.6 10.0 20.8 26.5 21.6 21.0 0.4 5.6 4.5 6.0
South Africa -2.5 -2.1 -0.2 0.9 0.1 -0.8 -5.9 -5.2 -4.6 -4.0
Asia/Pacific -3.3 -2.5 -2.5 -1.2 -0.4 -2.0 -4.7 -4.3 -3.8 -3.2
Japan -7.7 -5.5 -6.1 -1.0 -1.4 -3.5 -10.5 -9.0 -8.2 -7.5
Australia 1.8 1.2 1.4 1.5 1.7 0.3 -2.5 -4.5 -2.8 -0.8
New Zealand 4.0 4.1 4.5 5.1 4.0 0.4 -3.5 -4.3 -3.0 -2.0
Asia-ex-Japan -2.5 -2.0 -1.8 -1.4 -0.2 -1.8 -3.5 -3.2 -2.8 -2.3
China -2.2 -1.3 -1.2 -1.0 0.6 -0.4 -2.2 -2.8 -2.6 -2.1
Asia ex-Japan & China -2.8 -2.6 -2.4 -1.8 -1.1 -3.3 -4.8 -3.6 -3.0 -2.4
Hong Kong -3.2 1.7 1.0 4.0 7.7 0.1 0.1 -1.4 -0.3 1.0
India* -4.7 -4.3 -4.5 -3.8 -2.9 -6.6 -7.1 -5.5 -4.8 -4.5
Indonesia -1.7 -1.0 -0.5 -0.9 -1.3 -0.1 -1.6 -1.6 -1.2 -1.2
Malaysia -4.4 -4.1 -3.6 -3.3 -3.2 -4.8 -7.0 -4.5 -3.2 -2.1
Philippines -4.6 -3.8 -2.7 -1.0 -0.2 -0.9 -3.9 -4.3 -3.5 -3.1
Singapore -1.9 -0.8 -0.2 0.6 2.8 1.1 0.4 -0.2 1.4 1.5
South Korea 1.1 0.7 0.4 0.4 3.8 1.2 -1.7 0.3 0.6 1.2
Taiwan -1.2 -2.2 -0.6 0.1 -0.1 -0.9 -4.0 -3.4 -2.8 -1.0
Thailand 0.3 0.0 -0.5 1.4 -2.0 -1.1 -4.0 -1.6 -1.2 -0.9
Vietnam -4.9 -4.9 -4.9 -5.0 -5.0 -5.0 -8.0 -7.0 -5.5 -5.0
Note: * = based upon Egyptian financial year (July-June). Global and regional aggregates are calculated using the World Banks' 2004 PPP weights
Source: HSBC
37
Macro
Q4 2010
Current account
Percentage
% GDP 2003 2004 2005 2006 2007 2008 2009 2010f 2011f 2012f
North America -4.2 -4.7 -5.3 -5.4 -4.6 -4.2 -2.7 -3.2 -2.8 -2.6
US -4.7 -5.3 -5.9 -6.0 -5.1 -4.7 -2.7 -3.2 -3.0 -2.8
Canada 1.2 2.3 1.9 1.4 0.8 0.4 -2.8 -2.6 -1.5 -0.2
Latin America 0.9 1.1 1.1 1.3 0.5 -1.0 -0.1 -1.2 -1.9 -2.6
Mexico -1.0 -0.7 -0.6 -0.5 -0.8 -1.5 -0.7 -0.7 -1.3 -1.6
Brazil 0.8 1.8 1.6 1.3 0.1 -1.7 -1.5 -2.5 -3.4 -4.1
Argentina 6.3 2.3 3.1 3.8 2.8 2.2 3.9 1.6 0.7 -0.2
Chile -1.1 2.2 0.8 4.6 4.4 -1.5 2.6 -0.5 -1.4 -2.2
Western Europe 0.6 0.9 0.4 0.2 0.3 -1.0 0.0 0.0 0.4 0.3
Eurozone 0.3 0.8 0.1 -0.1 0.2 -1.7 -0.6 -0.5 -0.1 -0.1
Germany 1.9 4.7 5.1 6.5 7.6 6.7 4.9 5.1 5.3 5.1
France 0.7 0.5 -0.5 -0.5 -1.0 -1.9 -1.9 -1.9 -1.8 -1.9
Italy -1.3 -0.9 -1.7 -2.6 -2.4 -3.6 -3.2 -3.0 -2.1 -2.0
Spain -3.5 -5.3 -7.4 -9.0 -10.0 -9.7 -5.5 -5.0 -4.5 -4.9
UK -1.6 -2.1 -2.6 -3.4 -2.6 -1.6 -1.1 -1.9 -1.8 -1.7
Norway 12.3 12.7 16.3 17.2 14.1 17.8 13.1 14.2 15.8 14.7
Sweden 6.9 6.5 6.7 8.4 8.5 8.8 7.5 6.2 6.8 6.8
Switzerland 13.3 13.4 14.0 15.1 9.1 1.7 11.9 13.7 14.0 13.0
EMEA 2.5 3.8 5.2 3.7 1.5 1.4 0.7 0.7 -0.6 -1.9
European EMEA 2.6 3.5 3.9 2.1 0.0 -0.1 0.9 0.5 -0.9 -2.0
Czech Republic -6.2 -5.2 -1.3 -2.4 -3.2 -0.6 -1.0 -2.1 -2.5 -2.7
Hungary -8.7 -8.4 -7.2 -7.5 -6.8 -7.2 0.2 0.6 0.9 0.5
Poland -2.1 -4.0 -1.2 -2.7 -4.8 -5.1 -1.7 -2.3 -3.2 -3.3
Russia 8.3 10.0 11.1 9.5 5.9 6.1 4.0 4.3 1.7 0.7
Turkey -2.5 -3.7 -4.6 -6.1 -5.9 -5.7 -2.3 -5.1 -5.8 -5.9
Ukraine 5.8 10.5 3.1 -1.5 -3.7 -7.2 -1.7 -0.6 -0.7 -6.8
Romania -5.8 -8.4 -8.6 -10.4 -13.4 -12.2 -4.4 -4.5 -5.0 -6.2
Non-European EMEA 2.2 4.5 8.1 7.1 4.8 4.9 0.3 1.0 0.1 -1.6
Egypt* 2.4 4.3 3.3 1.6 1.7 0.5 -2.4 -2.0 -2.1 -1.8
Israel 1.2 2.2 3.2 5.1 2.9 0.6 3.8 2.9 2.5 2.3
Saudi Arabia 5.5 15.4 28.8 27.7 24.2 27.1 6.0 7.8 6.6 0.5
UAE 8.6 10.0 17.6 20.6 9.5 8.8 3.4 9.1 4.8 2.6
South Africa -1.3 -3.2 -3.8 -6.4 -7.3 -7.4 -4.0 -4.6 -5.1 -5.2
Asia/Pacific 3.0 2.8 3.7 5.1 5.9 4.4 3.7 2.8 2.5 2.1
Japan 3.2 3.7 3.7 3.9 4.8 3.3 2.8 3.5 3.6 4.0
Australia -5.2 -6.0 -5.7 -5.3 -6.2 -4.5 -4.4 -2.5 -2.3 -4.4
New Zealand -4.2 -6.2 -8.3 -8.4 -8.0 -8.6 -2.9 -3.0 -5.0 -3.0
Asia-ex-Japan 3.4 3.0 4.1 5.8 6.7 5.0 4.3 2.8 2.4 1.9
China 2.8 3.6 7.1 9.3 10.6 9.4 5.8 4.5 4.0 2.8
Hong Kong 9.2 8.9 12.4 11.4 10.8 10.2 7.2 9.5 7.4 9.3
India** 1.5 0.1 -2.0 -1.1 -0.8 -2.7 -2.3 -4.0 -4.0 -3.7
Indonesia 3.4 0.6 0.1 3.0 2.4 0.0 2.0 1.0 1.1 1.0
Malaysia 12.8 12.1 15.0 16.7 15.8 17.5 16.5 13.9 14.1 14.2
Philippines 0.9 1.1 2.0 4.5 4.8 2.2 5.3 6.5 6.0 5.5
Singapore 30.2 25.3 26.0 24.2 26.7 18.5 17.8 18.7 19.2 18.7
South Korea 2.0 4.1 1.9 0.6 0.6 -0.6 5.1 3.4 2.9 3.1
Taiwan 9.8 5.8 4.8 7.0 8.9 6.8 11.3 8.7 6.2 5.7
Thailand 5.6 1.7 -4.3 1.1 6.6 0.4 7.7 3.9 4.9 5.6
Vietnam -4.9 -2.1 -1.1 -0.3 -9.8 -11.6 -8.0 -8.9 -8.4 -7.1
Source: HSBC
38
Macro
Q4 2010
Balance
USDbn 2003 2004 2005 2006 2007 2008 2009 2010f 2011f 2012f
North America -510.0 -608.0 -727.0 -780.4 -712.7 -700.2 -415.4 -511.6 -471.4 -437.9
US -521.0 -630.0 -748.0 -798.4 -724.7 -707.2 -378.4 -471.5 -447.8 -434.3
Canada 11.0 22.0 21.0 18.0 12.0 7.0 -37.0 -40.2 -23.6 -3.6
Latin America 4.3 11.7 15.9 23.7 7.7 -40.1 -14.4 -52.9 -87.3 -115.7
Mexico -7.3 -5.2 -4.9 -4.8 -8.7 -16.2 -5.7 -7.3 -15.2 -19.2
Brazil 4.2 11.7 14.0 13.6 1.6 -28.2 -24.3 -50.6 -72.2 -90.0
Argentina 8.1 3.2 5.3 7.8 7.4 6.9 11.5 6.0 3.1 -1.3
Chile -0.8 2.1 1.5 7.2 7.5 -2.5 4.2 -1.0 -3.1 -5.2
Western Europe 100.4 133.1 85.7 64.0 81.3 -125.8 49.1 53.2 106.3 7.1
Eurozone 38.4 75.3 10.4 -16.2 17.8 -229.8 -75.6 -54.1 -16.7 -19.4
Germany 47.0 125.1 138.8 191.9 250.0 263.1 164.5 164.0 183.6 183.6
France 14.0 11.0 -10.0 -13.0 -25.0 -59.0 -52.0 -46.7 -50.0 -52.7
Italy -19.9 -15.9 -28.6 -49.0 -50.9 -89.5 -69.2 -60.5 -45.9 -43.2
Spain -31.6 -53.7 -80.9 -112.9 -142.2 -167.0 -81.8 -68.4 -65.5 -73.6
UK -30.2 -45.2 -58.9 -83.1 -73.2 -47.3 -25.5 -42.8 -44.8 -42.9
Norway 27.1 32.0 48.4 59.8 54.3 88.2 48.4 56.9 64.1 0.0
Sweden 22.1 23.0 23.9 34.3 38.9 46.8 30.0 26.4 31.1 0.0
Switzerland 43.0 48.0 51.0 61.0 39.0 9.0 59.0 66.7 72.5 69.3
EMEA 34.6 76.7 164.9 167.0 98.6 143.6 45.9 53.2 -19.7 -88.8
Czech Republic -5.8 -5.6 -1.6 -3.5 -5.3 -1.5 -2.0 -4.0 -5.4 -6.3
Hungary -6.8 -8.3 -7.7 -8.2 -8.9 -11.8 0.2 0.8 1.3 0.8
Poland -4.6 -10.1 -3.7 -9.4 -20.3 -26.9 -7.2 -10.6 -17.3 -19.8
Russia 35.8 59.9 84.3 94.3 77.2 102.3 49.0 64.4 28.1 13.3
Turkey -7.5 -14.4 -22.1 -32.2 -38.3 -41.9 -13.9 -37.6 -48.7 -54.6
Ukraine 2.9 6.8 2.5 -1.6 -5.3 -12.9 -1.9 -0.8 -1.1 -11.4
Romania -3.5 -6.4 -8.5 -12.8 -22.9 -24.9 -7.1 -7.0 -8.8 -12.2
Middle East -1.4 -1.1 22.8 55.3 122.4 144.1 120.1 156.8
Non-European EMEA -1.4 -0.4 20.6 48.4 113.2 127.7 99.4 136.4 21.7 41.0
Egypt* 1.9 3.4 2.9 1.8 2.3 0.9 -4.4 -4.3 -5.1 -5.1
Israel 1.4 2.7 4.3 7.4 4.9 1.3 7.4 6.4 6.0 6.0
Saudi Arabia 11.8 38.7 90.8 98.9 93.3 132.4 22.7 32.3 29.7 2.5
UAE 7.5 10.5 24.4 36.0 19.6 22.3 7.8 22.7 12.3 7.3
South Africa -2.2 -6.9 -9.2 -16.4 -20.7 -20.5 -11.8 -16.0 -19.5 -21.5
Asia/Pacific 242.1 305.3 364.2 501.1 661.0 608.2 559.7 505.7 511.9 544.9
Japan 131.2 170.9 166.2 174.1 199.9 156.1 137.7 187.9 182.4 205.8
Australia -29.3 -39.8 -41.4 -41.2 -59.7 -46.6 -45.3 -29.7 -29.3 -58.2
New Zealand -3.4 -6.2 -9.2 -9.1 -10.6 -11.3 -1.5 -10.7 -10.1 -10.1
Asia-ex-Japan 157.9 180.0 248.4 376.9 530.9 510.6 467.8 380.0 389.2 349.2
China 45.9 68.7 160.8 253.3 371.8 426.1 297.1 250.0 260.0 200.0
Hong Kong 14.7 14.7 22.1 21.7 22.4 21.9 15.1 21.8 17.7 23.3
India** 8.8 0.8 -14.7 -9.3 -8.1 -31.0 -26.6 -58.2 -68.7 -72.6
Indonesia 8.1 1.6 0.3 10.8 10.5 0.1 10.7 7.1 9.2 9.4
Malaysia 13.0 15.0 21.0 26.0 30.0 40.0 32.0 32.7 38.8 43.5
Philippines 0.7 0.9 2.0 5.3 7.1 3.6 8.6 12.3 13.4 14.2
Singapore 21.6 28.5 32.5 35.3 47.3 36.2 32.5 40.8 48.1 52.8
South Korea 11.9 28.2 15.0 5.4 5.9 -5.8 42.7 33.8 33.1 37.9
Taiwan 30.5 19.7 17.6 26.3 35.2 27.5 42.9 36.5 28.7 28.1
Thailand 4.8 2.8 -7.6 2.3 15.7 1.2 20.3 12.3 18.5 22.0
Source: HSBC
39
Macro
Q4 2010
US
Disappointing Since we expected growth to fall far short of those Kevin Logan
Chief US Economist
targets, we were confident that the Fed could not HSBC Securities (USA) Inc.
The recovery from the Great Recession of 2008-
consider an increase in the fed funds rate before the +1 212 525 3195
2009 is turning out to be less robust than many kevin.r.logan@us.hsbc.com
third quarter of 2011. Now with GDP growth likely
observers had expected. This is particularly true for Ryan Wang
to be even further below Fed expectations, we are Economist
the policymakers at the Federal Reserve. The latest HSBC Securities (USA) Inc.
pushing out that forecast. A rate hike before the +1 212 525 3181
annual revision to GDP data showed that the
second quarter of 2012 now seems unlikely. ryan.wang@us.hsbc.com
recession was a bit deeper than originally estimated
and that the rebound since the middle of 2009 has Sluggish growth in consumer spending is the main
been softer than the preliminary numbers suggested. reason for the shortfall in GDP growth over the past
Partly as a result, we have cut our GDP forecast for year. The burden of excess debt and the ongoing
2010 to 2.7%, down from our July quarterly update process of deleveraging lifted the nation’s personal
of 3.1%. For 2011, we are now looking for 2.5% savings rate from an average of 4.1% in 2008 to 5.8%
growth, a slight downgrade from 2.6% previously. in the first half of 2010. As long as consumers strive
to increase their savings, the growth of final demand
The GDP data have thrown cold water on the
will be constrained. That in turn will limit the growth
Federal Reserve’s expectation of an accelerating
in business investment spending. Meanwhile, state
economic expansion that would allow them to “exit”
and local government spending continues to be held
from an accommodative policy stance. In June, the
down by mounting budget constraints. All in all,
FOMC’s “central tendency” forecast was for 3.3%
GDP growth is likely to fall short of 3.0% in 2011.
GDP growth this year and 3.9% growth in 2011.
% q-o-q annualised
2010f 2011f 2012f Q3 10f Q4 10f Q1 11f Q2 11f Q3 11f Q4 11f
Consumer spending 1.5 2.2 2.5 1.9 2.0 2.2 2.3 2.4 2.5
Government consumption 1.0 1.0 0.9 1.6 1.3 0.2 0.5 0.8 0.4
Private fixed investment 4.3 7.5 8.3 3.6 6.8 6.9 7.9 7.5 7.4
Housing 0.5 5.3 8.5 -6.0 5.0 5.0 6.0 6.0 8.0
Stockbuilding (ppt contribution) 1.3 -0.1 0.0 0.3 -0.6 0.0 -0.3 0.1 0.1
Domestic demand 3.2 2.6 3.0 2.4 1.9 2.4 2.5 2.9 2.9
Exports 11.8 7.1 8.9 8.5 6.4 6.4 7.4 6.7 7.4
Imports 12.5 6.5 5.9 6.3 5.5 4.7 4.7 3.8 5.5
GDP (year) 2.7 2.5 3.2 3.2 2.4 2.1 2.4 2.5 2.8
GDP (% quarter annualised) - - - 2.5 1.8 2.5 2.7 3.2 2.9
Industrial production (% year) 5.4 3.0 2.9 6.4 5.2 4.1 3.1 2.5 2.6
Unemployment (%) 9.7 9.5 8.7 9.6 9.8 9.7 9.5 9.4 9.3
GDP deflator (% year) 0.8 0.9 1.1 0.9 1.1 1.1 0.9 0.9 1.0
Consumer prices (% year) 1.6 0.9 1.1 1.2 0.8 0.7 1.1 1.0 1.0
Employment costs (% year) 1.9 2.0 2.2 2.0 2.1 2.0 2.0 2.1 2.2
Current account (USDbn) -471.5 -447.8 -434.3 -482.6 -483.9 -460.6 -437.7 -433.3 -459.3
Current account (% GDP) -3.2 -3.0 -2.8 -3.3 -3.3 -3.1 -2.9 -2.9 -3.0
Budget balance (% GDP)* -9.0 -7.9 -6.5 - - - - - -
USD effective 78.8 72.5 83.0 77.0 74.0 73.0
3-month money (%) 0.3 0.4 1.5 0.3 0.3 0.3 0.3 0.3 0.4
10-year bond yield (%) 2.3 2.5 3.0 2.6 2.3 2.0 2.0 2.2 2.5
Note: *= based on fiscal year
Source: HSBC
40
Macro
Q4 2010
Upswing in business demand has slowed Business output

Index Index  New orders flowing to both manufacturing and non-
70 70 manufacturing firms rebounded sharply from the depths of
the recession but more recently have begun to taper off.
60 60  The slowdown in the flow of new orders reported by
purchasing managers to the Institute for Supply
50 50 Management (ISM) is probably a prelude to slower GDP
growth in the quarters ahead.
20% manufacturing,
40 80% non-manufacturing 40  Currently, GDP is about 6% below its potential level. A
slowdown in the growth of production would leave a
significant degree of slack in the economy, putting
30 30 persistent downward pressure on inflation.
00 01 02 03 04 05 06 07 08 09 10
ISM weighted new orders index
Source: Institute for Supply Management
Core inflation lower than at any time since the 1960s Inflation
% Yr % Yr  Core measures of inflation have dropped below 1.0%, a
4 4 level not seen since the early 1960s.
 Econometric models linked to measures of excess
3 3 demand point to even lower inflation in the year ahead.
 The Federal Reserve has an implicit inflation target of
2 2
1.7% to 2.0%. The policymakers may soon consider
adopting a more accommodative policy stance to
1 1
prevent the rate of inflation from falling further.
0 0
00 01 02 03 04 05 06 07 08 09 10
Cleveland Fed Trimmed Mean CPI
Dallas Fed Trimmed Mean PCE Inflation
Source: Federal Reserve Bank of Dallas, Federal Reserve Bank of Cleveland
Wage income at 2007 levels; proprietors’ at 2005 levels Income and profits
 Gains in wage and salary income have been particularly
3.5 3.5
weak since the end of the recession in June 2009. In a
3.0 3.0 period when the personal savings rate is rising, this
further damps growth in overall consumer spending.
2.5 2.5
 Small business income has recovered even more slowly,
2.0 2.0 and is currently well below the level reached in 2006.
1.5 1.5  Sluggish income growth contributes to low consumer
1.0 1.0 confidence and political discontent. It is possible that this
discontent could lead to a change in the control of the
0.5 0.5 House of Representatives in the upcoming November
89 91 93 95 97 99 01 03 05 07 09 11 elections.
Proprietors' income, 1990 = 100
Wage and salary income, 1990 = 100
Source: Bureau of Economic Analysis
41
Macro
Q4 2010
Canada
Humble pie From a policy standpoint, we expect the BoC to Stewart Hall
Economist
pause the rate cycle at its October meeting, driven HSBC Securities (Canada) Inc.
Canada has seen a sudden fall in the rate of +1 416 868 7523
by deceleration in the recovery, the uncertain
economic expansion. From Q1’s robust 5.9% q-o-q stewart.hall@hsbc.ca
outlook for the US economy and a subdued
ann. the economy decelerated to 2.0% in Q2 2010.
inflation profile.
And as we move deeper into the third quarter,
In broad terms, we expect the Canadian economy
GDP growth has continued to stagnate as
to continue on the road of recovery, although
consumer demand moderates and net trade drags,
growth rates will be characterized as incremental
setting the economy up for another lacklustre
in keeping with the overall tone of the developed-
performance. Although Canada maintains a fiscal
world economic environment. The uneven
profile that will save it from much of the burden
recovery in the US will remain a dominant
of austerity that many developed economies will
concern. Although Canada will benefit from the
bear in the years to come, fiscal stimulus will
high-growth emerging economies, its primary
come to an end with the close of fiscal 2010/11 in
point of attachment with the world economy is the
March of next year.
US, which remains the destination for more than
Yet all is not as gloomy as it may appear. M3 70% of Canadian exports.
continues to grow (6.0% y-o-y). Strong
employment growth and resurgent capex are
expected to continue lending a hand to what looks
like a decent picture for final domestic demand.
% Year
Government consumption 3.3 0.7 0.3 3.1 1.9 1.7 1.1 0.2 -0.4
Investment 7.3 7.2 3.9 8.4 9.1 8.4 7.9 6.7 5.8
Stockbuilding (% GDP) 0.9 0.9 0.7 1.2 1.1 1.0 1.0 0.9 0.7
Domestic demand 5.3 3.1 2.1 5.7 5.2 4.2 3.4 2.6 2.2
Exports 7.8 7.1 6.4 9.5 8.0 7.4 7.5 7.1 6.6
Imports 14.3 8.6 5.2 14.2 13.5 11.9 9.5 7.4 6.0
GDP 3.1 2.1 2.3 3.7 3.0 2.2 2.2 2.0 2.1
GDP (% quarter annualised) - - - 2.2 1.9 2.6 1.9 1.7 2.0
Industrial production 6.0 5.4 2.8 9.5 8.7 7.1 5.7 4.8 4.1
CPI 1.7 1.6 2.0 1.8 1.9 1.8 1.6 1.5 1.7
Average earnings 3.4 2.3 2.6 3.9 3.7 2.8 2.3 1.9 2.1
Unemployment (%) 8.1 7.8 7.6 8.1 8.0 7.9 7.8 7.7 7.8
Current account (CADbn) -42.5 -26.0 -4.0 -13.0 -10.0 -8.0 -7.0 -6.0 -5.0
Trade account (CADbn) -9.8 4.6 25.0 -6.3 -3.5 -2.0 0.5 2.6 3.5
Budget balance (CADbn)* -49.2 -27.6 -17.5 - - - - - -
CAD/USD 1.06 1.10 1.10 1.05 1.10 1.10 1.10 1.10 1.1
3-month money (%) 1.3 2.5 3.4 1.2 1.3 1.9 2.2 2.2 2.5
10-year bond yield (%) 2.7 3.0 3.9 2.8 2.7 2.5 2.5 2.7 3.0
Note: *Fiscal year
Source: HSBC
42
Macro
Q4 2010
Mexico
A bumpy economic recovery expected inflation rates in recent months. Sergio Martin
Economist
Consistent with this view on inflation, we now HSBC México, S.A
Mexico has seen signs of economic recovery in
expect the Central Bank to begin to tighten in +52 55 5721 2164
the recent past mixed with some soft spots; as sergio.martinm@hsbc.com.mx
October 2011 instead of February 2011. We
certain leading indicators point to a moderation in
expect the increase to be gradual, with 25bp hikes
the pace of activity. Furthermore, concerns around
in both October and November so that the
the strength of the US economic recovery make us
monetary policy rate rises to 5.0% by end-2011
fear that the pace of the Mexican recovery will
from 4.5%, currently.
slow in the coming months.
Net trade continues to contribute positively to
Nevertheless, as a result of a low statistical base
growth due to robust exports and low consumption
of comparison from 2009, real GDP grew 6.0% y-
and capital imports. We expect wage remittances
o-y in H1 2010 and we estimate it may grow 4.3%
to slow but to continue to be the main net source of
or more for the full year.
foreign currency. Capital inflows, in particular
However, in terms of external demand, we are portfolio investment inflows, have kept climbing
concerned that non-oil export growth may weaken to support a strong accumulation of international
should the pace of the US recovery slow down. reserves, which are now at USD107bn.
Moreover, on the domestic front, we believe that
The main downside risk to our view is the
high unemployment levels, tight credit conditions,
possibility of a sharper than expected slowdown
and a low consumer confidence level will keep
in the US.
domestic demand in check.
We have recently revised down our 2010 year-end

inflation forecast to 4.5% from 4.9%, given that a
number of factors have triggered lower than
% Year
2007 2008 2009 2010f 2011f 2012f
Private consumption 4.0 1.9 -6.1 3.7 2.8 6.3
Public consumption 3.1 0.9 2.3 3.9 6.9 8.9
Gross capital formation 6.9 4.4 -10.1 3.5 7.5 7.9
GDP 3.2 1.5 -6.5 4.3 3.8 4.5
Industrial production 2.0 -0.6 -7.3 5.9 4.1 4.8
Unemployment (%) 4.8 4.9 6.7 6.3 5.5 5.3
Consumer prices 4.0 5.1 5.3 4.2 4.0 3.4
Exports (USDbn) 271.9 291.3 229.8 290.2 318.9 355.1
Imports (USDbn) 281.9 308.6 234.4 297.1 333.3 374.1
Current account (USDbn) -8.7 -16.2 -5.7 -7.3 -15.2 -19.2
Current account (% GDP) -0.8 -1.5 -0.7 -0.7 -1.3 -1.6
Budget balance (% GDP) 0.0 -0.1 -2.3 -2.7 -2.4 -2.1
MXN/USD 10.9 11.2 13.5 12.6 12.4 12.6
3-month money (%) 7.4 7.9 5.5 4.6 5.2 6.3
Source: HSBC
43
Macro
Q4 2010
Brazil
The challenge of infrastructure tightening cycle at a rate of 10.75%, arguing that the André Loes
Economist
needs neutral interest rate may actually be lower than what HSBC Bank Brasil S.A.
private analysts had been estimating. +55 11 3371 8184
Brazilian voters will soon elect a new president, and andre.a.loes@hsbc.com.br
opinion polls such as CNT-Sensus and Ibope We are unconvinced by this argument, and believe
indicate Dilma Rousseff of the Worker’s Party, the the current economic backdrop will push inflation
candidate handpicked by President Lula, may win higher over the coming months, requiring further
outright in the first round, to be held on 3 October. monetary tightening sometime in Q2 2011.
The new president will be sworn in on 1 January and But the most important challenge for the new
will immediately face some challenges. Data suggest administration is fiscal. We believe the new
the economy remains close to overheating, thanks to government will advance on the much-needed
robust domestic demand, implying significant increase in infrastructure investment, to reduce the
inflation risks. bottlenecks that prevent the economy from
consistently growing above 4.5%. Our calculation is
The factors supporting demand don’t show signs of
that the country needs 3% of GDP additional
losing momentum: unemployment remains low,
investment a year for the next four to five years.
with 2.2 million new registered jobs created in the
12-months to August and upward pressure on wages The government should attract private resources to
(+ 9.8 % y-o-y in July). fund part of this effort, avoiding a deterioration of
the primary fiscal surplus. A more marked
Credit conditions remain favourable, and GDP
deterioration of the fiscal surplus would certainly
growth in the second quarter surprised on the upside,
reduce the willingness of foreign investors to finance
reflecting high growth rates of investment.
a current account deficit which may keep increasing
Inflation, on the other hand, has been lower than in the following years.
expected, leading the BCB to end the monetary
% Year
2007 2008 2009 2010f 2011f 2012f
Private consumption 6.1 7.0 4.1 6.7 5.2 4.4
Gross capital formation 13.9 13.4 -9.9 22.0 13.0 10.0
GDP 6.1 5.1 -0.2 7.5 5.1 4.5
Industrial production 6.0 3.1 -7.4 12.3 7.0 5.0
Unemployment (%) 9.3 7.9 8.1 7.1 6.5 5.9
Consumer prices 3.6 5.7 4.9 4.9 5.4 4.6
Exports (USDbn) 160.6 197.9 153.0 188.4 222.8 256.2
Imports (USDbn) 120.6 173.2 127.6 176.3 226.8 276.7
Current account (USDbn) 1.6 -28.3 -24.3 -50.6 -72.2 -90.0
Current account (% GDP) 0.1 -1.7 -1.5 -2.5 -3.4 -4.1
Budget balance (% GDP) -2.8 -2.0 -3.3 -2.6 -2.5 -3.5
BRL/USD 1.95 1.83 2.00 1.77 1.82 1.96
3-month money 11.7 12.7 9.6 10.3 12.5 10.4
Source: HSBC
44
Macro
Q4 2010
Surprisingly low inflation… …allowed the COPOM to pause its tightening cycle
 Food deflation in recent months was expected to contain the
10% 20% pressure on headline inflation that materialized in the beginning
8% 15% of 2010.
 However, low monthly inflation readings persisted into July and
6% 10% August, suggesting a broader downward movement in prices
(that may have something to do with the external backdrop) that
4% 5% took analysts by surprise.
2% 0%  The COPOM responded to the better-than-expected data by
declaring victory over inflation, suggesting the neutral interest rate
0% -5% in the economy is now lower, and paused in its tightening cycle.
04 05 06 07 08 09 10  We believe the tightening of 2010 fell short of what was
IPCA (LHS) necessary, and rising inflation may oblige the COPOM to
IPCA ex food & fuel (LHS) resume tightening in 2011.
Food prices (RHS)
Source: IBGE
The growth story remains one of demand… …leading to a wider current account deficit
 Domestic consumer demand continues to lead economic growth.
 While investment is expanding at an impressive pace and will
boost the economy’s supply capacity in the medium term, in the
% Year
2007 2008 2009 2010F 2011F 1Q10 2Q10
short term, it implies additional pressure on demand, causing
GDP 6.1 5.1 -0.2 7.5 5.1 9.0 8.8 domestic absorption to exceed current supply.
Household Consumption 6.1 7.0 4.1 6.7 5.2 9.3 6.7  The result is growing pressure on the current account balance,
Government Consumption 5.1 1.6 3.7 3.7 2.0 2.0 5.1
Investment 13.9 13.4 -9.9 22.0 13.0 26.0 26.5
which is expected to end 2010 at a deficit of USD 50.6 bn (from
Exports 6.2 -0.6 -10.3 16.5 13.0 14.5 7.3 USD -24.3 bn in 2009).
Imports 19.9 18.0 -11.4 38.0 25.4 39.5 38.8
 External financing conditions, however, remain highly
Agriculture 4.8 5.7 -5.2 4.0 4.0 5.1 11.4
Industry 5.3 4.4 -5.5 9.8 5.5 14.6 13.8 favourable, which is ultimately what makes the combination of
Services 6.1 4.8 2.6 4.1 3.7 5.9 5.6 strong consumption growth and investment possible.
Source: IBGE
Unemployment and capacity utilization.. …suggest that growth may be reaching its limit
%  Despite the possibility to compensate “excess” domestic
absorption through a growing current account deficit, factor
84 12 utilization may be close to its limit.
83 11  Unemployment is close to its historical lows, and anecdotal
82 10 evidence (such as the outcome of wage negotiations between
labour unions and companies) suggests an increasingly tight
81 9 labour market.
80 8  Installed capacity utilization is also close to its pre-crisis peaks.
Strong investment growth suggests a benign outlook for this
79 7 variable, but short-term dynamics suggest considerable short-
78 6 term inflationary risks.
05 06 07 08 09 10
Installed capacity utilisation (inv. axis) (LHS)
Unemployment (RHS)
Source: IBGE and CNI
45
Macro
Q4 2010
Argentina
Something’s gotta give import substitution labour in intensive sectors Javier Finkman
Economist
with a negative impact on employment. In HSBC Bank Argentina S.A
Our base case for Argentina in 2011 sees GDP
addition, the belief that the currency is becoming +54 11 4344 8144
growth moderating to a 4% to 5% annual pace and javier.finkman@hsbc.com.ar
expensive could lead the public to increase its
a stronger ARS. In such a scenario, inflation Jorge Morgenstern
demand for foreign assets. Fiscal-led inflation and Economist
should not accelerate. But there are a number of HSBC Bank Argentina S.A
an overvalued currency may disrupt our smooth
risks related both to the macro outlook and to +54 11 4130 9229
profile for the exchange rate next year. The jorge.morgenstern@hsbc.com.ar
political uncertainty.
government would rather delay corrections
The outcome of elections, the government reaction beyond the elections but pressures will increase as
to a deceleration in growth and a stronger currency time goes by. Dynamics are stable for some time
are the main risks. The outcome of the elections is without reopening external financing, but they
hard to call now. The current government improved will imply diminishing reserves at some point.
in the polls during H1 2010 and will seek a re-
Having highlighted risks, the 2011 financing
election. Still, the business cycle has peaked as
program is easily doable once the budget bill is
Brazil decelerates, and social policies and the
approved. We estimate a net funding gap of
agricultural sector will not deliver another push.
USD8bn until the end of 2011 with USD3bn of
The economy is decelerating. The government
debt obligations due after the presidential term
might try to push growth further through additional
ends, on 10 December. The budget bill seeks
fiscal expansion. The main risk associated with that
USD7.5bn of foreign currency reserves to cover
is higher inflation instead. The recent loosening of
all bond-debt obligations with the private sector.
the monetary program highlights that inflation is a
If the bill is approved with the required funding,
low priority for the government.
the federal government will continue paying net
The use of the exchange rate as an anchor, amid debt, leaving provinces to do the fundraising.
inflation 20% pts higher than its trade partners,
leads to a rapid real appreciation. It will damage
% Year
2007 2008 2009 2010f 2011f 2012f
Consumption 9.0 6.1 -1.5 8.7 4.6 5.0
Gross fixed capital formation 13.6 7.3 -12.6 11.8 1.9 10.5
GDP 8.7 4.9 -2.7 7.8 4.5 5.0
Unemployment (%) 7.8 7.4 8.4 7.9 7.6 7.2
Consumer prices* 20.1 22.9 14.8 26.5 21.7 18.7
Exports (USDbn) 55.8 70.0 56.9 64.9 69.6 76.6
Imports (USDbn) 44.6 57.4 38.8 52.9 61.0 73.1
Current account (USDbn) 7.4 7.0 11.5 6.0 3.1 -1.3
Current account (% GDP) 2.8 2.2 3.9 1.6 0.7 -0.2
Budget balance (% GDP) 1.1 1.4 -0.6 -0.1 -1.9 -0.6
ARS/USD 3.12 3.19 3.77 3.93 4.18 4.41
1-month money (%) 8.2 11.7 11.6 9.2 9.6 9.1
Source: HSBC. *Year end forecast
46
Macro
Q4 2010
Chile
From recovery to expansion “core” consumer prices measuring flat year-to- Jorge Morgenstern
Economist
date, but we still believe that demand pressures HSBC Bank Argentina, S.A
The momentum of economic activity indicators +54 11 4130-9229
will lead to inflation of above 3% y-o-y.
suggest that the Chilean economy will continue to jorge.morgenstern@hsbc.com.ar
expand rapidly through the rest of the year. We The central bank is reducing monetary stimulus,
expect annualised growth of 7.4% in H2 2010. raising the interest rate by 50bps per meeting
recently. We expect them to ease the pace of
Industrial production has almost fully recovered
tightening to 25bps in November, reaching 3.50%
since the earthquake. Mining was not affected.
in December towards a target of 5.25% by Q3
Construction is lagging the recovery of other
2011. In our view, the mid-term inflation
sectors, but we believe that it will soon start to
expectations converging towards the policy target,
grow rapidly, contributing positively to job
a strengthening currency and sustained
creation and supporting consumer demand.
uncertainty about the global outlook reduce the
Employment is advancing at a remarkable pace, risk of more aggressive monetary tightening.
and business and consumer sentiment continue to
CLP/USD falling below 500 triggered currency
improve. All in, we see factors in place for
comments from the Executive and placed all eyes
private-sector driven growth to continue
on the central bank regarding possible
throughout 2011 at an above-potential pace.
intervention. We believe there is still room for the
As a result, the gap between potential and current peso to weaken further before any market
output created by the recession and the earthquake intervention takes place. As a guide, the Central
is likely to disappear by the end of the year. As a Bank watches the real exchange rate level seen
consequence of the brisk recovery, imports are during the last intervention episode. The last
growing quickly already leading to a reduction in intervention was in March 2008 when the rate was
the trade surplus. Inflation remains tame, with the around 480 CLP/USD.
% Year
2007 2008 2009 2010f 2011f 2012f
Private consumption 7.0 4.6 0.9 9.9 7.1 5.8

Fixed investment 11.2 18.6 -15.3 18.7 18.1 15.0
GDP 4.7 3.7 -1.5 5.0 5.5 4.5
Unemployment (%) 7.0 7.5 10.0 8.0 6.9 6.6
Consumer prices 4.4 7.8 0.3 1.6 3.3 3.2
Exports (USDbn) 68.0 66.5 53.7 64.2 69.5 77.4
Imports (USDbn) 44.0 57.6 39.8 51.7 59.6 68.8
Current account (USDbn) 7.2 -2.5 4.2 -1.0 -3.1 -5.2
Current account (% GDP) 4.4 -1.5 2.6 -0.5 -1.4 -2.2
Budget balance (% GDP) 8.6 5.0 -4.7 -1.7 -0.2 0.0
CLP/USD 523.0 522.1 559.6 526.1 486.9 480.0
3-month money (%)* 6.36 12.60 8.52 1.80 5.00 7.00
Note: *end-year 90-day deposit rate
Source: HSBC
47
Macro
Q4 2010
Eurozone
Here we go again From a political and policy perspective, the focus in Janet Henry
Economist
the coming months will be on providing support for HSBC Bank plc
The big upside surprise to Eurozone Q2 GDP
the peripheral Eurozone economies to undertake the +44 20 7991 6711
growth was the fact that it was driven not just by janet.henry@hsbcib.com
necessary multi-year budget deficit reduction. The
exports but by domestic demand. This shifted the Astrid Schilo
ECB is set to continue providing liquidity to the Economist
markets’ focus away from the sovereign debt crisis HSBC Bank plc
financial sector for the foreseeable future. Although
for a period. However, now that growth is showing +44 20 7991 6708
deficit reduction this year is largely on track, the astrid.schilo@hsbcib.com
signs of softening, the focus is already shifting back
current level of bond spreads implies there is a
to the weak links in the Eurozone.
growing risk that in 2011 not only might the ECB
Our growth outlook is little changed. We have have to start ramping up its purchases of debt again
revised up our 2010 forecast from 1.2% to 1.6% but the newly established European Financial
because of the higher-than-expected Q2 figure and Stability Facility (EFSF) may have to issue some of
have kept our 2011 forecast unchanged at 1.3%, its AAA-rated bonds for a country requiring
largely reflecting the weakening of world trade and financial assistance. This would inevitably resurrect
(for the region as a whole) a small tightening of the some of the concerns about the political will of the
fiscal stance. With inflation pressures expected to stronger Eurozone countries to continue to support
remain subdued, we do not expect the ECB to raise their weaker neighbours.
interest rates until well into 2012.
% Year
Government consumption 0.8 -0.5 -0.1 0.6 0.4 0.0 -0.7 -0.8 -0.6
Fixed investment -0.1 3.6 2.8 1.7 3.8 4.8 3.7 3.0 3.1
Final domestic demand 0.6 1.1 1.2 1.0 1.3 1.4 0.9 0.9 1.1
Stockbuilding (% GDP) 0.0 0.0 0.0 0.0 -0.1 -0.1 0.0 -0.1 -0.1
Domestic demand 0.6 1.0 1.3 1.0 1.2 1.4 0.6 0.8 1.1
Exports 9.9 5.7 6.1 11.3 10.5 8.9 5.2 4.5 4.5
Imports 10.4 5.4 5.6 11.9 11.8 8.5 4.8 4.2 4.3
GDP 1.6 1.3 1.6 1.9 1.9 1.8 1.1 1.0 1.3
GDP (% quarter) - - - 0.4 0.2 0.2 0.3 0.4 0.4
Unemployment (%) 10.0 9.9 9.6 10.0 10.0 10.0 9.9 9.8 9.7
Wages 1.5 1.6 1.8 1.4 1.4 1.5 1.5 1.7 1.7
Inflation 1.6 1.6 1.7 1.7 2.0 1.9 1.6 1.6 1.4
M3 0.9 4.4 5.8 1.0 2.7 3.8 4.4 4.6 4.7
Current account (% GDP) -0.5 -0.1 -0.1 - - - - - -
Budget balance (% GDP) -6.7 -5.8 -4.9 - - - - - -
Debt (% GDP) 84.5 88.6 91.5 - - - - - -
ECB refi rate* 1.00 1.00 1.75 1.00 1.00 1.00 1.00 1.00 1.00
3-month money (%) 0.8 1.0 2.0 0.8 0.8 0.8 0.8 0.9 1.0
10-year bond yield (%)** 2.9 2.9 3.2 3.0 2.9 2.7 2.6 2.7 2.9
USD/EUR* 1.35 1.35 1.35 1.27 1.35 1.35 1.35 1.35 1.35
Note: *end-year. **weighted average of the ‘Big 4’
Source: HSBC
48
Macro
Q4 2010
Growth slowing but not collapsing Growth and PMIs

 By Eurozone standards, Q2 GDP growth was impressive at 1%
Inde x % Qtr
62 1.5 q-o-q, the strongest quarterly growth rate since 2Q 2006.
58 1.0  This still leaves the level of GDP in mid-2010 about 3.5% below
54 0.5 its 1Q 2008 peak. Nonetheless there were some encouraging
features in the release, even if they are highly unlikely to be
50 0.0
repeated in the coming quarters.
46 -0 .5
42 -1 .0
 The 1.8% q-o-q increase in investment spending marked the
first quarterly rise in more than two years, while consumer
38 -1 .5 spending grew for a third consecutive quarter - and by 0.5% q-
34 -2 .0 o-q - which is an above-trend rate in the Eurozone.
30 -2 .5
 The PMIs have started to weaken, particularly in September but
99 00 01 02 03 04 05 0 6 07 0 8 09 10 are still pointing to GDP growth rates of around 0.4-0.5% q-o-q
Eurozone composite PMI output (LHS)
in Q3. We expect a further slowdown in Q4 but no outright
Eurozone GDP (RHS)
recession.
Source: Markit Economics, Eurostat and HSBC
Peripheral disinflation to resume in 2011 Inflation and disinflation
% Yr HICP inflation % Yr  Price pressures remain subdued with inflation having remained
5 5 well below 2% over the past two years.
 The rise in wholesale food prices, particularly wheat, has yet to
4 4
feed through but is likely to start soon. Combined with low base
3 3 effects from last year this implies that higher food price inflation
2 2 could push inflation briefly up to 2% around the turn of the year.
 Core inflation is expected to be fairly stable at around 1.0%.
1 1
The impact of the VAT increases in the periphery will continue
0 0 to feed through over the next few months but the weakness of
-1 -1 domestic demand should mean that core inflation rates register
renewed declines in the most affected countries through the
-2 -2 course of 2011.
02 03 04 05 06 07 08 09 10
Germany Periphery* Other Eurozone
Source: Eurostat and HSBC. Note: Periphery is Spain, Greece, Portugal and Ireland
Slowing to a virtual standstill ECB bond purchases

 Despite peripheral government bond spreads being back at
EUR bn ECB government debt EUR bn their May highs, the pace of ECB bond purchases ticked up
18 18 only marginally in September.
 If spreads continue to widen the ECB may find itself buying on
13.5 13.5 a larger scale early next year once the peripheral countries
have announced suitably aggressive 2011 budgets and before
9 9 they face big refinancing needs.
 We expect the ECB to continue to support the banking sectors
4.5 4.5
of these countries with unlimited one-week liquidity provision
likely to be extended well beyond the current deadline of 18
0 0 January 2011.
14 28 11 25 09 23 06 20 03 17
May Jun Jul Aug Sep
ECB purchases
Source: ECB and HSBC. Note: Weekly bond purchases which began on May 10th.2010
49
Macro
Q4 2010
Germany
Now to a lower gear process after three consecutive quarters of negative Astrid Schilo
Economist
growth. While the labour market has certainly HSBC Bank plc
After a dramatic decline in 2009, the German +44 20 7991 6708
improved, and we expect it to continue doing so, we
economy has staged an impressive catch-up in the astrid.schilo@hsbcib.com
believe it is too early in the cycle to count on private
first half of the year, posting GDP growth of 2.2% Lothar Hessler
consumption as a self-sustaining driver. We Economist
q-o-q in Q2 – the strongest rate since 1991. This HSBC Trinkaus & Burkhardt AG
nevertheless expect reasonable growth rates by +49 21 1910 2906
number is unlikely to be repeated, but we believe lothar.hessler@hsbctrinkaus.de
German standards, and have a slightly more robust
order figures and sentiment indicators still point to
outlook for the second half of next year. Rainer Sartoris
a solid expansion in the second half of this year. Economist
HSBC Trinkaus & Burkhardt AG
After 3.3% this year, we expect growth to slow to Given that capacity utilisation has returned to its +49 21 1910 2470
1.9% in 2011. long-term average, we believe companies will rainer.sartoris@hsbctrinkaus.de
continue investing. Although we expect this to be

The latest slowing in world trade will hit the export
predominantly for replacement purposes, it should
sector, which has been the driving force behind the
also be driven by the fact that companies need high-
recovery since Q3 2009. However, Q2 GDP figures
quality equipment to remain competitive in
already showed growth becoming more balanced,
international markets. The recent upswing has
with consumer spending and total investment
benefited the fiscal position, and we now expect a
contributing respectively 0.3pp and 0.8pp.
deficit of 3.9% this year. This means there is no need
We attribute much of the stellar Q2 private for further belt-tightening, which might have
consumption number (0.6% q-o-q) to a catch-up hindered the recovery. .
% Year
Consumer spending -0.1 0.7 0.9 0.4 0.6 0.9 0.5 0.6 0.9
Investment 5.7 5.1 2.6 7.4 9.6 9.1 5.1 3.6 3.0
Machinery & equipment 8.4 7.3 4.2 10.8 14.1 10.9 7.9 5.6 5.1
Construction 3.7 2.8 0.8 4.8 6.6 7.4 2.2 1.4 0.6
Stockbuilding (% GDP) -1.8 -2.1 -2.4 -1.9 -2.2 -2.2 -2.1 -2.1 -2.1
Domestic demand 1.9 1.2 0.8 1.6 3.3 1.8 0.7 0.9 1.3
Exports 16.4 9.4 7.0 19.8 19.6 17.5 9.8 6.3 4.9
Imports 14.5 8.8 5.9 16.0 21.0 15.2 9.0 6.7 5.2
GDP 3.3 1.9 1.8 4.0 3.7 3.5 1.6 1.1 1.4
GDP (% quarter) - - - 1.0 0.1 0.2 0.4 0.4 0.4
Unemployment (%) 7.7 7.0 6.8 7.5 7.4 7.3 7.0 6.9 6.8
Producer prices 1.6 2.2 1.3 3.7 4.3 3.7 2.3 1.4 1.3
Consumer prices 1.1 1.2 1.3 1.2 1.3 1.4 1.3 1.2 1.1
Current account (EURbn) 125.8 136.0 136.0 34.0 34.0 34.0 34.0 34.0 34.0
Current account (% GDP) 5.1 5.3 5.1 5.4 5.4 5.4 5.3 5.2 5.2
3-month money (%) 0.8 1.0 2.0 0.7 0.7 0.7 0.7 0.7 0.9
10-year bond yield (%) 2.1 2.2 2.5 2.3 2.1 1.9 1.8 2.0 2.2
Source: HSBC
50
Macro
Q4 2010
Turning East… … where China remains the star

 The destination of German exports has changed significantly in
%pts %pts the past decade.
5 5
Change in share since 1995
 The rising star is clearly China, while countries from Eastern

4 CHI 4
Europe also increased their share significantly; aggregate
3 3 exports to the Czech Republic, Poland and Hungary are bigger
2 POL 2 than those to the US, although intra-company trade may play a
RUS
1 TUR CZE 1 big role.
0 IND
HUN ESP OST 0  Nonetheless, the well-being of the German export sector is now
DEN SWE US
-1 ITA NED -1 less dependent on a few big western industrialised nations.
JAP SWI
-2 SKO BEL FRF -2  Overall, this diversification cannot protect German exports
UK completely against the looming weakness in global trade, but
-3 -3
the deceleration may be cushioned by continued demand out
0 2 4 6 8 10 of Asia.
Share of exports
Source: Destatis, HSBC
With exports and capacity utilisation rising… … investment should pick up

 Over the last few quarters, the upswing in the German
Index, 1Q08=100 Index, 1Q08=100 economy has mainly been driven by exports, which we expect
120 120 to surpass their 2008 peak in Q3 2010.
 With demand rising, companies’ capacity utilisation has risen
100 100 over recent months, increasing incentives for new investments.
80 80  The recent credit conditions surveys of the Bundesbank and
60 60 the Ifo institute do not indicate that any credit rationing is taking
place in the banking system.
40 40
20 20
0 0
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
Exports Investment in machinery & equipment
Source: Reuters EcoWin, HSBC
Unemployment has come down... ... and will continue to do so

 Output collapsed in 2008/2009. However, the impact on the
'000 % Yr labour market was cushioned by the adoption of short-shift
Ger many
measures, which also prevented a more pronounced increase
1800 50
in the unemployment rate.
 As a result of the strength of the recent upswing, the number of
1200 25 people in short shift fell sharply from its peak at 1.4m (May
2009) to 0.4m (June 2010); this trend is likely to continue.
 After reducing short shift, companies will be forced to hire more
600 0 new workers. On our estimates, the unemployment rate should
decrease to 7.0% in 2011, the number of unemployed workers
0 -25 (sa) will fall below the 3m barrier in Q4 2010 (2008: 3.27m;
2009: 3.42m; 2010e: 3.24m; 2011e: 2.95m).
95 96 97 98 99 00 01 02 03 0 4 05 06 07 08 09 10  An element of the success of the labour market is its increased
flexibility. The use of temporary employment and leased
Short shift stock (LHS) Leas ed s taff (RHS)
workers continues to account for a significant element of the
labour market.
Source: Statistisches Bundesamt, HSBC
51
Macro
Q4 2010
France
Job creation and credit set to 74.5% in August even though it was already Mathilde Lemoine
Economist
bolster consumption below its long-term average of 83%. So we HSBC France
believe that while the recovery in business +33 1 40 70 32 66
French GDP growth was more vigorous than Mathilde.lemoine@hsbc.fr
investment will continue, it will remain modest.
expected in the second quarter, reaching 0.7% q-
Job creation is unlikely to accelerate, and note
o-q after rising 0.2% q-o-q in Q1, thanks to a 0.6
also that stronger consumption than initially
percentage point contribution from stocks.
forecast points to bigger gains in imports and
Consumption also boosted growth, but by fuelling
therefore a very negative contribution from
imports it resulted in a negative contribution from
foreign trade.
foreign trade. But the main upside surprise came
from the labour market, which turned up earlier All in all, GDP growth could reach 1.6% y-o-y in
than forecast and has prompted us to revise our 2010. The public deficit could therefore reach 7.7%
projections for household consumption growth in of GDP rather than the 8.6% initially estimated.
Q3 and Q4 2010. The rebound in employment is
In H1 2011, growth could suffer from the
likely to push up wages and therefore gross real
deceleration in US GDP growth expected by HSBC
disposable income, even with accelerating
in H2 2010 (French GDP lags America’s by two
inflation, meaning a gain in consumption.
quarters on average) and from the end of the
Nevertheless, we do not expect any quickening in
domestic stimulus plan. This will to some extent be
GDP growth in Q3 and Q4, as industrial
offset by the support from the labour market and
production appears to be faltering. According to
the resilience in household spending. In 2011, GDP
the September PMI, the growth in manufacturing
growth may therefore decelerate slightly.
production should slow compared with H1 2010.
Moreover, the capacity utilisation rate dropped to
% Year
Government consumption 1.4 -0.7 0.4 1.2 0.6 0.1 -0.8 -1.0 -1.0
Investment -1.6 4.4 4.2 -0.4 1.4 3.5 3.9 4.6 5.6
Domestic demand 1.3 1.8 2.2 2.2 1.5 2.2 1.5 1.7 1.9
Exports 8.6 4.1 6.4 9.0 8.5 4.4 2.3 4.2 5.7
Imports 6.6 5.0 7.4 9.6 7.1 5.9 2.9 4.6 6.5
GDP 1.6 1.5 1.8 1.9 1.7 1.7 1.3 1.5 1.5
GDP (% quarter) - - - 0.4 0.4 0.2 0.3 0.5 0.5
Manufacturing output 5.4 1.8 1.4 4.5 4.4 2.9 1.9 1.2 1.1
Unemployment (%) 10.0 10.2 10.1 10.2 10.2 10.2 10.2 10.3 10.2
Consumer prices 1.8 1.8 1.6 1.8 2.0 1.8 1.7 2.1 1.8
Trade account (EURbn) -50.0 -52.0 -54.0 -12.8 -12.9 -12.9 -13.0 -13.0 -13.1
3-month money (%) 0.8 1.0 2.0 0.8 0.8 0.8 0.8 0.9 1.0
10-year bond yield (%) 2.5 2.6 3.0 2.7 2.5 2.4 2.4 2.5 2.6
Source: HSBC
52
Macro
Q4 2010
The labour market has picked up… … more quickly than expected
Balance of opinions %Yr  In 2009, the market sector shed 335,500 waged jobs. The labour
market started to rebound in the first quarter of 2010, however,
40 6
and employment increased by 35,900 in Q1 10 then by 24,000
20 in Q2 10. Many new jobs were temporary.
3
0
 Despite the fact that most of jobs created are temporary, the
0 labour market’s buoyancy has had a major effect on households,
-20 as they have reduced their savings slightly in order to consume
-3 more.
-40
 Consumption increased 0.4% q-o-q in Q2 2010 despite higher
-60 -6 inflation, stagnating wages and a slump in car sales linked to
90 92 94 96 98 00 02 04 06 08 10 reductions in the car scrappage scheme.
French industrial survey: employment expectations (LHS)
French services survey: employment exepctations (LHS)
Non-farm private payrolls in France (RHS)
Sources: INSEE, HSBC
Better household confidence… … is increasing the effectiveness of monetary policy

France: new loans to households and NFCs  Consumer behaviour is also reflected in the credit market,
%Yr %pts particularly home loans. New loans to households for house
purchase increased 47.7% y-o-y in July 2010.
40 40
30 30  Tax credits designed to bolster demand for new homes partly
20 20 explain the upturn on the property market. Low interest rates have
10 10 also helped. We note that the return on property investments has
0 0 ceased to rise relative to government bond yields.
-10 -10  Demand for residential property is likely to increase further into
-20 -20 the end of 2010. But recent price appreciation will weigh on
-30 -30
households’ ability to buy and thereby limit home sales in 2011
04 05 06 07 08 09 10 relative to this year.
Contribution: new loans to NFCs (RHS)
Contribution: new housing loans to households (RHS)
New loans to households and NFCs (LHS)
Sources: INSEE, Banque de France, HSBC
Economic activity remains modest... … and this will limit rise in investment
Capacity utilisation rate and business investment in France  Industrial production expanded 8.9% between its trough in
%Yr % April 2009 and July 2010, but it is still 11.7% below its peak in
15 90 April 2008.
10  The capacity utilisation rate therefore remains below its long-
85 term average of 83%. It was 74.5% in August 2010.
5
0 80  French companies will probably continue to reduce their debt,
-5 which amounts to 130.6% of their value added. That compares
Long term average for 75
-10 with 96.2% for US firms, according to the Banque de France.
capacity utilisation 70  Investment will resume, but more to renew production facilities
-15
-20 65 than to increase productive capacity. Its growth will be modest in
the quarters ahead. We expect business investment to increase
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 6.1% y-o-y in 2011 after an average 1.8% y-o-y drop in 2010.
Business investment (LHS)
Capacity utilisation rate (RHS)
Sources: INSEE, Thomson Financial Datastream, HSBC
53
Macro
Q4 2010
Italy
Slowdown ahead sector pay freeze (and for higher earners, pay cuts), Janet Henry
Economist
a gradual reduction in public-sector headcount and HSBC Bank plc
Growth in the first half of this year was better than
cuts in local government spending. They will +44 20 7991 6711
expected, but all of the upside surprises came from janet.henry@hsbcib.com
impact more in 2011-2012, but the impact on
net trade thanks to a stronger-than-expected
confidence is already starting to take its toll.
rebound in world trade and the fact that Italy’s
export product mix means it tends to be one of the Despite spending cuts, the budget deficit continued
bigger beneficiaries of a weak euro even though its to widen in the first half of this year but is unlikely
competitiveness remains generally poor. to be too wide of the government’s projection of
5% of GDP in 2010. The collapse of the
There was some evidence of an improvement in
Berlusconi coalition in July initially created some
investment spending in Q2 and unemployment
uncertainty about whether the austerity measures
seems to be edging down somewhat earlier than
in the 2011 budget will get through parliament in
we had expected, but consumer spending remains
October but the more recent signs suggest they
depressed and the latest confidence readings
should. Hence Italian spreads have not been
suggest no near-term revival.
unduly affected by the renewed sovereign
Hence the recent signs of a downturn in the global concerns in the likes of Portugal and Ireland.
industrial cycle, and indeed the latest readings on
Italian production, point to a marked slowdown in
GDP growth in the second half of the year which is
when the domestic austerity measures will also
start to bite. These include a three-year public-
% Year
Government consumption -0.3 -0.4 -0.4 -0.3 -0.1 0.3 -0.4 -0.6 -0.7
Investment 2.1 1.8 2.9 3.4 3.0 2.0 1.2 1.8 2.1
Domestic demand 0.9 0.4 0.9 1.3 0.4 0.2 0.5 0.4 0.6
Exports 7.4 3.6 5.4 8.0 8.7 6.3 3.4 2.3 2.7
Imports 6.6 2.6 4.8 8.4 5.5 3.5 2.8 1.9 2.4
GDP 1.0 0.7 1.0 1.1 1.3 0.9 0.6 0.5 0.6
GDP (% quarter) - - - 0.3 0.1 0.1 0.2 0.2 0.2
Unemployment (%) 8.5 8.5 8.3 8.5 8.5 8.5 8.5 8.5 8.4
Hourly wage rate 2.3 2.2 2.2 2.2 2.2 2.2 2.2 2.2 2.2
Consumer prices 1.6 1.9 1.7 1.8 1.9 2.2 1.9 1.8 1.7
Current account (EURbn) -46.4 -34.0 -32.0 -6.0 -8.0 -10.0 -9.0 -7.0 -8.0
Budget balance (% GDP)* -5.4 -5.0 -4.5 - - - - - -
3-month money (%) 0.8 1.0 2.0 0.8 0.8 0.8 0.8 0.9 1.0
10-year bond yield (%) 3.7 3.7 3.9 3.9 3.7 3.6 3.5 3.6 3.7
Note: * National measure
Source: HSBC
54
Macro
Q4 2010
Growth to slow after strong Q2 Growth

 GDP growth consistently surprised to the upside in the first half
Index Italy % Qtr
of the year, growing 0.4% q-o-q in Q1 and 0.5% in Q2 with
68 3 virtually all of the growth driven by net exports.
62 2  However growth is expected to soften considerably in the
second half and early 2011. Industrial production (0.1% m-o-m
56 1
in July) and exports started on a soft note and the latest PMI
50 0 readings suggest activity slowed further since.
 There are some welcome signs of stabilisation in the labour
44 -1
market but real income growth appears set to remain weak in
38 -2 the coming quarters.
32 -3
98 00 02 04 06 08 10
Composite PMI output (LHS) GDP (RHS)
Source: Markit Economics, Eurostat and HSBC
Gloomy consumers Consumption

 Italy has about the lowest rate of household indebtedness in
%qtr Italy Index
the Eurozone so one welcome development has been the
1 115 revival of household loan growth, particularly mortgages.
0.5 110  But there is no evidence of it feeding through into consumer
spending, which stagnated again in Q2 and there are no signs
0 105 of a near-term improvement.
-0.5 100  Having risen through the second half of 2009, consumer
confidence has fallen steadily this year, as the new austerity
-1 95 measures have already started to curtail households’ intention
to spend.
-1.5 90
Jan-06 Jan-07 Jan-08 Jan-09 Jan-10
Private consumption (LHS)
Consumer confidence (RHS)
Source: Eurostat, European Commission and HSBC
No contagion yet Politics and public finances

 The coalition of Prime Minister Berlusconi broke down in July
% 10-yr Government bond spreads over German Bunds %
though he continues to operate with a minority government.
4 4  The finance minister has reassured markets that the necessary
austerity measures will manage to be passed by parliament
3 3 in October.
2 2  The markets have so far been forgiving, with Italian spreads
having barely reacted to the surge in spreads across much of
1 1 the periphery but given the country’s extremely high debt-to-
GDP ratio (115% of GDP at end-2009) it will need to continue
0 0 to demonstrate that it is capable of starting to rein in the deficit
in 2011.
05 06 07 08 09 10
Italy Spain Portugal Ireland
Source: Bloomberg and HSBC
55
Macro
Q4 2010
Spain
Double dipping investment likely to continue falling for another Madhur Jha
Economist
few quarters, domestic demand-driven growth HSBC Bank plc
While the other ‘big four’ European countries +44 20 7991 6755
looks questionable. At the same time, as the
saw reasonable cyclically-driven growth in Q2, madhur.jha@hsbcib.com
global indicators of world trade slow, we expect
Spain managed only a meagre 0.2% q-o-q
net trade to remain a drag on growth. As a
expansion, despite an impressive 0.7 % pt
result, we don’t see any of the usual drivers of
contribution from consumer spending and a
growth countering the decline in government
smaller drag from investment. However, this
spending, resulting in a negative H2.
strength is unlikely to last into H2 2010, with
consumer spending likely to be hit by the VAT Spain seems to be on track to meet its fiscal
hike in July. So far, the data seem to support our targets for 2010 and has also approved a fairly
view. Retail sales, albeit notoriously volatile, ambitious budget plan for 2011. However,
slumped in July. More importantly, the services markets are likely to remain edgy about the
PMI also dipped back into contraction territory commitment of the Spanish government to
in August. The housing sector remains further austerity measures given recent
problematic and although the unemployment comments that suggest they could back away
rate appears to have stabilised (at a steep 20%); from objectives discussed earlier in the year.
the PMI labour components are not yet The sovereign market will remain vulnerable to
suggesting any expansion. This is unlikely to bouts of risk aversion of which upcoming
encourage a consumption boom. With industrial action could be a trigger.
% Year
Government consumption 0.1 -1.2 -0.4 0.2 0.0 -0.7 -1.6 -1.6 -0.9
Investment -6.2 0.0 2.4 -4.4 -2.9 -1.5 -0.6 0.5 1.8
Domestic demand -0.9 0.3 1.2 0.0 -0.4 -0.1 -0.6 0.3 1.6
Exports 8.5 3.7 4.3 8.4 6.4 3.1 3.4 3.9 4.4
Imports 6.8 2.1 2.5 9.1 8.2 4.3 1.7 1.2 1.4
GDP -0.4 0.6 1.5 0.0 -0.1 -0.2 0.1 0.7 1.6
GDP (% quarter) - - - -0.2 -0.2 0.1 0.4 0.5 0.6
Industrial production 0.6 0.8 3.6 -0.2 -0.7 -0.6 -1.1 1.5 3.4
Unemployment (%) 20.1 20.4 19.5 20.3 20.6 20.7 20.5 20.3 20.1
Consumer prices 1.6 1.5 1.7 1.8 1.6 1.7 1.5 1.2 1.5
Trade account (EURbn) -49.2 -41.0 -16.5 -12.5 -10.5 -9.5 -9.0 -10.5 -12.0
Current account (EURbn) -52.6 -48.5 -54.5 -12.0 -11.0 -14.0 -12.0 -10.0 -12.5
3-month money (%) 0.8 1.0 2.0 0.8 0.8 0.8 0.8 0.9 1.0
10-year bond yield (%) 4.2 3.9 4.0 4.2 4.2 3.8 3.7 3.8 3.9
Source: HSBC
56
Macro
Q4 2010
Labour market concerns are likely to persist... …with few indications of sustainable demand for labour
 The unemployment rate continues to creep up but the pace has
Index %
moderated on the back of a cyclical recovery in H1 10
70 25
 The moderation in the pace of job shedding, however, has
60 20 predominantly come on the back of a rise in temporary
employment. This is partly expected as temporary employment
50
15 bore the brunt of the job shedding during the downturn but for
40 labour market improvements to be sustainable, full-time
10 permanent employment would have to pick up. This has yet to
30 happen in any meaningful way
20 5  The employment components of both the services and the
98 99 00 01 02 03 04 05 06 07 08 09 10 manufacturing PMIs are still below the no-change 50 level and
PMI mfg (LHS) renewed signs of a weakness in the economy could see gains
PMI svs (LHS) made in temporary employment fade quite quickly
Unemployment rate (RHS )
Source: Eurostat, Markit and HSBC
Fiscal performance so far has been encouraging… …but credibility gap is likely to persist
 On the fiscal front, the Spanish government seems to have
EURbn Central government finances EURbn outperformed other peripheral countries in terms of improving
120 120 their tax revenues both direct and indirect
100 100  At the same time, the government has been able to cut back
some expenditure, albeit the surge in revenues has given it
80 80 room to be more gentle in its cutbacks
60 60  While the performance so far is encouraging, markets are likely
to remain worried about the authorities’ commitment to
40 40 continued austerity. Certainly, the recent decision to reverse
20 20 planned expenditure cuts of EUR 700 mn as well as statements
suggesting that further easing on targets might be allowed if
0 0 growth outperforms raises the susceptibility of Spanish markets
Revenue Expenditure Cash deficit to another bout of risk aversion. Political developments,
Jan - Jul 2009 Jan - Jul 2010 especially the government’s reaction to planned mass strikes
would be crucial then
Source: Instituo Nacional de Estadística and HSBC
The boost from consumer spending… …is unlikely to last into H2 2010
 Consumption spending remained the biggest contributor to
Index % Yr growth in Q2, adding 0.7 % pts to growth in Q2 alone (Q1
0 6 contribution : 0.6% pts)
-10 3  This was the result of consumers bringing forward demand
ahead of the 2% pt VAT hike in July could be attributed to the
-20 0 bringing forward of consumption demand ahead of the 2% pt
VAT hike in July as well as fiscal measures such as the car
-30 -3 scrappage schemes aimed at boosting growth
-40 -6  Consumer confidence however remains weak with labour
market and housing sector concerns unlikely to disappear
-50 -9 anytime soon. Also as households prepare themselves for the
05 06 07 08 09 10 impact of fiscal austerity in the form of wage freezes and cuts in
Consumer confidence (LHS) the face of ongoing credit constraints, we are likely to see the
Consumer spending (RHS) Spanish savings rate rise further, especially is risk aversion
Retail sales (RHS) returns. Consumer spending is expected to fall from H2 2010 as
a result
Source: European Commission, Eurostat and HSBC
57
Macro
Q4 2010
UK
Flat-lining We look for GDP growth of just 1.4% in 2010 and Stuart Green
Economist
2011, before a gentle acceleration to leads to GDP HSBC Bank plc
Headline growth may have surprised to the upside
rising by 1.8% in 2012. Even these modest +44 20 7991 6718
during the second quarter of the year, but the stuart1.green@hsbcib.com
forecasts, however, depend upon a solid recovery
details of the 1.2% quarter-on-quarter rise in GDP
developing within business investment expenditure
were far from convincing and we look for a
and some level of private sector job creation being
pronounced slowing of activity to develop during
maintained. Even so, we look for the
the second half of the year. The strong rise
unemployment rate to rise to above the 8% level in
recorded in government consumption during the
2011 as the planned decline in public sector
quarter is evidently unsustainable given the
employment develops traction.
looming fiscal consolidation, while the decline
recorded in the household savings ratio during the Should growth disappoint and inflation concerns
first half of the year – to just 3.2% in Q2 – ease, speculation will inevitably mount over the
questions the ability of consumption to maintain a prospects for a further round of quantitative easing
decent level of growth as a variety of labour to be delivered. Indeed, the debate looks to
market indicators point to an imminent slowdown already be underway across the Monetary Policy
in employment growth. With net exports failing to Committee, although we currently attach a roughly
make a positive contribution over the past year, 40% probability to such an outcome, not least
concerns over the balance of UK growth and the because of the apparently meagre real economy
ability to absorb the aggressive deficit reduction benefits derived from the actions taken to date.
plan remain as acute as ever.
% Year
Government consumption 1.8 -0.3 -1.8 2.5 1.7 0.9 -0.3 -0.7 -1.0
Investment 1.3 0.2 3.1 1.8 3.3 0.6 -0.6 0.1 0.6
Domestic demand 2.4 1.1 1.3 3.4 2.8 1.9 0.8 0.8 0.9
Exports 4.3 4.2 4.4 6.0 2.9 4.4 3.3 4.1 4.9
Imports 7.8 2.9 2.3 10.0 5.9 4.5 2.6 2.4 2.2
GDP 1.4 1.4 1.8 2.2 2.0 1.8 1.0 1.2 1.6
GDP (% quarter) - - - 0.2 0.1 0.3 0.4 0.4 0.5
Manufacturing output 3.4 1.8 1.5 4.6 3.8 2.7 1.5 1.5 1.5
Unemployment (%) - ILO 7.8 8.1 8.1 7.8 7.9 7.9 8.0 8.1 8.2
Average earnings (inc. bonuses) 2.0 1.3 1.8 1.3 1.5 1.2 1.2 1.4 1.5
RPI 4.6 3.0 2.6 4.6 4.0 3.8 3.0 2.8 2.7
CPI 3.2 2.9 1.8 3.1 3.0 3.3 3.0 2.8 2.5
Current account (% GDP) -1.9 -1.8 -1.7 - - - -
PSNB (% GDP)* -9.9 -8.2 -6.4 - - - -
USD/GBP** 1.54 1.64 1.65 1.53 1.62 1.65 1.65 1.65 1.65
GBP/EUR** 0.84 0.82 0.82 0.83 0.83 0.82 0.82 0.82 0.82
Base rate (%)*** 0.50 0.50 2.00 0.50 0.50 0.50 0.50 0.50 0.50
10-year bond yield (%)*** 2.70 2.80 3.20 3.2 2.7 2.5 2.3 2.5 2.8
Note: *Public borrowing numbers are shown in fiscal years (2009 is FY09/10, 2010 is FY10/11, 2011 is FY2011/12), **Period average, ***End period estimates.
Source: HSBC
58
Macro
Q4 2010
Recovery of export volumes losing steam… …as confidence in export story evaporates
Index, 2006=100 Index, 2006=100  Net exports made a negative contribution to overall GDP
growth for a fourth successive quarter during Q2, underlining
130 130 the limited impact to date of the more than 25% depreciation of
120 120 the pound since late-2007.
110 110  Increases in export volumes will always lag an improvement in
competitiveness, but the recovery in exports – which has been
100 100 driven by non-EU countries - already looks to be losing
90 90 momentum.
80 80  We expect faith in the UK export-led recovery story to take a
further hit over the coming months, in turn threatening the
70 70 consensus growth forecasts. Our assumption of a moderate
Jul-06 Jul-07 Jul-08 Jul-09 Jul-10 net trade contribution to overall growth in 2012 relates mainly to
Total export volumes, ex. oil & erratic items a weak level of import growth, reflecting soft domestic demand
Total export prices, ex. oil & erratic items conditions.
Source: ONS and HSBC
House prices under renewed pressure… …but lack of turnover should prove a positive
10% 160  Most measures of house prices have suffered reverses during
recent months, although these declines have typically proved very
8% 140 moderate and we expect the currently subdued level of housing
6%
120 market turnover to prevent a more extensive decline in prices.
4%
2% 100  We believe that a much sharper rise in unemployment - well
beyond that factored into our own assumptions for 2011 and
0% 80 2012 – would be required to provoke a significant
-2%
60 destabilisation of the housing market. Measures of housing
-4% stress, most notably the number of repossession claims issued
-6% 40
by mortgage lenders – have continued to decline during 2010.
-8% 20
 Nonetheless, the potential for house price appreciation – a
88 90 92 94 96 98 00 02 04 06 08 10 factor which has proved most beneficial during periods of fiscal
Nationwide price index: 3m change (LHS) consolidation within a number of countries in recent decades –
Mortgage Apps, 000's, advanced 3mths (RHS) appears limited during the forecast period.
Employment proved more durable during downturn… …but upside appears strictly limited
 Employment proved much more durable than many could have
Quarterly rate of change
hoped for during the recession. While output fell by 6.5% peak
2% to trough, a 2.2% decline was recorded in employment.
1%  Although this durability undoubtedly helped to prevent the worst
risks around the economy – and housing market in particular –
0% from developing during 2008/9, the relatively high level of
employment across the economy could work to slow the pace of
-1% recovery. The more forward-looking indicators of employment
have already begun to reverse, and we expect unemployment to
-2% edge up in 2011 as a result.
 The path of public sector employment is expected to plot a
-3% steady retreat over the coming years. The Office for Budget
00 01 02 03 04 05 06 07 08 09 10 Responsibility forecasts general government employment falling
Total Employment GDP by roughly half a million by 2014/15, thereby reversing all of the
gains seen since 2000.
59
Macro
Q4 2010
Norway
Mixed signals moderately over the remainder of the year, with Janet Henry
Economist
rising retail sales and renewed consumer confidence. HSBC Bank plc
The pace of growth in Norway’s total GDP slowed to +44 20 7991 6711
0.1% q-o-q in Q2 from 0.2% in Q1. But the strong q-o- Other reasons for reassurance include the sharp increase janet.henry@hsbcib.com
q increase of 0.5% in the mainland, as against 0.2% in in investment and the upturn in manufacturing. Urvashi Nangia
Associate, Bangalore
Q1, provides some reassurance. We have cut our 2010 Investment grew by 7.3% q-o-q as growth in oil and
annual growth forecasts for the total economy to 0.5% housing investments recovered in Q2. We expect
from 1.2%. investments to keep playing a positive role in the
coming few quarters.
Weak exports and a decline in household
consumption were the main reasons for the lower Following the rate rise in May, house price inflation has
growth experienced in the total economy. Net abated somewhat. Norges Bank has kept rates on hold
exports subtracted 2.7pp from quarterly growth in for the past two meetings. Future price pressures are
the second quarter as imports rose by 5.5% q-o-q expected to remain low, with annual headline inflation
while exports declined by 2.4%, mainly due to a fall reaching 2.3% and 1.5% in the next two years,
in oil exports. We expect trade to be sluggish in the respectively. This, combined with a slow growth
coming quarters, closely tracking developments in outlook, leads us to expect Norges Bank to maintain the
oil prices and household spending. current rate of 2% for the rest of this year and to begin
raising rates again slowly in 2011.
Following a year of robust growth, household
consumption contracted more sharply than we had
expected, falling by 0.5% q-o-q in Q2. A slightly
higher unemployment rate and lower asset prices led
to this outcome. We expect consumption to pick up
% Year
Investment -3.0 6.6 3.4 4.3 2.5 15.1 7.5 2.8 1.9
Domestic demand 3.7 2.3 3.3 5.1 4.5 4.3 1.5 1.3 2.0
Exports -0.5 2.6 2.5 -2.3 -1.6 -0.4 3.2 4.2 3.5
Imports 8.3 5.5 3.5 9.1 7.6 8.3 4.5 4.5 4.8
GDP 0.5 1.4 2.1 0.7 0.9 1.0 1.4 1.6 1.8
GDP (% quarter) - - - 0.2 0.3 0.4 0.4 0.4 0.6
Industrial production -5.2 0.4 1.4 -6.5 -6.0 -4.1 -0.8 3.3 3.5
Unemployment (%) 3.7 3.5 3.5 3.6 3.4 3.6 3.6 3.3 3.3
Consumer prices 2.3 1.7 2.5 1.9 1.9 1.6 1.6 1.7 2.0
Budget balance (% GDP) 10.0 11.0 13.0 - - - - - -
NOK/EUR 7.82 7.50 7.50 7.70 7.60 7.50 7.50 7.50 7.50
3-month money (%) 2.7 3.4 4.2 2.6 2.7 2.8 2.9 3.2 3.4
10-year bond yield (%) 3.2 3.8 4.2 3.1 3.2 3.4 3.5 3.7 3.8
Source: HSBC
60
Macro
Q4 2010
Sweden
An outlier owing to robust domestic demand and the ongoing Janet Henry
Economist
currency appreciation, we forecast imports to remain HSBC Bank plc
Sweden’s Q2 GDP came in at an astonishing 1.9%
strong. Private consumption grew 0.6% q-o-q in Q2. +44 20 7991 6711
q-o-q, even stronger than the 1.5% rise in Q1. Based janet.henry@hsbcib.com
Rising consumer confidence, growing retail sales
on higher Q2 results, we have raised our GDP Urvashi Nangia
and falling unemployment rates lend support to a Associate, Bangalore
growth forecast to 4.0% for 2010 from 3.1%.
further rise throughout the year, although we believe
The main surprises came from investment, which higher policy rates will curb its impact somewhat.
grew 2% q-o-q (0.4% in Q1), and inventories, which Following the recent election in September, we
added 0.7pp to the overall growth number. expect government consumption to contribute
Investment in machinery, building and construction positively in H2 too.
showed massive rises. We expect investment to
Led by a robust growth outlook, the Riksbank has
remain strong as credit conditions are still
increased rates twice – in both July and September,
favourable, manufacturing confidence is rising and
bringing rates to 0.75%. Price pressures are low but
resource utilisation is picking up. This is clearly
we expect annual inflation to rise to 1.1% and 2% in
reflected in the industrial production numbers, which
the next two years, respectively, with further rises in
grew by 5.1% q-o-q (3.7% earlier).
resource utilisation and employment. We expect the
Trade showed an impressive increase, with net trade gradual normalisation to continue, with one more
adding 0.35pp to Q2 growth after two quarters of 25bp rise in Q4 this year and a few more next year,
negative contributions. We expect world trade taking rates to 2% by end-2011.
growth to slow down in the coming quarters but,
% Year
Investment 4.0 6.6 4.1 4.9 5.0 6.0 5.8 6.8 7.6
Domestic demand 4.5 2.7 2.1 5.4 4.1 2.8 1.9 2.6 3.4
Exports 11.7 7.6 4.0 14.6 15.6 12.6 7.6 5.0 5.7
Imports 14.1 7.9 3.4 18.1 17.1 12.7 7.7 5.6 6.1
GDP 4.0 2.9 2.5 4.6 4.2 3.4 2.2 2.5 3.4
GDP (% quarter, sa) - - - 0.6 0.2 0.7 0.8 0.9 1.0
Unemployment (%) 8.9 8.5 7.8 8.8 8.4 8.6 8.8 8.3 8.2
Consumer prices 1.1 2.1 2.5 1.1 1.3 1.5 2.0 2.3 2.5
State debt (% GDP) 42.5 40.0 40.0 - - - - - -
SEK/USD 7.36 6.96 6.96 7.48 6.96 6.96 6.96 6.96 6.96
SEK/ EUR 9.54 9.40 9.40 9.50 9.40 9.40 9.40 9.40 9.40
3-month money (%) 1.4 2.4 3.4 1.0 1.4 1.6 1.9 2.1 2.4
10-year bond yield (%) 2.4 3.0 3.6 2.4 2.4 2.3 2.4 2.7 3.0
Source: HSBC
61
Macro
Q4 2010
Switzerland
SNB still cares about CHF This is all a textbook economic recovery for a small Astrid Schilo
Economist
open economy. The two variables which remain less HSBC Bank plc
Switzerland depends on global trade, which means +44 20 7991 6708
predictable are the Swiss franc and the SNB’s
that a slowdown has to be expected, but growth astrid.schilo@hsbcib.com
reaction to it. In June, the SNB appeared
rates will remain healthy. The most intriguing
surprisingly balanced and announced it would no
aspect for Switzerland’s economy will remain how
longer intervene against the currency’s strength.
the SNB handles the strength of its currency.
Since then, the franc has appreciated by 5%, and the
Second-quarter GDP growth was strong. However, SNB’s reaction in September was to lower
net exports came in below our expectations, but aggressively its inflation outlook, which came close
given that the statistics office notes that imports to verbal intervention. With risk aversion likely to
were especially strong because of jewellery, we stay a factor, we don’t think the franc will fall
treat it as a one off. In our forecast period, imports significantly against the euro. This means that
should, however, naturally grow in importance as imported price pressure will remain low, bearing in
the recovery in trade should support domestic mind that commodity imports depend on
demand. On the corporate side, rising capacity USD/CHF. All eyes are therefore on domestic price
utilisation – it is just at 83%, close to the long-run pressures. Here, the surprising development is that
average – should lead to a pick up in investment, mortgage growth has stabilised. Overall, we
and households should consume more as labour maintain the view that the SNB may have to raise
markets improve. rates before its peers, as rates are even lower than in
the US, but in our expectations we have postponed
the timing for the first rate hike to Q3 2011.
% Year
Investment 3.1 2.9 2.3 2.6 1.7 4.0 2.1 2.5 2.8
Exports 10.9 4.4 6.5 10.2 8.1 4.9 4.4 4.3 4.2
Imports 8.0 4.9 6.8 9.2 8.6 7.3 3.8 4.3 4.3
GDP 2.9 1.7 1.8 3.2 3.0 2.2 1.7 1.5 1.5
GDP (% quarter) - - - 0.6 0.4 0.3 0.3 0.4 0.5
Unemployment (%) 3.9 3.5 2.9 3.8 5.0 3.7 3.6 3.5 3.3
Consumer prices 0.7 0.7 1.5 0.4 0.2 -0.1 0.5 1.1 1.3
Current account (EURbn) 51.3 53.7 51.4 12.5 12.7 13.1 14.3 13.1 13.2
CHF/USD 1.03 1.00 1.00 1.02 0.96 0.98 0.99 1.01 1.02
CHF/EUR 1.34 1.35 1.35 1.30 1.30 1.32 1.34 1.36 1.38
3-month money (%) 0.25 0.83 1.50 0.18 0.25 0.25 0.42 0.75 0.83
10-year bond yield (%) 1.4 2.0 2.6 1.4 1.4 1.5 1.7 1.8 2.0
Source: HSBC
62
Macro
Q4 2010
Hungary
Not yet out of the woods ambiguity has recently transformed into financial Kubilay Ozturk
Economist
stability strains, as the debt-servicing capacity of HSBC Bank plc
The Hungarian economy came out of recession in
the heavily FX-indebted household sector has been +44 20 7991 1360
Q4 2009, but is recovering very gradually. Weak kubilay.ozturk@hsbcib.com
dented further with HUF remaining sustainably
investments, tight lending standards, rising
weak against the CHF. Details of the 2011 budget
unemployment and subdued wages suggest private
(to be unveiled only after local elections on 3
demand will remain depressed, while net exports
October) is likely to be followed closely by the
are set to be the sole source of growth again.
markets, while lack of structural measures, over-
Financial consolidation seen in the second half of
dependence on renewed financial levy and cyclical
2009 and early this year came to an abrupt end
factors, along with the possible step-wise
shortly after the April general elections, in which
introduction of a flat PIT (at 16%) may raise
Fidesz (centre-right) received a constitutional
question marks over the quality of any fiscal
majority, as the party’s default blunder and the
consolidation ahead.
stand-off with the IMF and EU (in June and July
respectively) stunned the markets, causing a huge The NBH opted to halt its monetary easing in May
‘credibility gap’. and has adopted a wait-and-see approach since
then. The MPC more recently appeared worried
Despite the government’s recent commitment to a
about the worsening in financial stability conditions
2011 budget deficit below 3% of GDP, in line with
and risk assessment of Hungarian assets, while two
the threshold under the European Commission’s
(out of seven) rate-setters opted for a 25bp rate hike
Excessive Deficit Procedure, the Fidesz cabinet
in August. Notwithstanding the NBH’s recently
continues to distance itself from any kind of
upgraded CPI projections (mainly owing to a
cooperation with the IMF over its medium-term
weakened HUF), there is currently no consensus
economic plans. However, absence of a meaningful
among Council members over inflation trajectory,
safety net might make Hungary more vulnerable to
justifying our call for steady rates well into 2011,
a reversal in global sentiment, given its high
with risks tilted to the upside.
external and public debt and significant dependence
on market financing. Ongoing political/fiscal
% Year
2007 2008 2009 2010f 2011f 2012f
Consumer spending 0.4 -0.5 -7.5 -2.5 1.8 2.6
Government consumption -7.2 -0.6 -1.1 1.3 2.0 2.2
Fixed investment 1.6 0.4 -6.5 -1.5 2.8 4.1
Exports 16.2 5.6 -9.1 14.1 9.3 8.8
Imports 13.3 5.7 -15.4 12.1 8.4 8.9
GDP 1.0 0.6 -6.3 1.0 2.7 3.0
Unemployment* 7.7 8.0 10.5 11.5 11.2 10.6
Consumer prices 7.9 6.1 4.2 4.8 3.2 3.4
Current account (% GDP) -6.8 -7.2 0.2 0.6 0.9 0.5
Budget balance (% GDP)** -5.0 -3.8 -4.0 -4.0 -3.7 -3.5
HUF/USD 179.3 169.2 199.7 214.1 198.1 196.3
HUF/EUR 249.3 250.7 279.9 277.6 267.5 265.0
3-month money (%) 7.7 8.9 8.3 5.4 5.6 5.6
10-year yield (%) 6.8 8.3 9.4 7.1 6.7 6.7
Note: * = year-end **= fiscal year
Source: HSBC
63
Macro
Q4 2010
Poland
Still ahead of the pack ensure a downward path on budgetary balances. Kubilay Ozturk
Economist
Most fiscal consolidation is still expected to take HSBC Bank plc
Poland again reported stellar growth in Q2 2010, +44 20 7991 1360
place in 2012.
at 3.5% y-o-y, supported mainly by resilient kubilay.ozturk@hsbcib.com
domestic absorption, which bodes well in the event Notwithstanding the resilient growth, core and
of a slowdown in Western Europe before year-end. headline inflation both remain low. Domestic cost-
EU funds, expected to be around EUR14bn this side pressures are relatively muted thanks to
year, a benign environment for foreign capital unprecedented labour hoarding over the course of
inflows and planned public investments before the the downturn. Although the MPC discussed the
2012 European Football Cup are likely to provide possibility of tightening at the August meeting, the
support during the rest of the year and in 2011, ambiguous external backdrop and benign inflation
confirming Poland’s ongoing economic outlook argue for constant rates until year-end,
outperformance within the CEE4 region. followed by intermittent hikes in 2011.
The political backdrop has improved following the PLN remains on a firming ground, thanks to
victory of ruling PO-affiliated Bronislaw Poland’s undisrupted economic outperformance,
Komorowski in the June-July Presidential elections. notable correction in external balances, and renewal
The threat of vetoes associated with ex-President of IMF’s USD20.6bn Flexible Credit Line. The
Kaczynski against reforms needed to scale back NBP's direct intervention in early April confirms
structural spending – 75% of total government that fast strengthening is likely to be avoided again;
spending – is dissipating. That said, the recently hence, the expected appreciation trend will probably
announced fiscal consolidation path has fallen short be gradual and measured.
of expectations. The forthcoming election cycle
(local in November 2010, general elections in
autumn 2011) still appears to dominate Civic
Platform’s (PO) agenda. A 1% cap on real growth
of discretionary spending and a 1pp VAT hike have
been perceived as only ‘fine-tuning’ measures to
% Year
2007 2008 2009 2010f 2011f 2012f
Consumer spending 4.9 5.9 2.3 2.3 3.3 2.8
Government consumption 3.7 7.5 1.9 2.8 2.2 2.0
Exports 9.1 7.1 -7.9 12.1 8.8 8.5
Imports 13.7 8.0 -13.6 12.8 10.8 9.2
GDP 6.8 5.0 1.8 3.2 3.9 3.4
Unemployment (%)* 11.4 9.5 11.9 12.3 11.5 10.7
Consumer prices 2.5 4.2 3.5 2.5 2.9 3.3
PLN/USD 2.70 2.43 3.10 3.07 2.80 2.76
PLN/EUR 3.75 3.60 4.35 3.97 3.78 3.73
3-month money (%) 4.8 6.2 4.2 3.8 4.5 4.5
10-year bond yield (%) 5.5 6.0 6.3 5.6 5.8 5.9
Note:* = year-end
Source: HSBC
64
Macro
Q4 2010
Romania
Recovery back-loaded deal following expiration of the current Stand-by Kubilay Ozturk
Economist
Agreement in April 2011 provides some respite. HSBC Bank plc
Romania’s sequential growth turned positive, at +44 20 7991 1360
The fiscal outlook still hinges on political
0.3% q-o-q (in seasonally adjusted terms) in Q2 kubilay.ozturk@hsbcib.com
developments and, although the current centrist
2010, following -0.3% previously. Lingering
coalition (formed of the PDL, UDMR and
positive base effects, an externally driven
independent MPs) remains committed to the
improvement in inventories and industrial activity
targets of 7.3% (of GDP, in ESA terms) this year
continue to provide support, but domestic
and 4.9% next, the risks still look tilted to the
consumption remains fairly depressed. Looking
upside, owing to the back-loaded recovery.
ahead, a subdued outlook for foreign capital inflows
(and external funding) and additional austerity Given concerns over the possibility of wide-scale
measures (a 5pp VAT hike from July 2010 and a deterioration in headline CPI in the aftermath of the
25% cut in public wages) indicate that the exit from recent VAT hike, the NBR opted to halt its easing in
recession is likely to be temporary. We expect full- late June and has adopted a ‘wait-and-see’ strategy.
year GDP growth to remain in negative territory this The capped pass-through from the VAT hike in July
year, followed by a likely stagnation in 2011. and August and the persistence of a large negative
output gap may argue for the possibility of a
The political backdrop appears far from stable as
renewed monetary stimulus. However such a move
half of the cabinet was replaced in a recent
would require: political/fiscal/financial stability; the
reshuffle prompted by heightened public
absence of any sustainable deterioration in
discontent with additional IMF-induced fiscal
inflationary expectations; undisrupted IMF/EU
measures. Support for the ruling Liberal
scrutiny/support; and a constructive external
Democrats (PDL) is plunging, and the two main
backdrop. We maintain our view that policy rates
opposition parties, the PNL and PSD, are
will likely remain steady at 6.25% well into 2011
allegedly working together to file another vote of
and expect the next move to be upwards, given
no confidence, pointing to significant political
that there are quite a few ‘ifs’ in the
overhang on Romanian markets and the RON.
aforementioned scenario.
That said, the high likelihood of a renewed IMF
% Year
2007 2008 2009 2010f 2011f 2012f
Consumer spending 11.6 9.1 -10.8 -3.3 0.0 2.0
Exports 7.8 18.9 -5.5 14.9 9.3 8.7
Imports 27.8 17.1 -20.6 12.7 8.2 9.3
GDP 6.2 7.1 -7.1 -2.2 0.1 2.2
Unemployment (%)* 4.1 4.4 7.8 8.5 8.6 7.9
Consumer prices 4.8 7.9 5.6 6.0 5.5 4.6
RON/USD* 2.45 2.89 2.95 3.15 3.00 2.89
RON/EUR* 3.57 4.03 4.23 4.25 4.05 3.90
3-month money (%)* 8.0 14.7 10.4 6.6 7.0 8.1
Note: * = year-end, ** = General government balance (ESA 95)
Source: HSBC
65
Macro
Q4 2010
Russia
Economic growth: Gone with September from 5.5% in July and has the potential Alexander Morozov
Economist
the heat wave to accelerate in October. HSBC Bank (RR), Moscow
+7 495 783 8855
Economic growth in Russia appears to have Moreover, there are growing concerns that alexander.morozov@hsbc.com
decelerated faster during the third quarter than we inflation is getting entrenched in higher
initially expected. The heat wave, drought and inflationary expectations, and price growth
smog should have written off some 1pp from acceleration is spreading into non-food goods and
GDP growth this year (and annualized 4% pts of services. Past strong money supply growth and
Q3 GDP). Most likely, it has prompted stagnation abundant RUB liquidity is contributing to this
in the economy in Q3 q-o-q. It follows that GDP scenario.
growth peaked at 5.2% y-o-y in Q2 and will
From the financial markets’ viewpoint, Russia’s
decelerate thereafter. An improvement in the new
macroeconomic outlook has weakened markedly
orders indicator in manufacturing is encouraging,
in H2 compared with H1 2010. Hopes for strong
but the decline in new export orders points to the
economic growth have diminished while inflation
increased risks for the sustainability of output
has reversed its trend and started accelerating. The
growth in manufacturing. We cautiously look for
foreign trade balance has weakened, with exports
economic growth to return to the trend of 2% to
stagnating since March and imports growing by
4% in the final quarter of 2010.
more than 30% y-o-y.
The heat wave and drought has also negatively
While sovereign credit metrics remain solid, the
affected inflation. Poor crops have stopped
market risks for RUB bonds as well as for the
seasonal disinflation of fruits and vegetables and
currency have increased.
fuelled significant price rises on many wheat and
dairy products. Given that foodstuffs account for
38% of CPI in Russia, the rise in food prices has a
much stronger impact on inflation in Russia than
it would in OECD countries. In y-o-y terms
consumer price growth accelerated to c7% in
% Year
2007 2008 2009 2010f 2011f 2012f
GDP 8.1 5.6 -7.9 3.8 3.5 3.0
Consumer prices 9.0 14.1 11.7 7.0 9.5 8.5
Current account (USDbn) 77.2 102.3 49.0 64.4 28.1 13.3
Current account (% GDP) 5.9 6.1 4.0 4.3 1.7 0.7
Foreign exchange reserves (USDbn) 465.9 412.5 416.7 467.4 473.9 476.8
Overall fiscal balance (% GDP) 5.4 4.1 -5.9 -4.7 -4.1 -3.7
RUB/USD 25.6 24.8 31.8 30.4 31.0 33.0
1-month money (%) 4.9 10.1 12.2 5.0 7.7 6.8
Source: HSBC
66
Macro
Q4 2010
HSBC PMI Output data… …point to economic stagnation in Q3

Index % Yr  HSBC Russia Composite PMI Output index proved serve as a
good lead indicator for GDP growth. The index recently
70 12
declined to a level just below the 50 mark that separates
65 9 growth from contraction.
60 6
 The heat wave and drought levied a heavy toll on economic
55 3
growth in Russia this summer; such a slowdown should prove
50 0 temporary.
45 -3
 However, the PMI Output index had peaked at a lower level in
40 -6
April and June 2010 than its average levels in 2004-1H 2008. It
35 -9 suggests that the likely resumption of economic growth in
30 -12 Russia would result in lower growth rates than seen before the
04 05 06 07 08 09 10 2008 crisis.
HSBC Russia composite PMI output index (LHS)
GDP (RHS)
Source: HSBC/Markit, Rosstat
Will strong growth of domestic orders be sustained? Export vs. domestic demand: which one is the key
driver?
 Historically, the Manufacturing PMI New Export Orders index
Index HSBC Russia Manufacturing PMI Index and New Orders index have been closely correlated. Taking
65 65 into account that export demand generates domestic demand
60 60 via upstream production chains, the New Export Orders has
55 55 tended to lead the overall New Orders series.
50 50  Since June 2010, the PMI New Export Orders index and New
45 45 Orders index have moved in opposite directions. New Export
Orders have weakened and moved below the 50 mark pointing
40 40
to contracting export demand. Conversely, New Orders keep
35 35
improving, pointing to strong growth of domestic demand in
30 30 manufacturing.
25 25
 The Russian state cannot employ additional fiscal stimuli to
06 07 08 09 10 boost domestic demand, except for the recently launched
New orders New export orders ‘cash-for-clunkers’ program. So, it appears that export demand
should take the upper hand in manufacturing output dynamics.
Source: HSBC/Markit
Manufacturing PMI Input Prices index is still rising Price pressures intensify in manufacturing
% Yr Index  HSBC Manufacturing PMI Input Prices suggest pressure have

been growing since 2009 and is already approaching pre-crisis
35 85
30 80 levels. So has PPI.
25 75  In that respect, the recent slowdown of PPI growth y-o-y is
20 70 likely to be temporary…
15 65
 …as manufacturers are reporting an ability to pass on rising
10 60
5 55 costs to their customers.
0 50
-5 45
-10 40
-15 35
06 07 08 09 10
PPI (LHS)
HSBC Russia manufacturing PMI input prices (RHS)
Source: HSBC/Markit, Rosstat
67
Macro
Q4 2010
Turkey
Growth and its discontents take their toll in 2011. In line with this, we expect Dr. Murat Ulgen
Economist
domestic activity to continue to drive growth, albeit HSBC Turkey
Recently released second-quarter GDP data provide +90 212 376 4619
at a lower pace, well into the next year.
further evidence of Turkey’s impressive recovery muratulgen@hsbc.com.tr
story. Domestic demand remains the primary Turkey’s asymmetric growth story brings with it
driver, while foreign demand remains subdued. The two risks, one for the near term, the other for the
recovery in investment, which had been lagging longer term. Inflation is the near-term concern.
that of consumption early in the year, has also Easy financial conditions are spurring domestic
shown a marked improvement, as recent data on demand and global food and soft-commodity prices
machinery and equipment production and have been rising steadily in the past few months.
investment goods imports suggest. The Central Bank has set an ambitious target of
5.5% headline inflation for 2011, but the conflation
Contrary to the strength in household consumption
of these two factors could pose an upside risk.
and private fixed capital formation, foreign demand
remains weak. Trade and current account figures The medium-term risk is the widening current
show that despite a recent acceleration, export account deficit and lack of long-term, quality
growth has not caught up with that of imports. In financing. There are multiple factors at play here:
pre-crisis years, the widening trade deficit would be trade and tourism links to Europe, TRY
partly offset by tourism revenues (particularly in appreciation and Turkey’s energy importer status
the summer months), but as Europe’s recovery are all sources of future vulnerabilities.
falters, so does Turkey’s export performance and
its tourism income. This trend appears unlikely to
reverse in the near term; it may become even more
entrenched as fiscal austerity measures in Europe
% Year
2007 2008 2009 2010f 2011f 2012f
Consumer spending 5.5 -0.3 -2.3 5.9 3.5 3.7
Fixed investment 3.1 -6.2 -19.2 13.6 4.7 3.0
Stockbuilding (% GDP) -0.1 0.2 -2.0 0.0 1.0 3.0
Domestic demand 5.0 -1.5 -5.2 7.0 3.9 3.5
Exports 7.3 2.7 -5.4 6.0 8.9 8.0
Imports 10.7 -4.1 -14.4 15.4 12.1 11.9
GDP 4.7 0.7 -4.7 6.8 3.9 4.3
Consumer Prices 8.8 10.4 6.3 8.7 7.7 7.0
Producer Prices * 5.9 8.1 5.9 8.4 7.6 6.0
Budget deficit (% GDP) -1.6 -1.8 -5.5 -4.4 -5.2 -3.3
TRY/USD** 1.27 1.34 1.49 1.46 1.45 1.47
3-month money (%)*** 16.0 15.5 7.5 7.5 9.0 9.2
Note: * = year end; ** = starting in January 2005, when the Turkish currency (until then coded TRL) shed 6 zeros off its exchange rate. ***=average
Source: HSBC
68
Macro
Q4 2010
Domestic demand drives the v-shaped recovery How much slack is left in the economy?
6%  Domestic demand, spurred by negative real interest rates,
stable currency and strong banking system, continues to drive
4% growth.
2%  Investment demand (particularly in the private sector) caught up
with consumption demand in the second quarter, contributing
0%
significantly to headline GDP.
-2%  We estimate that the output gap may be closing more quickly
-4% than the Central Bank had anticipated. This, combined with
possible cost-side pressures, could translate into upside risks to
-6% achieving the year-end inflation target of 5.5%.
QoQ growth
-8%
Estimated output gap
-10%
1Q99
1Q00
1Q01
1Q02
1Q03
1Q04
1Q05
1Q06
1Q07
1Q08
1Q09
1Q10
Source: TURKSTAT, HSBC
Food inflation drives the headline… …with its large share and high volatility
40%  Food and non-alcoholic beverages have a large share of 27.6%
PPI (Agriculture prices, y/y) in the CPI basket. This, as well as the second-order impact of
high food prices on sectors such as catering services,
30% CPI (Food prices, y/y)
translates into an outsized impact on headline inflation.
 Unprocessed food inflation is also highly volatile in Turkey,
20%
partly because of the inherent seasonality but also because of
structural issues regarding shortcomings in the food supply
10% chain and animal husbandry sectors.
 Markets currently expect the disinflationary process to continue.
0% But global commodity price pressures, combined with the
rapidly shrinking output gap, could disappoint those
-10% expectations.
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Source: TURKSTAT
Current account deficit is widening rapidly… … for a variety of reasons

20 C/A Balance, bn $  Turkey’s total energy imports reach cUSD30.0bn annually,
Non-energy C/A Balance, bn $ which renders it vulnerable to energy commodity price
10 pressures. Its exports, on the other hand, are hurt by the real
appreciation in TRY.
0
 Despite increased trade with its Eastern neighbours in the last
-10 few years, Europe remains Turkey’s most significant trade (and
tourism) partner.
-20
 Currently, financing of the external deficit is of low-quality and
-30 short-term nature. A sustained improvement in FDI flows or
long-term borrowing could ease concerns regarding the current
-40
12-m rolling sum account deficit. But as things stand now, the swiftly widening
-50 deficit and rising external financing needs could act as a
constraint on Turkey’s growth in the medium term.
Jan-03
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Source: CBRT
69
Macro
Q4 2010
Egypt
Still gaining speed H1 2010, allowing the central bank to add to Simon Williams
Economist
reserves which have reached record highs. EGP HSBC Bank Middle East
Despite continued political uncertainties, Egypt’s
has weakened throughout 2010, hitting a four-year Limited, Dubai
economic recovery continues to gather +971 4423 6925
low in September. The clear evidence of gains in simon.williams@hsbc.com
momentum. Provisional data put growth at almost
the economic environment leads us to believe that
6% in the second quarter of 2010, marking the
the trend is a CBE policy choice, not a reflection
fifth quarter in six in which the pace of economic
of deteriorating fundamentals. We expect this
expansion has accelerated. Encouragingly, the
positive momentum to persist and look for Egypt
pick-up in economic growth has begun to boost
to be one of MENA’s strongest economic
job creation, with unemployment falling below
performers over the coming two years.
9% in Q2 2010 for the first time since late 2008.
Egypt’s fiscal position – long the economy’s Nevertheless, political uncertainties look set to
Achilles’ Heel - weakened last year. However, the deepen as this year’s parliamentary election and
stronger-than-anticipated economic growth next year’s presidential poll refocus attention on
offered government revenues good support, succession to Hosni Mubarak, Egypt’s president
holding what we anticipate will be the cyclical for the past 29 years. Mr Mubarak’s son, Gamal,
peak deficit below forecast levels. is still seen as front runner for the post. However,
confidence in his accession is weakening, and the
New data show the current account recorded a
uncertainty could leave Egypt vulnerable to an
deficit in FY2010 (ending 30 June) for the second
abrupt reversal of confidence. Establishing a new
consecutive year. At around 2% of GDP, however,
political order after such a long period of rule by
the shortfall was not only unchanged on FY2009,
Mr Mubarak may also prove challenging.
but also characterised by strengthening inflows as
export earnings as well as inflows from tourism,
Suez and other service sectors gained speed.
Aggregate capital inflows also strengthened over
% Year
2007 2008 2009 2010f 2011f 2012f
Exports 23.3 28.8 -12.8 -2.8 9.5 8.5
Imports 28.5 26.3 -17.7 -3.9 7.5 8.0
GDP 7.1 7.2 4.7 5.1 6.0 6.1
Consumer prices 8.5 20.2 10.0 10.7 10.4 11.0
Current account balance (USDbn) 2.3 0.9 -4.4 -4.3 -5.1 -5.1
Current account balance (% GDP) 1.7 0.5 -2.4 -2.0 -2.1 -1.8
EGP/USD 5.69 5.33 5.59 5.70 5.75 5.80
3-month money (%) 9.6 10.2 9.5 9.2 10.0 10.5
Note: Fiscal year ending June 30th.
Source: CBE, HSBC
70
Macro
Q4 2010
Saudi Arabia
Government takes the strain extended period of underinvestment in Simon Williams
Economist
infrastructure and real estate. Saudi Arabia’s status HSBC Bank Middle East
Although the data are scant there are good signs that
as the world’s biggest oil exporter and the surpluses Limited, Dubai
the kingdom’s economic recovery has momentum. +971 4423 6925
it accrued during the oil-boom period also leave it simon.williams@hsbc.com
Surveys of local corporates show confidence
well placed to provide funding support and should
running above pre-crisis level, while available
support accelerating growth from 2010 onward.
indicators of consumer spending point to an upturn
in outlays. Accelerating import spending also attests However, while the government has taken the lead,
to more robust domestic demand for capital and the private sector has struggled to play its part.
consumer goods while the reported pick-up in non- Private sector funding has proved particularly
oil export earnings points to the kingdom’s success difficult to access, slowing project execution and
in catching rising emerging market demand for muting the multiplier effect that the strong growth
energy-intensive industrial goods. in public spending might otherwise have had.
Although the government has stepped in to provide
Public spending has been pivotal to the economic
finance, there are limits to what even the Saudi state
pick-up. Alongside the strongly expansionary
can do with our forecasts suggesting that the budget
budgets announced for 2009 and 2010, the
will move into deficit no later than 2012 without a
government outlined an ambitious five year strategy
pick up in oil prices. Our expectation that capacity
that seeks to spend over USD350bn on
constraints would mean that even modest rates of
infrastructure related projects. Although all
economic growth would trigger an early return of
governments in the oil-rich GCC region have
inflation is also being realised. At 6%, price growth
outlined capital-intensive development strategies,
was the highest in the GCC by some way at the end
those for the kingdom have particular urgency given
of H1 2010 and is likely to remain elevated
the youth and size of its population (three-quarters
throughout the coming two years.
of all Gulf nationals are Saudi nationals) and the
% Year
2007 2008 2009 2010f 2011f 2012f
Consumer spending* 18.7 18.0 8.1 9.0 11.0 12.0

Government consumption* 3.5 7.1 1.0 7.8 11.0 13.0
Fixed investment* 26.7 17.8 -0.1 11.0 14.0 17.0
Stocks* -18.0 243.4 -56.7 -5.0 -5.0 -5.0
Exports* 10.6 29.6 -37.4 14.7 13.0 5.4
Imports* 28.1 14.4 -3.2 14.0 21.0 22.0
GDP 3.4 4.4 0.1 3.6 4.4 4.8
Consumer prices 4.1 9.9 5.1 5.5 6.6 7.0
Current account balance (USDbn) 93.3 132.4 22.7 32.3 29.7 2.5
Current account balance (% GDP) 24.2 27.1 6.0 7.8 6.6 0.5
Budget balance (% GDP) 12.4 31.8 -3.2 2.3 1.9 -2.0
SAR/USD 3.75 3.75 3.75 3.75 3.75 3.75
3-month money (%)** 4.0 3.0 0.8 0.8 1.0 1.8
Note: * Nominal growth. ** End year.
Source: HSBC
71
Macro
Q4 2010
UAE
A different kind of normal though with Dubai beginning to gain speed. Simon Williams
Economist
However, at around 2% this year and an average of HSBC Bank Middle East
After an uncertain 18 months, there are
Limited, Dubai
convincing signs of stabilisation in the UAE. At around 4.3% over 2011-12, the pace of growth will +971 4423 6925
simon.williams@hsbc.com
USD75-80/bbl, oil prices should deliver much lag that generated by some of its neighbours on our
stronger public finances this year after last year’s estimates. It will also be roughly half the 8.0% rate
unusually weak outturn. This should also enable of expansion the UAE generated in the six years
the trade and current account position to gain before the 2009 slump, marking the shift towards a
ground, allowing the UAE to add to its stock of new and rather more subdued economic cycle.
foreign assets, which remained substantial even
In part our expectation of a downshift in growth
after recent drawdowns.
trends reflects the weaker global environment as
We also see evidence that the UAE has benefited well as concerns over unresolved excesses built up
from the emerging market-led improvement in the during the boom – particularly in the real estate
global economy during 2010, with rising sectors of both Dubai and Abu Dhabi. We also
throughput at the UAE’s ports and airports and believe that access to international funding will be
resilient tourism numbers offering visible markers more difficult than during the previous cycle and
of increased external demand for the country’s that local banks will not provide new funding at
export-orientated service sector. The announcement the pace or low cost that characterised earlier
in September that creditors had accepted the times. Although we expect public spending to rise,
restructuring terms offered by Dubai World also flat real oil prices and the chastening experience of
marks a significant step toward the normalisation last year’s debt difficulties are likely to result in a
of the UAE’s relationship with global capital more modest pace of expansion.
markets. Overall we look for acceleration in
economic growth, led initially by Abu Dhabi,
% Year
2007 2008 2009f 2010f 2011f 2012f
Consumer spending* 12.0 21.4 2.0 3.0 5.2 8.7

Government consumption* 31.0 14.0 7.0 4.0 5.7 8.0
Fixed investment* 105.2 20.8 -15.0 6.0 7.2 10.5
Stocks* 10.8 105.5 9.0 1.0 2.7 4.0
Exports* 22.5 33.3 -19.7 11.3 5.4 8.8
Imports* 47.1 32.3 -14.9 6.0 9.0 10.0
GDP 5.2 7.0 -2.9 2.0 3.9 4.5
Consumer prices 11.1 13.5 1.8 1.0 2.7 4.0
Current account balance (USDbn) 19.6 22.3 7.8 22.7 12.3 7.3
Current account balance (% GDP) 9.5 8.8 3.4 9.1 4.8 2.6
Budget balance (% GDP) 21.6 21.0 0.4 5.6 4.5 6.0
AED/USD 3.67 3.67 3.67 3.67 3.67 3.67
3-month money (%)** 4.6 4.2 1.9 2.2 2.1 2.2
Note: * Nominal growth. **End year.
Source: HSBC
72
Macro
Q4 2010
South Africa
Recovery unpalatably slow frameworks in EM and a credible South African Dr. Murat Ulgen
Economist
Reserve Bank (SARB). While the SARB
South Africa successfully organised the FIFA HSBC Bank
maintains and recently has even amplified its +90 212 376 4619
World Cup Finals in June and July, which muratulgen@hsbc.com.tr
monetary stimulus, politicians are also considering
benefited the economy with some boost to
other measures, for instance a Brazilian-style
domestic consumption and favourable effects on
“inflows tax” to curb appreciation pressure on
certain service areas. However, the effects are
ZAR. Alliance members are also considering
already fading; the global economy is slowing in
modifying the inflation targeting regime or
the second half of this year and the outlook for
changing the target band.
foreign demand is uncertain, while real
appreciation of the rand (ZAR) is likely to weigh At the end of the day, however, we do not expect
on production performance. In sum, the recovery any serious changes, since authorities are also
from last year’s shallow recession remains fairly aware that South Africa’s narrowing but still
sluggish at below 3.0%, according to our forecasts sizable current account gap is being financed
for this year. mostly through portfolio inflows. That said, such
proposals and ideas are likely in our view to
Even though this may still be considered
continue to make the headlines. Apart from an
reasonable by international standards, the South
unpalatably slow recovery, the key risk remains a
African government wants to achieve a much
deepening rift among the members of the ruling
higher growth rate of at least 6.0%, double the
alliance. Too much uncertainty about political
current rate, for a few decades in succession in
developments could affect consumer and business
order to bring down South Africa’s unemployment
sentiment negatively and in turn further hamper an
rate of c25% to more civilised levels. Thus, there
already sluggish recovery.
are ongoing debates among the ruling alliance
members about how to approach economic policy.
South Africa is renowned for its policy orthodoxy
and credited with having one of the best fiscal
% Year
2007 2008 2009 2010f 2011f 2012f
Consumer spending 5.5 2.4 -3.5 1.7 2.9 2.0
Fixed investment 14.2 11.7 4.0 6.2 8.1 7.0
Exports 7.5 1.7 -16.5 10.0 11.0 12.5
Imports 10.0 2.2 -18.5 13.5 18.5 16.2
GDP 5.5 3.7 -1.8 2.6 3.5 3.1
M3 19.6 18.5 6.8 7.5 11.0 13.0
Consumer prices 7.1 11.0 7.2 4.7 5.5 6.0
ZAR/USD 7.05 8.27 8.41 7.15 7.20 7.25
3-month money (%)* 11.3 11.4 7.1 6.6 6.6 7.5
10-year bond yield (%)* 8.4 7.3 9.0 7.8 8.6 9.5
Note: * = index 1995 = 100 (end year)
Source: HSBC
73
Macro
Q4 2010
Japan
2011 looking weak the quarterly growth forecast for Q1 2011 to 0.3% Seiji Shiraishi
Economist
from 0.1% but revised down for Q2 to 0.1% from HSBC Securities (Japan)
We have maintained our real GDP growth forecast Limited
0.5%. External conditions are also expected to turn
for 2010 at 3.0% while lowering it to 0.7% from +81 3 5203 3802
less positive for Japan, as indicated by the seiji.shiraishi@hsbc.com.jp
1.0% for 2011. This revision is attributable to: 1) the
slowdown in the OECD leading indicators.
downward revision to the US growth forecast; 2)
the expected negative impact of current yen The pace of increase in capex is expected to remain
appreciation; and 3) delay of the expiry of moderate through the forecasting period, and
government incentives on eco home appliance sales unemployment looks set to stay around 5% in 2010
to end of March next year from the end of and to decline only slightly in 2011. Thus, private
December this year. domestic demand will not drive growth, which will,
instead, be supported by exports to rapidly
We now expect a quarterly GDP contraction in Q4
developing Asian countries.
this year, on the back of a sizable decline in auto
sales after the expiry of government subsidies in The continued negative output gap will be a
September, and lower demand for eco home persistent source of downward pressure on prices.
appliances now that consumers have been given We project the core CPI will fall by 1.1% in 2010
more time before incentives run out in March next and by 0.5% in 2011, and the BoJ will not hike base
year. Mainly owing to this extension, we revised up rates through 2012.
% Year
Consumer spending 1.9 -0.4 0.7 1.6 0.1 -0.4 -0.6 -0.8 0.2
Investment -0.5 0.4 1.8 2.1 1.3 0.5 0.7 0.3 1.0
Private non-residential 1.5 2.6 4.1 5.6 3.9 3.0 2.5 2.0 3.0
Private residential -8.3 1.2 2.3 -2.9 0.0 -0.3 1.5 1.5 2.1
Public -4.4 -8.7 -8.0 -8.1 -9.3 -10.2 -9.5 -7.2 -7.7
Stockbuilding (% GDP) -0.1 0.1 0.1 -0.1 0.0 0.1 0.1 0.1 0.1
Domestic demand 1.2 0.3 1.0 1.7 1.0 0.4 0.5 0.1 0.7
Exports 25.6 5.9 4.6 22.8 17.9 11.8 6.1 3.5 2.5
Imports 10.7 3.9 1.8 11.6 10.5 7.8 4.0 2.0 2.0
GDP 3.0 0.7 1.5 3.0 1.9 1.0 0.7 0.4 0.9
GDP (% quarter) - - - 0.5 -0.2 0.3 0.1 0.2 0.2
Industrial production (% year) 15.2 -0.4 3.9 11.6 4.4 2.6 -2.2 -3.4 1.5
Unemployment rate 5.1 5.2 4.8 5.1 5.2 5.3 5.2 5.1 5.0
Wholesale prices -0.3 0.8 1.5 -0.1 0.5 0.3 0.1 1.1 1.7
CPI -1.1 -0.5 -0.4 -1.0 -0.8 -0.5 -0.4 -0.7 -0.6
M2+CDs 2.8 2.5 2.5 2.8 2.8 2.6 2.5 2.5 2.5
Current account (JPYtrn) 16.8 17.3 19.5 3.9 4.4 4.4 4.1 4.2 4.6
JPY/USD 89.0 95.0 95.0 86.0 90.0 95.0 95.0 95.0 95.0
3-month money (%) 0.3 0.3 0.3 0.2 0.3 0.3 0.3 0.3 0.3
Benchmark bond (%) 1.0 1.0 1.2 1.0 1.0 0.9 0.9 0.9 1.0
Source: HSBC
74
Macro
Q4 2010
Short-term stimulus is wearing off… …and there are little signs of sustained recovery
% %  Contributions of durable goods consumption and net
3 3 external demand to the GDP growth in FY2009 reached
2 2 137%, indicating an artificial growth led by the globally
1 1 by sizable fiscal stimuli.
0 0  But stimuli effects seem to have peaked without spurring
-1 -1 an autonomous recovery in domestic demand.
-2 -2
09/2Q 09/3Q 09/4Q 10/1Q 10/2Q
Net external demand
Public demand
Other private demand
Durable goods consumption
Real GDP q-o-q
Source: Cabinet Office.
Sizable negative reaction of car sales expected in Q410… … due to expiries of incentives on eco car sales
million million  New car sales surged in Q3 2010, reflecting a rush in

650 650 demand just before government subsidies on ecological
600 600 autos expired.
550 550  We expect sizable contraction from Q4 as the sharp
decline in sales after the Lehman shock (shown by the
500 500 area below the trend line) was much smaller than the
450 450 sales increased by the incentives (shown by the area
400 400 above the trend line).
350 350  Large car makers already announced that they will cut
300 300
monthly production by 20 to 30% from October, which
would push down industrial production by around 4%
Jan-01
Jan-02
Jan-03
Jan-06
Jan-07
Jan-00
Jan-04
Jan-05
Jan-08
Jan-09
Jan-10
in October.
Source: Japan Automobile Dealers Association, HSBC
Negative output gap to persist… … as well as deflation
% Yr % Yr  The output gap is estimated to be -3.8% in Q2 2010,

Forecast and based on our new GDP forecast this gap will remain
4 4
in negative territory even at the end of 2012.
2 3
 Core CPI deflation is expected to persist through 2012
2
0 based on the stable relationship against output gap in
1 the past.
-2
0  The BoJ will not be able to hike rates amid deflation
-4 through 2012.
-1
-6 -2
-8 -3
92/1Q
96/1Q
06/1Q
10/1Q
90/1Q
94/1Q
98/1Q
00/1Q
02/1Q
04/1Q
08/1Q
12/1Q
Output gap Core CPI y-o-y (RHS)
Source: Cabinet Office, MIC, HSBC forecasts.
75
Macro
Q4 2010
Australia
Onwards and upwards The greater fear is now that the Australian economy Paul Bloxham
Economist
will be running up against capacity constraints, The Hongkong and Shanghai
Growth continues to surprise on the upside, and we Banking Corporation Limited,
putting further upward pressure on prices. A tight
have recently raised our GDP growth forecasts, to (HK)
labour market fuels this concern, with the +612 435 966 522
3.4% for 2010 and 4.1% for 2011. Fears that there paulbloxham@hsbc.com.au
unemployment rate falling to 5.1% in August. A
may have been a ‘gap’ in growth – as the effect of
further challenge is that the economy starts this
the fiscal stimulus on demand starts to wane – were
upturn with inflation already in the top half of the
somewhat allayed by signs of a healthy pick-up in
Reserve Bank’s target range.
private demand in the national accounts. Household
activity is especially strong, and a rapidly tightening On interest rates, our view remains that the positive
labour market should see this persist. outcomes mean that the Reserve Bank will probably
make another move upwards before Christmas. We
The economy is benefiting from soaring structural
expect further rate increases in 2011 – probably
demand for raw materials. Indeed, for the resources
totalling around 100bp over the year.
sector things look bright, with commodity prices
around historic highs and very strong investment in
the mining sector expected over the next couple of
years. Many of the projects that are expected to
support investment growth are multi-year projects
that have already commenced, with a very high level
of mining engineering work yet to be done.
% Year
Investment 5.5 5.3 6.5 6.5 2.7 3.7 5.3 5.6 6.4
Stockbuilding (% GDP) 0.3 -0.2 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Domestic demand 5.1 4.2 4.3 5.2 3.7 3.7 4.3 4.3 4.4
Exports 5.7 7.8 6.7 9.4 8.6 11.0 7.0 6.7 6.9
Imports 13.6 8.1 8.2 14.7 8.9 9.2 7.9 7.7 7.7
GDP 3.4 4.1 3.9 3.9 3.7 4.1 4.1 4.0 4.2
GDP (% quarter) - - - 0.9 0.8 1.1 1.2 0.9 1.0
CPI 3.0 3.1 2.9 3.0 3.2 3.1 3.2 3.1 3.1
Unemployment 5.1 4.6 4.5 5.0 4.8 4.8 4.6 4.6 4.5
Current account (AUDbn)* -33.9 -34.5 -68.4 -5.1 -6.6 -7.3 -8.0 -9.0 -10.2
Current account (% GDP) -2.5 -2.3 -4.4 -1.5 -1.9 -2.0 -2.2 -2.4 -2.7
USD/AUD 0.88 0.85 0.85 0.92 0.84 0.89 0.85 0.85 0.85
3-month money (%) 5.1 6.0 6.0 4.7 5.1 5.4 5.6 5.9 6.0
10-year bond (%) 5.2 5.7 6.0 5.1 5.2 5.3 5.5 5.6 5.7
Note: *Period-end. Quarterly data is annualized
Source: HSBC
76
Macro
Q4 2010
New Zealand
Shaken but not stirred dairy prices have risen, which are clearly Paul Bloxham
Economist
beneficial for New Zealand, in that they boost the The Hongkong and Shanghai
The earthquake that struck the Canterbury region Banking Corporation Limited,
terms of trade and thus incomes, but these higher
on 4 September will weaken near-term growth by (HK)
prices can also feed into inflation. +612 435 966 522
a noticeable amount, though it will also drive paulbloxham@hsbc.com.au
stronger growth in GDP in 2011 as firms and Dealing with so many shocks at once puts the
households invest in repairs and replacement policymakers in a tough position. They could
capital. Combine this factor with the weaker-than- choose to tighten in the face of a reduced capital
expected June quarter GDP numbers, and we stock and the upside risks to inflation associated
think demand is quite subdued and will remain so with the tax and commodity-price developments.
for the next few quarters. Indeed, a quarter or two This would, however, threaten already tepid
of negative GDP would not be out of the question, demand growth. On balance, we think the net
though the significant rebuilding is likely to put a result of these shocks is that policy is on hold in
floor under activity from early next year. the near term with further modest rate rises
expected around the middle of next year.
This is, however, not the only supply-side
challenge faced by Kiwi policymakers. Impending
changes in indirect taxes are expected to
significantly boost inflation in the second half of
this year, which has the potential to have second-
round effects and to become embedded in
inflation expectations. At the same time, meat and
% Year
Investment -0.7 8.0 7.5 11.1 -3.0 0.0 1.0 2.0 3.0
Domestic demand 2.5 2.7 4.2 4.1 3.0 0.2 0.4 1.9 3.7
Exports 4.0 5.8 6.7 1.3 1.0 1.0 1.6 1.7 1.7
Imports 7.4 6.4 8.2 0.6 1.0 1.2 1.9 1.9 1.9
GDP 1.4 2.6 3.7 1.9 1.3 0.4 0.6 1.7 3.5
GDP (% quarter) - - - 0.2 -0.4 0.1 0.8 1.2 1.4
Industrial production 0.8 0.6 3.0 -0.2 2.0 -2.7 -3.2 1.4 2.0
Consumer prices 2.3 4.0 2.3 1.8 1.4 3.9 4.1 4.9 4.5
Unemployment 6.6 6.5 6.0 6.8 7.0 6.8 6.6 6.5 6.4
NZD/USD 0.7 0.7 0.8 0.69 0.72 0.72 0.72 0.72 0.72
3-month money (%) 3.5 4.1 4.7 3.3 3.5 3.5 3.6 3.9 4.1
10-year bond (%) 6.1 6.2 6.2 6.1 6.1 6.1 6.1 6.1 6.2
Source: HSBC
77
Macro
Q4 2010
China
Domestic demand strengthens The headline CPI inched up to a 22-month high of Qu Hongbin
Economist
3.5% y-o-y in August, but it is mainly driven by The Hongkong and Shanghai
Chinese economic growth has slowed from 11.1% y-
seasonality-induced food prices hikes. The Banking Corporation Limited
o-y in H1 to around 9% in Q3 2010, reflecting in part (HK)
underlying inflation risk has eased meaningfully as +852 2822 2025
the impact of policy tightening. Exports seem to have hongbinqu@hsbc.com.hk
output growth is moderating to a below trend rate in
already peaked and will probably soften amidst
the coming quarters. We expect headline CPI to peak
increasing uncertainty about the global economic
in Q3 and then to moderate in Q4. Meanwhile, the
recovery. Will China’s economy slow sharply in the
peaking of PPI due to the pullback in international
coming quarters?
commodities prices also implies easing pipeline
Our answer is probably not, because there will be pressure for downstream products. We expect annual
enormous resilience in China’s domestic demand. In CPI for the whole year to be 2.9%.
fact, domestic demand strengthened across the board
Beijing will retain its tight policy stance in the
in August. On top of the surprise rebound in import
coming months, including the current tightening in
growth, industrial production growth beat market
the property market. The need for significantly more
expectation by accelerating to 13.9% y-o-y from
aggressive tightening measures stays low, however.
13.4% in July. Meanwhile domestic investment and
We maintain our annual GDP forecast of 10% y-o-y
retail sales also picked up in both nominal and real
for 2010 and 8.9% for 2011.
terms, despite the initial effects of austere property
market tightening measures that weighed on
transaction volume and sentiment. We expect
continued investment into more than 100,000
existing infrastructure projects, plus still resilient
consumption growth, to support a GDP growth rate
of around 9% in the rest of the year and in 2011.
% Year
2007 2008 2009 2010f 2011f 2012f
Fixed asset investment 25.8 26.1 30.5 26.0 20.0 18.5
Exports 23.8 11.2 -17.9 23.0 12.5 8.0
Imports 17.8 8.5 -16.3 27.0 11.0 9.0
GDP 13.0 9.6 9.1 10.0 8.9 8.6
Industrial production* 17.1 12.9 12.9 15.5 13.2 12.5
Consumer prices 4.8 5.9 -0.7 2.9 2.5 2.2
CNY/USD 7.60 6.94 6.83 6.77 6.60 6.48
1-year time deposit (%) 3.29 3.80 2.25 2.25 2.25 1.98
1-year lending (%) 6.78 7.04 5.31 5.31 5.31 5.11
Source: HSBC Note: *Excluding small enterprises
78
Macro
Q4 2010
CPI to peak out soon… …before moderating towards year-end

% Yr % Yr  CPI hit a 22-month high of 3.5% in August, topping the
40 10 3% whole year official target, but this is mainly driven by
35 8 seasonality-induced food prices.
30 6  The underlying inflation risk has been eased
meaningfully as output growth is and will be moderating
25 4
to below trend growth in the coming quarters, alleviating
20 2 the need for aggressive tightening.
15 0  Meanwhile, quantitative tightening has kept lending
10 -2 growth generally in line with the annual quota of
5 -4 RMB7.5trn for the whole year.
98 99 00 01 02 03 04 05 06 07 08 09 10
M1 (LHS) CPI (Lag by 6 months, RHS)
Source: CEIC and HSBC
Industrial output picked up in August… …reflecting firm domestic demand
% Yr, 3mma Index  August IP growth surprised the market to the upside by
24 60
jumping to 13.9% y-o-y from 13.4% previously, reflecting
the improvement in domestic demand.
18 55  The pick-up in recent headline manufacturing PMI
readings, plus the stronger than expected imports,
12 50 should ease concerns about a sharp slowdown in
industrial sectors.
6 45  The energy-intensity reduction measures seem to have
already had an impact, with August crude steel production
0 40 dropping 1.1%y-o-y (vs. 2.2% up in July). But there is no
05 06 07 08 09 10 meaningful impact on overall industrial production.
IP (LHS) HSBC China manufacturing PMI (RHS)
Exports growth has peaked… …resistance to rapid RMB appreciation to continue
% Yr, 3mma USDm, 3mma  Exports growth is likely to have peaked and slower
80 50000
growth is expected on the back of base effects and also
a softening in external demand0
60 40000
 The significance of slowing exports is less material this
40 30000 year; we expect a modest positive contribution from net
20 20000 exports this year, in contrast to scrapping 4.2ppt from
0 10000 GDP growth in 20090
-20 0  A smaller trade surplus in August is likely to increase
Beijing’s resistance to pressures for greater appreciation of
-40 -10000
the renminbi; we believe currency policy should focus on
93 95 97 99 01 03 05 07 09 two-way flexibility and internationalisation of the renminbi.
Trade balance (RHS) Exports (LHS)
Imports (LHS)
79
Macro
Q4 2010
India
Sticky inflation widely anticipated after the re-election of the new Frederic Neumann
Economist
UPA II government, seems to have stalled. High The Hongkong and Shanghai
India’s GDP grew by 8.8% y-o-y in the April-
inflation and upcoming state elections, crucial for Banking Corporation Limited
June quarter 2010, the highest growth rate in two (HK)
the powerful coalition partners, could push more +85228224556
and a half years. Investments (7.6 % y-o-y) and fredericneumann@hsbc.com.hk
difficult decisions to a safer date in the future.
government spending (14% y-o-y) accounted for
Prithviraj Srinivas
most of the rise in demand, whereas private Inflation appears sticky, and increasingly looks to Economics Associate,
Bangalore
consumption (3.8% y-o-y) rose at a more be a product of strong demand. However, WPI
moderate pace. This is likely to change: with a inflation is expected to come-off sharply in annual
tight labour market fuelling wage gains and terms, largely due to improved food supply rather
sentiment upbeat, household spending should than policy rate hikes. This, however, does not give
accelerate in the coming quarters. the full picture: the index, even after recent
rejigging remains too narrow to pick up all relevant
High frequency data suggests that there is no
price developments, such as in services.
slowdown in investment. Industrial production in
July rose 7% m-o-m sa, with capital goods Sticky inflation and strong growth warrant further
powering the rise. The latter have grown at an monetary tightening. The RBI has already raised
impressive pace, averaging 33% in the 12 months interest rates earlier this year, but the process is
ending July 2010. Moreover, forward looking not over yet. In order to wring inflation out of the
indicators within HSBC’s PMI surveys continue to economy, we expect another 150bps in policy rate
indicate expansion in manufacturing and services, hikes, taking the repo and reverse repo rates to
albeit at a slower pace than in the previous quarters. 7.5% and 6.5%, respectively (from 6% and 5%
currently).
Cheaper credit, better farm output and
infrastructure spending by the government should
keep the wheels of the economy turning in H2
2011. It is the last of these that could slow the pace
a little. Progress on several policy reform measures,
% Year
2007 2008 2009 2010f 2011f 2012f
GDP* 9.5 7.5 6.7 8.8 8.6 8.0
GDP (Financial year)** 9.2 6.7 7.4 8.8 8.3 8.0
Consumer prices** 6.4 8.3 10.9 10.7 5.4 7.1
Current account (% GDP)** -0.8 -2.7 -2.3 -4.0 -4.0 -3.7
Broad money supply** 21.9 20.4 19.0 18.0 19.0 19.0
INR/USD 40.9 44.6 48.4 46.0 44.5 43.5
3-month money (%) 8.34 9.24 5.08 5.64 6.54 7.23
Prime rate (%) 13.00 12.88 11.50 12.25 13.00 13.50
Note: * = calendar year, ** = based upon Indian fiscal year (April-March).
Source: HSBC
80
Macro
Q4 2010
GDP (supply): services to drive growth in H2 2010… …but industry may not lag far behind
% Yr % Yr  Industry may have paused to take a breath but services

20 20 and agriculture are ticking up. Positive demand-side factors
15 15
for services could see it lead growth in the H2 of 2010.
 Agriculture has the potential to bounce back sharply
10 10
following better rains this year, with positive spill-over
5 5 effects seen for services and industry as a result.
0 0  Capacity constraints and waning policy stimulus effects
-5 -5 may have lowered manufacturing growth. However,
-10 -10 good monsoons, capex investment by companies and
infrastructure needs could still power growth in industry
-15 -15
this year.
98 99 00 01 02 03 04 05 06 07 08 09 10
Agriculture Industry Services
Source: CEIC
GDP (demand): trend rise in investment… …to keep factories running
% contribution to GDP % contribution to GDP  A trend rise in investments over the last ten years has
100% 100% been a key driver of growth and there isn’t any reason
for this to change.
80% 80%
 Growth in investment might have slowed during the
60% 60%
‘Great Recession’ but tight capacity and strong demand
40% 40% conditions are likely to support the desire to invest.
20% 20%  Cyclically low credit costs and strong employment growth
0% 0% could boost personal consumption further. However,
lagged effects from the withdrawal of policy stimulus
-20% -20%
could weigh on the strength of the demand boost.
97 98 99 00 01 02 03 04 05 06 07 08 09 10
 Persistent high inflation, particularly in food, is the other
Pvt. consumption Govt. Consumption
Investment Net exports
key risk to private consumption demand growth.
Source: CEIC
Inflation… …is still alive

 Cost-push drivers from a supply shock in agriculture and
% Yr % Yr
20 20 international commodity price increases may have
fuelled wholesale price inflation so far.
15 15
 Demand-driven inflation could take the baton from cost-
10 10 push factors to keep price inflation alive and at uneasy
levels for monetary authorities.
5 5  Already tight capacity in the product and labour market
has raised demand-side inflationary pressures, which
0 0
could continue to increase with rising demand in H2.
-5 -5  Having said this, WPI inflation in annual terms will
04 05 06 07 08 09 10 decline to low single digits by year end due to a high
Food, Energy & Mineral ore Core* base effect; a moot point because WPI does not capture
price increases in services.
Source: CEIC and HSBC. *non-food manufacturing
81
Macro
Q4 2010
Hong Kong
Soft landing, firm footing direction. It would be better to highlight the Donna Kwok
Economist
catalysts underlying both which are monetary The Hongkong and Shanghai
Hong Kong’s exposure to global trade makes it Banking Corporation Limited,
stimulus “Made in the US” and fiscal stimulus
vulnerable to a renewed US/EU-led global (HK)
“Made in China”. + 852 2996 6621
slowdown in demand. But the risk of a double-dip donnahjkwok@hsbc.com.hk
recession remains remote because of the huge Since Q3 2008, Hong Kong has reaped the benefit
imported monetary stimulus will continue to boost of the Fed’s ultra loose policies and record-low
mainland growth. Coupled with improving labour rates through a tightly managed currency board
market conditions, domestic demand should be regime. At the same time, global investors have
more than well-armed to weather any piled their capital into Hong Kong as a proxy for
deterioration in G3 demand around the corner, to and/or conduit to China, tripling the territory’s
ensure that GDP expands by 5.4% this year. total monetary base to over HKD1trn. This unique
mix of imported monetary stimulus and mainland
During 2009 and H1 2010, governments around
fiscal spill-over was Hong Kong’s primary defence
Asia used a combination of both monetary and
against collapsing global demand, and will be
fiscal policy tools to revive domestic demand. In
again as external demand slows in the coming
contrast, Hong Kong used neither. What sets the
quarters. Boosted by a planned pick-up in public
recovery in Hong Kong apart from the recovery in
sector works, we expect business and employer
the rest of Asia, thus far, has been the recovery in
sentiment to continue improving, keeping the
Hong Kong property prices. The relationship
labour market recovery on track and supporting
between Hong Kong’s asset market and its wider
Hong Kong’s domestic demand through growth in
economic performance is strong, but it would be
private consumption and investment.
misguided to assume causality in any one
% Year
2007 2008 2009 2010f 2011f 2012f
Stockbuilding (% GDP) 0.8 0.5 1.7 1.0 1.1 0.3
Domestic demand 7.9 1.6 0.9 4.9 4.4 2.5
Exports 8.3 2.5 -10.1 16.5 12.0 13.3
Imports 9.2 2.3 -8.8 16.7 11.7 12.9
GDP 6.4 2.4 -2.8 5.4 4.7 4.5
Industrial production -1.5 -6.6 -8.3 0.7 5.0 3.1
Unemployment (%) 4.1 3.4 5.2 4.4 4.1 4.0
Retail sales 12.8 10.5 0.6 18.0 11.0 7.5
Consumer prices 2.0 4.3 0.6 2.4 2.9 3.3
Goods & services balance (% GDP) 10.8 10.2 7.2 9.5 7.4 9.3
Budget balance (% GDP) 7.7 0.1 0.1 -1.4 -0.3 1.0
HKD/USD 7.80 7.77 7.78 7.80 7.80 7.80
3-month money (%) 4.33 2.36 0.45 0.27 0.40 0.70
Prime rate (%) 7.56 5.31 5.00 5.00 5.00 5.50
Source: HSBC, CEIC
82
Macro
Q4 2010
Indonesia
Awaiting rate hikes highlights the potential for unforeseen events to Wellian Wiranto
Economist
affect inflation prints unexpectedly. The Hongkong and Shanghai
Indonesia’s growth outlook remains robust, even in
Banking Corporation Limited,
light of the relatively uncertain global outlook – not Ideally, we would like to see the central bank (Singapore)
+65 6230 2879
least because it is one of the least export-dependent nudging up the policy rate in the near term, to wellianwiranto@hsbc.com.sg
economies in the world. Private consumption prevent real rates from dipping into negative
remains the key pillar of support for the economy, territory. However, Bank Indonesia is opting to rely
but there are signs that upcoming investment streams on the recent hike in reserve requirements rather than
will come to contribute more substantially to growth. disturbing the record-low policy rate – prompted by
We expect GDP growth to hit 6.1% y-o-y in 2010, its desire to encourage credit growth. We believe
before reaching 6.4% in 2011. that loan disbursement has already gained sufficient
momentum, though, and normalisation of rates could
Strong growth brings rising price pressures,
lead to a net boost in lending by removing
however. Resilient consumption and increasingly
uncertainty about the timing and magnitude of
significant investment activities have the potential to
expected rate hikes.
place pressure on the economy’s productive
capacity, with attendant effects on prices. Still, given its determinedly dovish stance, it looks
unlikely that BI can be persuaded to move this year
Just to be clear, we do not see any likelihood of
– although we expect it to start tightening by January
stubbornly high inflation at present, but we believe
2011. We forecast three 25bp hikes, bringing the
that keeping the policy rate unchanged leaves the
policy rate to 7.25% by the end of Q1 2011, after
central bank with only a thin buffer against
which we expect BI to pause again.
unexpected price pressures. The recent pick-up in
food inflation caused by weather conditions may
have become less threatening, but it nevertheless
% Year
2007 2008 2009 2010f 2011f 2012f
Government consumption 3.9 10.4 15.7 -0.4 8.0 7.0
Stockbuilding (% GDP) 0.0 0.1 0.0 0.3 0.3 0.3
Domestic demand 4.1 7.6 5.3 5.7 6.6 6.6
Exports 8.5 9.5 -9.7 14.0 8.0 8.0
Imports 9.1 10.0 -15.0 16.4 9.0 9.0
GDP 6.3 6.0 4.5 6.1 6.4 6.3
Industrial production 4.7 3.7 2.1 5.5 6.0 5.0
Unemployment (%) 9.7 8.8 8.1 7.7 7.4 6.9
Consumer prices 6.4 10.2 4.8 5.2 6.0 5.2
IDR/USD 9143 9575 10482 9076 8725 8700
3-month money (%) 8.1 9.3 7.9 6.8 7.3 7.3
Source: HSBC
83
Macro
Q4 2010
Malaysia
Activity is normalising Given the fact that BNM was among the first Asian Wellian Wiranto
Economist
banks to hike rates this year, it appears to have The Hongkong and Shanghai
Economic activity remained robust in Malaysia,
completed the normalisation process. As the Banking Corporation Limited,
with Q2 GDP registering 8.9% y-o-y growth – a (Singapore)
economy enters a softer patch now, BNM does not +65 6230 2879
considerable upside surprise. The industry and wellianwiranto@hsbc.com.sg
need to make further adjustments to the policy rate.
services sectors remain the bulwark of growth. Namrata Mittal
Private consumption continues to be an important On the fiscal front, the government took small Economics Associate,
Bangalore
driver backed by a stable labour market and, more steps towards removing some of the subsidies, on
importantly, strong export performance which kept sugar, petrol and LPG. It appears that any further
manufacturing activity humming. subsidy removals in the future will be done very
gradually, especially for fuel where consumers are
Looking forward, growth in the second half will
very sensitive. As the price adjustments are small,
likely be a lot less vigorous due to global concerns.
we expect inflation to remain moderate – and
Even though exports continue to post double-digit
subsidy adjustments alone will not be enough to
y-o-y growth, at 13.5% in July for instance, the
prompt BNM to move on policy rates.
data points to a slower in pace than in H1.
Shipments to major export destinations such as
China, Japan, US, and EU are starting to grow at
considerably slower monthly pace.
In view of a less rosy export outlook, Bank Negara

Malaysia paused after three successive hikes
earlier this year. The central bank left its overnight
policy rate unchanged at 2.75% at its meeting on 2
September and we expect it to remain there for the
rest of the year.
% Year
2007 2008 2009 2010f 2011f 2012f
Stockbuilding (% GDP) -0.2 -0.8 -2.7 0.6 0.1 0.1
Domestic demand 9.4 6.0 -2.7 10.7 5.2 4.9
Exports 4.1 1.6 -10.4 13.0 8.3 7.9
Imports 5.9 2.2 -12.3 16.9 8.6 8.1
GDP 6.5 4.7 -1.7 7.3 5.2 5.0
Unemployment (%) 3.2 3.3 3.7 3.3 3.2 3.1
Consumer prices 2.0 5.4 0.6 1.9 2.7 2.2
MYR/USD 3.43 3.32 3.52 3.22 2.97 2.85
3-month interbank rate (%) 3.63 3.62 2.29 2.61 2.75 2.75
Source: HSBC
84
Macro
Q4 2010
Philippines
Fiscal reform is still the key discretionary spending could help reduce the Sherman Chan
Economist
structural imbalance in public finance. However, all The Hongkong and Shanghai
The Philippine economy accelerated in H1 2010, Banking Corporation Limited,
that needs coherent and strong political will, which is
much to the relief of the new administration. GDP (HK)
a hard slog, as the incumbent government is dealing + 852 2996 6975
for Q2 rose 7.9% y-o-y, the fastest rate since Q2 shermanwkchan@hsbc.com.hk
with a parliament controlled by the opposition. We
2007, prompting us to raise our 2010 forecast to Anuja Kar
therefore maintain our forecast that the budget deficit Associate, Bangalore
5.9% from 5%. Resilient domestic demand and
will reach 4.3% of GDP in 2010 and improve
buoyant exports remained the key drivers of growth.
slightly to 3.5% of GDP in 2011.
Steady flows of remittances played a crucial role in
fostering private consumption and also added to the Meanwhile, monetary policy is likely to remain
country’s international reserves. accommodative in the coming months. The output
gap is closing rapidly, but there are no imminent
The Philippine economic outlook is positive, in our
signs of runaway inflation. We expect an uptick in
view. Business confidence has improved in recent
H2, mainly owing to food prices. However, headline
months, and now that the domestic political climate
inflation should stay well within the authorities’
has also stabilised, investment looks set to remain
target band, allowing the BSP to leave rates
strong in the near term. That said, we see no grounds
unchanged until Q2 2011.
for overwhelming optimism. Although the Aquino
administration has started rolling out fiscal incentive On the trade front, exports are likely to moderate
plans, essentially by improving tax compliance and amid soft consumer demand in major destinations,
restructuring the tax administrative system, such weighing on the country’s growth momentum in H2.
limited measures may be insufficient to ensure fiscal Nevertheless, we expect the Philippine economic
sustainability in the medium term. The authorities recovery to continue at a still-healthy pace heading
need to focus on fiscal reforms on a larger scale. into 2011.
Scrapping tax-evading measures and rationalising
% Year
2007 2008 2009 2010f 2011f 2012f
Stockbuilding (% GDP) 0.8 0.7 -0.3 -0.6 -0.6 -0.6
Domestic demand 7.0 4.0 3.7 6.8 5.4 5.7
Exports 5.5 -2.0 -13.4 18.3 6.8 9.9
Imports -4.1 0.8 -1.9 18.0 8.7 10.0
GDP 7.1 3.7 1.1 5.9 4.6 5.6
Unemployment (%)* 7.2 7.5 7.4 7.4 7.0 7.0
Consumer prices 2.8 9.3 3.3 4.2 4.5 4.7
PHP/USD 45.2 44.4 47.7 45.1 42.0 40.0
3-month money (%) 3.4 5.6 4.2 4.2 5.2 5.3
Note: * Since Sep 2005, the ILO definition of unemployment has been adopted by official sources.
Source: HSBC.
85
Macro
Q4 2010
Singapore
Too good to last inventory build-up had been especially strong in Frederic Neumann
Economist
Q2. Overall, the labour market is tight, and The Hongkong and Shanghai
Singapore delivered stunning growth over the first
evidence of wage pressures is beginning to Banking Corporation Limited
half of this year. The nation’s GDP grew 17.9% y- (HK)
emerge. As a result, inflation is beginning to tick +852 2822 4556
o-y on average in H1 and is now expected to slow fredericneumann@hsbc.com.hk
up. Even if global commodity prices were to
sharply to 8.8% y-o-y in the second half. Song Yi Kim
stabilise, this might not necessarily dampen price Economist
However, 13.2% for the full year would not be a
pressures sufficiently: the housing market, for The Hongkong and Shanghai
bad number by any measure – although we expect Banking Corporation Limited
example, is tight, and rent and house price increases (HK)
Singapore’s GDP to fall by 5% on a seasonally +852 2822 4870
are pushing up the CPI along with other core
adjusted quarterly basis in Q3, before a mild songyikim@hsbc.com.hk
items less influenced by global supply and raw
recovery of 2% in Q4. Much of this swing will
material demand conditions.
driven by inventories and the slowdown in the
global trade cycle. As bright as Singapore’s outlook currently appears,
however, there are some worrying clouds on the
The domestic economy is still benefiting from
horizon. The boom in the global electronics cycle
buoyant consumption. New casinos are luring
might begin to wear off over the second half of
more and more visitors to the island state, and
the year, as inventory restocking fades and
retail sales have also been boosted by the arrival
consumers in the West take a harder look at their
of around one million visitors every month. Even
budget constraints. In short, the big bounce has
car sales, which had been sluggish on account of
already occurred and the economy will slow from
high licence fees, have now roared back.
here in our view. Still, momentum is robust
Meanwhile the industrial sector is facing some enough for the Singapore monetary authority to
challenges, especially pharmaceuticals where maintain its tightening bias.
% Year
2007 2008 2009 2010f 2011f 2012f
Stockbuilding (% GDP) -2.7 2.2 -1.7 0.9 0.4 0.4
Domestic demand 7.8 14.7 -4.9 9.8 4.9 6.1
Exports 8.9 4.1 -9.0 14.4 3.7 6.1
Imports 7.8 9.2 -11.0 13.2 3.7 6.1
GDP 8.5 1.8 -1.3 13.2 4.6 6.0
Unemployment (%) 2.1 2.3 3.0 1.9 1.6 1.7
Consumer prices 2.1 6.6 0.6 2.2 2.7 2.8
Budget balance (% GDP) 2.8 1.1 0.4 -0.2 1.4 1.5
SGD/USD 1.50 1.40 1.45 1.38 1.29 1.25
3-month money (%) 2.73 1.54 0.71 0.60 0.85 1.14
Prime rate (%) 5.33 5.38 5.38 5.38 5.38 5.38
Source: HSBC
86
Macro
Q4 2010
South Korea
Rates still going up Even with export growth slowing in the coming Song Yi Kim
Economist
months, domestic demand should hold up well. The Hongkong and Shanghai
Korea has delivered an impressive growth
Private consumption, for example, should grow 3- Banking Corporation Limited
performance in the year so far – and not only (HK)
4% a year during 2010-12, on our estimates, +852 2822 4870
because of soaring exports: domestic demand,
following the strong recovery in employment and songyikim@hsbc.com.hk
especially consumption, and increasingly private
wages. Job growth remains robust enough to
investment, are driving the recovery forward. The
alleviate worries about job security. Record high
tricky question now facing policy-makers is
capacity utilisation rates will also help sustain
whether to tighten monetary policy further. We
investment spending.
believe they are most likely to do so.
All of this points to a normalisation in economic
There are two reasons for expecting the Bank of
activity, with growth returning to trend after the 6%
Korea to raise rates again over the next three quarters
expansion this year. As a result, rates need to be
– possibly by 25bp on each occasion. First, we
normalised as well. With the neutral policy rate
expect inflation to drift upwards in the coming
estimated at 4.3%, there is still plenty of room for
months, topping 3% in annual terms. The new
the Bank of Korea to act before any rate hikes
governor recently said that inflation shouldn’t
really start to bite.
exceed this level and has made increasingly hawkish
remarks. Second, with the recent loosening of real
estate lending regulations, the property market will
likely recover from its recent lull, giving officials
more confidence about tightening policy. Finally,
with long-term rates falling, mortgage-funding
conditions have actually eased in recent months.
% Year
2007 2008 2009 2010f 2011f 2012f
Stockbuilding (% GDP) 0.8 1.3 -2.5 -0.3 0.5 0.7
Domestic demand 4.5 0.0 0.8 4.6 3.3 4.0
Exports 12.6 6.6 -0.8 11.6 6.0 6.4
Imports 11.7 4.4 -8.2 16.0 6.0 6.0
GDP 5.1 2.3 0.2 6.0 4.0 4.6
Unemployment (%) 3.2 3.2 3.3 3.7 3.2 3.1
Retail sales 4.4 0.0 12.8 7.0 8.0 9.0
Consumer prices 2.5 4.7 2.8 2.7 2.9 3.0
Current account (% GDP) 0.6 -0.6 5.1 3.4 2.9 3.1
Budget balance (% GDP) 3.8 1.2 -1.7 0.3 0.6 1.2
KRW/USD 928 1085 1262 1170 1095 1084
3-month CD yield (%) 5.2 5.5 2.6 2.8 3.7 4.4
5-year treasury yield* 5.4 5.2 4.8 4.0 4.1 4.4
Source: HSBC Note: *Year-end.
87
Macro
Q4 2010
Taiwan
Rotating growth drivers July, as household confidence for job prospects Donna Kwok
Economist
simultaneously shot up to a three-year high. The Hongkong and Shanghai
Taiwan’s recovery process is maturing. Most recent Banking Corporation Limited,
Shoppers are also starting to dip into their wallets
lead indicator readings, including the ISM survey in (HK)
more consistently, sending July’s retail sales index + 852 2996 6621
the US and HSBC's Taiwan PMI, already suggest a donnahjkwok@hsbc.com.hk
to an 18-month high (although record mainland
weakening trade cycle. After the trade-driven steep
tourist inflows likely contributed too).
rebound, some moderation in the growth rate was
expected. But Taiwan is especially exposed to any China’s own normalisation process has dragged
potential downturn in the global tech-cycle, which on Taiwan’s growth recently, but Chinese
even strong Chinese consumption may not be able to domestic demand growth is just slowing, not
offset. To maintain growth, therefore, other drivers coming to an end. Public housing construction is
including investment and robust local consumption set to accelerate, with investment on 100,000
are needed. ongoing infrastructure projects and fiscal support
for private consumption also set to continue;
Taiwan’s economy is in good shape, but a fading
therefore Chinese appetite for Taiwanese exports
base effect and rising uncertainties in the external
ought to find a floor before long. Until then,
environment is making two factors increasingly
politics should keep cross-Strait economic
critical for Taiwanese growth: structural labour
interactions alive and mainland procurement trips
market improvements and China. On the first,
coming, which will bolster household confidence
although July 2010’s unemployment rate (sa) of
on the island. In this context, Taiwan’s domestic
5.2% may sound high, a deeper dig into the data
demand story looks set to turn around.
shows real signs of structural improvement
beneath. Both the participation rate and labour
force increased for the third consecutive month in
% Year
2007 2008 2009 2010f 2011f 2012f
Consumer spending 2.1 -0.6 1.4 2.5 4.9 5.0
Stockbuilding (% GDP) 0.1 1.2 -1.3 0.6 -0.1 0.0
Domestic demand 1.4 -1.7 -3.8 6.6 3.6 4.3
Exports 9.6 0.6 -9.1 22.8 6.6 7.9
Imports 3.0 -3.1 -13.4 25.8 5.3 9.7
GDP 6.0 0.7 -1.9 7.3 4.9 3.8
Unemployment (%) 3.9 4.1 5.9 5.2 4.7 4.5
Consumer prices 1.8 3.5 -0.9 1.2 1.6 1.6
TWD/USD 32.8 31.4 32.8 31.7 30.8 30.1
3-month CD (%) 2.0 2.1 0.5 0.6 0.8 1.5
Policy rate (%) 3.375 2.000 1.250 1.500 1.750 2.750
Source: HSBC, CEIC
88
Macro
Q4 2010
Thailand
The golden shield The silver lining here is that domestic demand Wellian Wiranto
Economist
should still keep the economic momentum going, The Hongkong and Shanghai
The Thai economy went through its own version of a
judging from indicators such as VAT collections and Banking Corporation Limited,
stress test in Q2 2010, when it faced heightened (Singapore)
retail sales figures. +65 6230 2879
political disturbances. And yet it still managed to wellianwiranto@hsbc.com.sg
perform in line with the regional peers. Helped by its The shifts in the main growth drivers from external Tushar Arora
strong long-term fundamentals, it not only avoided a to internal and from government to private hands Economics Associate,
Bangalore
widely expected contraction in Q2 but also surged mean that a strong economic performance should The Hongkong and Shanghai
Banking Corporation Limited
by 9.1% y-o-y in the quarter, to end H1-2010 with still be possible. We expect a solid 7.9% growth rate (HK)
the fastest growth rate since 1995. for 2010 and a respectable 5.3% for 2011.
While a strong rebound in exports led the upsurge in Such robust growth, however, implies that still-low
the first half, domestic demand provided support, as inflation is on the uptick, although currency
well – and was powerful enough to propel the appreciation will help limit imported inflation to
economy to near-capacity. some extent.
Given the robust bounce-back, BoT had room to Looking ahead at future potential price pressures,
start normalising its policy rates in June and has BoT has prudently opted to normalise rates.
since brought the rate to 1.75%, helping to anchor Taking into account the two factors that it has
inflation expectations down the road. moved relatively early and that global growth
risks cannot be fully discounted, we believe BoT
For the second half of the year, external demand is
will raise rates just one more time, in October,
likely to be less robust than before. Shipments to
before pausing at the 2% level.
Asian counterparts may provide some buffer against
a slowdown in exports going to Europe and the US.
% Year
2007 2008 2009 2010f 2011f 2012f
Stockbuilding (% GDP) 0.0 1.3 -2.3 0.6 1.0 0.9
Domestic demand 2.3 4.1 -6.6 10.2 4.6 4.1
Exports 7.8 5.1 -12.7 12.7 5.5 5.9
Imports 4.4 8.5 -21.8 18.7 4.2 6.5
GDP 4.9 2.5 -2.2 7.9 5.3 4.1
Unemployment (%) 1.4 1.4 1.5 1.1 1.0 1.1
Consumer prices 2.2 5.5 -0.8 3.5 3.6 3.0
THB/USD 34.6 33.3 34.3 32.0 29.4 28.5
3-month interbank rate (%) 4.0 3.6 1.5 1.7 2.3 2.3
Source: HSBC
89
Macro
Q4 2010
Vietnam
Making progress Inflation—a key policy concern in recent years— Sherman Chan
Economist
now appears to be under control. CPI growth The Hong Kong and Shanghai
Vietnam appears on track to exceed the official Banking Corporation Limited,
moderated to 8.2% y-o-y in August, gradually
growth target of 6.5% for 2010, with policy- (HK)
approaching the government’s target of 8%. But + 852 2996 6975
makers now forecasting 6.7%. Although H1 GDP shermanwkchan@hsbc.com.hk
upside risks from food prices and strong demand
growth was just 6.2% y-o-y, momentum has been
may revive inflationary pressures later in the year.
strengthening, especially in the industrial sector.
The recent devaluation of the dong is also likely to
We expect a notable acceleration in H2, pushing
inflate import prices. The local target therefore
annual GDP growth to 7%.
appears ambitious.
Industrial production has been robust in recent
Meanwhile, the authorities seem to be making
months. Output surged 15.2% y-o-y in August,
steady progress towards managing another long-
supported by strong exports and domestic retail
existing policy challenge – large trade deficits. The
sales. There are downside risks to the H2 export
trade shortfall has averaged around USD1bn a
outlook amid uncertainties in major destinations,
month in the year to date, which is in line with the
but domestic demand is likely to take up the slack
official target. However, strong credit growth may
given our expectation of a credit boom. As the
stimulate demand for imports, meaning that more
government is striving for credit growth of 25%
work is needed. Not only is it essential for the
this year, monetary policy looks set to remain
government to monitor spending by the state
accommodative in the near term. However, we
sector so as to control imports, it also needs to try
may not see any policy rate cuts in the coming
to boost exports by encouraging greater
months, as the central bank has opted to directly
competitiveness in the domestic industries.
ask commercial banks to cut lending rates, as
instructed by the government.
% Year
2007 2008 2009 2010f 2011f 2012f
Exports - Goods 22.7 29.9 -5.4 13.9 11.8 10.5
Imports - Goods 41.2 28.5 -15.1 17.0 10.0 8.0
GDP 8.5 6.2 5.3 7.0 7.5 7.8
Industrial production 11.6 11.8 7.2 12.9 13.0 13.0
Unemployment (%) 4.6 4.7 5.4 5.3 4.9 4.8
Consumer prices 8.3 23.0 7.1 8.7 8.5 8.0
VND/USD 16096 16759 18317 19363 19900 20000
Short-term lending rate (%)* 8.25 8.50 8.00 8.00 8.00 9.00
5-year interest rate (%)* 8.73 10.00 11.70 11.00 11.50 11.50
Note: *End-year
Source: HSBC
90
Macro
Q4 2010
Notes
91
Macro
Q4 2010
Notes
92
Macro
Q4 2010
Notes
93
Macro
Q4 2010
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94
Macro
Q4 2010
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[279186]
95
abc
Global Economics Research Team

Global Emerging Europe, Middle East and Africa
Stephen King Kubilay Ozturk
Global Head of Economics +44 20 7991 6045 kubilay.ozturk@hsbcib.com
+44 20 7991 6700 stephen.king@hsbcib.com
Alexander Morozov
Karen Ward +7 495 783 8855 alexander.morozov@hsbc.com
Murat Ulgen
+44 20 7991 3692 karen.ward@hsbcib.com
+90 212 376 4619 muratulgen@hsbc.com.tr
Madhur Jha
Simon Williams
+44 20 7991 6755 madhur.jha@hsbcib.com
+971 4507 7614 simon.williams@hsbc.com
Europe Latin America
Janet Henry
Argentina
Chief European Economist
Javier Finkman
+44 20 7991 6711 janet.henry@hsbcib.com
Chief Economist, South America ex-Brazil
Astrid Schilo +54 11 4344 8144 javier.finkman@hsbc.com.ar
+44 20 7991 6708 astrid.schilo@hsbcib.com
Ramiro D Blazquez
Germany Senior Economist
Lothar Hessler +54 11 4348 5759 ramiro.blazquez@hsbc.com.ar
+49 21 1910 2906 lothar.hessler@hsbctrinkaus.de
Jorge Morgenstern
France Economist
Mathilde Lemoine +54 11 4130 9229 jorge.morgenstern@hsbc.com.ar
+33 1 4070 3266 mathilde.lemoine@hsbc.fr
Brazil
United Kingdom Andre Loes
Stuart Green Chief Economist
+44 20 7991 6718 stuart1.green@hsbcib.com +55 11 3371 8184 andre.a.loes@hsbc.com.br
Andrew Grantham Constantin Jancso

+44 20 7991 2170 andrew.grantham@hsbcib.com Senior Economist
+55 11 3371 8183 constantin.c.jancso@hsbc.com.br
North America
Mexico
Kevin Logan Sergio Martin
+1 212 525 3195 kevin.r.logan@us.hsbc.com Chief Economist
+52 55 5721 2164 sergio.martinm@hsbc.com.mx
Ryan Wang
+1 212 525 3181 ryan.wang@us.hsbc.com Central America
Lorena Dominguez
Stewart Hall
Economist
+1 416 868 7523 stewart_hall@hsbc.ca
+52 55 5721 2172 lorena.dominguez@hsbc.com.mx
Asia Pacific
Qu Hongbin
Managing Direct, Co-head Asian Economics Research and
Chief Economist Greater China
+852 2822 2025 hongbinqu@hsbc.com.hk
Frederic Neumann
Managing Direct, Co-head Asian Economics Research
+852 2822 4556 fredericneumann@hsbc.com.hk
Paul Bloxham
Chief Economist, Australia and New Zealand
+61 2925 52635 paulbloxham@hsbc.com.au
Song Yi Kim
+852 2822 4870 songyikim@hsbc.com.hk
Donna Kwok
+852 2996 6621 donnahjkwok@hsbc.com.hk
Sherman Chan
+852 2996 6975 shermanwkchan@hsbc.com.hk
Wellian Wiranto
+65 6230 2879 wellianwiranto@hsbc.com.sg
Seiji Shiraishi
+81 3 5203 3802 seiji.shiraishi@hsbc.co.jp
Yukiko Tani
+81 3 5203 3827 yukiko.tani@hsbc.co.jp
Sun Junwei
Associate
Sophia Ma
Associate
Global
ECONOMICS Macro
Global Economics
Q4 2010
Principal contributors

Stephen King
Chief Economist
HSBC Bank plc
+44 20 7991 6700
stephen.king@hsbcib.com
Stephen is the HSBC Group’s Global Head of Economics and Asset Allocation research. He joined the company
in 1988, having previously worked as an economic adviser at the UK Treasury. Stephen is a regular economics
High debts and excessively low inflation...
commentator on television and radio and has written a weekly column for The Independent, one of the UK’s leading
newspapers, since 2001. Stephen’s first book, Losing Control: the Emerging Threats to Western Prosperity is now ...point to Western stagnation...
available from Yale University Press.
Karen Ward
...with the debt-lite emerging nations in the driving seat of global growth
HSBC Bank plc
+44 20 7991 3692
Karen joined HSBC in 2006 as UK economist. In 2010 she was appointed Senior Global Economist with responsibility
for monitoring challenges facing the global economy and their implications for financial markets. Before joining
HSBC in 2006 Karen worked at the Bank of England where she provided supporting analysis for the Monetary Policy
Committee. She has an MSc Economics from University College London.
Global Economics
Madhur Jha
Global Economist
HSBC Bank plc
+44 20 7991 6755
madhur.jha@hsbcib.com
Madhur is HSBC’s Global Economist. She joined HSBC London in 2007 as an ABS generalist to cover the EMEA
markets. She has gained experience in emerging markets economics research from her stints as Fixed income/FX
strategist at a leading research consultancy in London and at the largest private sector bank in India, where she also
worked in FX derivative sales.
By Stephen King, Karen Ward and Madhur Jha
Disclosures and Disclaimer This report must be read with the disclosures and analyst
Q4 2010
certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it

Global Economics q4

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Global Economics q4

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Global

Emerging elation, Western stagnation

By Stephen King, Karen Ward and Madhur Jha

Emerging boom, western headache

HSBC growth and inflation forecasts

Let battle commence

Source: Thomson Reuters Datastream, HSBC calculations

Betting on the emerging world

Monetary & fiscal policy

Emerging elation, Western stagnation

Note:West Germany prior to 1997. This challenge is remarkably reminiscent of the

The most obvious explanation for the failure of -3 -3

consider the much better response of many of the -12 -12

emerging economies during this crisis. Their

rebounds have been much more dynamic, largely

Spain have been achieved mostly by cutting

weaker dollar makes foreign creditors to the US Sharing the pain

And whilst corporate profits fell sharply in the

Dr John Williamson (22 September) and Stephen King

The recent US recession in context

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

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

7. In nominal terms…the position is dismal

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

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

8. And yet profits have staged a remarkable recovery

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

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

Source: Thomson Reuters Datastream, ECRI, HSBC

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

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

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

10. …and income

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

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

Source: Thomson Reuters Datastream, ECRI, HSBC

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

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

Source: Thomson Reuters Datastream

% pts Malaysia % pts Philippines

Source: Bloomberg, HSBC Source: Bloomberg, HSBC

Earlier in the year, it was commonly thought that

Headline inflation has been below expectations in the East

% pts US headline inflation % pts % pts Mexico headline inflation % pts

Source: Bloomberg, HSBC Source: Bloomberg, HSBC

Source: Bloomberg, HSBC Source: Bloomberg, HSBC

Source: Bloomberg, HSBC Source: Bloomberg, HSBC

% Yr Core inflation % Yr Index, 2000=100 Index, 2000=100

Japan US India Korea

Source: Thomson Reuters Datastream, HSBC

26. As have corporate bonds In other words, whilst deflationary pressures in

There are five options:

Source: Thomson Reuters Datastream, HSBC

The incentive to shift the burden of adjustment

Exchange rates vs USD

Exchange rate vs EUR & GBP

Upswing in business demand has slowed Business output

Source: Institute for Supply Management

Source: Federal Reserve Bank of Dallas, Federal Reserve Bank of Cleveland

Source: Bureau of Economic Analysis

We have recently revised down our 2010 year-end

Source: IBGE and CNI

Private consumption 7.0 4.6 0.9 9.9 7.1 5.8