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to the European Commission, capacity utilisation in the manufacturing sector is lower than it has ever been in the survey’s 24-year history. Economy-wide profits have contracted for three successive quarters and profit margins are being compressed. Profits and profit margins are likely to have dropped in Q1 as well. This bodes for little need, or indeed scope, to invest during 2009. On the whole, we believe that business investment will have a negative effect on growth throughout 2009. Groundwork for a recovery has been laid Nonetheless, the groundwork for a recovery has been laid. Expansionary fiscal policy, dramatic interest rate cuts, a policy of quantitative easing and record weakness in the GBP will start to gradually support the economy during the course of 2009. Profits and margins are falling Savings rate will rise Sources: <strong>Handelsbanken</strong> Capital Markets and Reuters Ecowin Dire situation for households wishing to rebuild their balance sheets The situation for households will remain dire, as unemployment rates will rise for several years and remain high throughout our forecast horizon. After overindulging in debt for several years, households’ balance sheets will need to be repaired through higher savings rates. As in the US, the household savings rate in the UK has been on a downward path since the early nineties. Easy credit and rising house prices led to a steady build-up of debt and fuelled consumption well in excess of income. This process has been turned on its head. On the back of tighter credit, negative wealth effects from falling asset prices and fears of unemployment, the household sector is likely to continue to rebuild savings to a level close to the historical average of approximately seven percent. Household demand growth is likely to remain below potential throughout our forecast horizon and contribute negatively to GDP in 2009. Fiscal stimulus is positive but could become counterproductive Government expenditure is expected to contribute positively to GDP growth during our forecast horizon, with the lion’s share of the stimulus taking place this year. With government borrowing rising to around 12 percent of GDP and the debt-to-GDP ratio likely to surpass 70 percent, further fiscal spending will be less effective because it will raise questions about long-term sustainability. This is particularly true because the UK’s potential growth rate is most likely on a slowing path. Furthermore, the OECD recently warned that additional measures to loosen fiscal policy beyond those announced by Chancellor Darling in his November pre-budget report would have to be accompanied by a "stronger and more credible" commitment to consolidate public finances once recovery takes hold. The IMF has also warned that further fiscal stimulus could negatively affect growth when debt levels exceed 60 percent of GDP. 26 April 28, 2009
Risk of deflation increasing – BOE likely to keep rates extremely low Headline inflation is on a downward trend based on building economic slack and previous drops in energy and commodity prices. However, the y-o-y inflation rate is likely to receive a boost approaching the end of 2009 or early 2010 if the oil price and the USD/GBP rate remain stable around current levels. Even, so, disinflationary – even deflationary – pressures will increase throughout our forecast horizon on the back of a ballooning output gap. Any rebound in core inflation pressures will rest on the output gap closing and turning positive. This is unlikely during our forecast horizon and will probably not occur until around 2015. Instead, deflation pressures are likely to increase. Below-trend demand growth and intensifying deflation pressure lead us to expect the BOE to keep rates stable at the current level of 0.50 percent well into 2010 and probably into 2011. Any additional monetary policy stimulus should therefore come from further quantitative measures. HICP to get a boost in 2010 Fiscal policy impact 0.30 0.20 Impact on recovery 0.10 0.00 -0.10 -0.20 -0.30 -0.40 0.00 0.60 1.20 Debt-to-GDP ratio Sources: IMF World Economic Outlook 2009 and Reuters Ecowin Note: Figure 6 shows the relationship between the impact of fiscal policy on the strength of the economic recovery and the debt-to-GDP ratio. It shows that with a debt-to-GDP ratio above 60 percent, further fiscal stimulus measures could become unproductive. Key macroeconomic indicators Percentage change 2007 2008 2009f 2010f 2011f GDP 3.0 0.7 -4.1 -0.5 1.2 Household consumption 3.0 1.4 -2.9 -0.5 0.8 Gross investment 6.8 -3.1 -8.8 -2.9 1.0 Unemployment* 2.7 2.8 6.5 8.3 9.5 Consumer prices 2.3 3.6 1.6 1.6 1.0 *Percent of labour force Sources: <strong>Handelsbanken</strong> Capital Markets and Reuters EcoWin Martin Enlund, +46 8 463 4633, maen12@handelsbanken.se April 28, 2009 27
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Page 4 and 5: INTRODUCTION Who will pull the worl
Page 6 and 7: Emerging economies have been badly
Page 8 and 9: Consumer spending rebounded in Q1 U
Page 10 and 11: tion is due to the fall in oil pric
Page 12 and 13: The pattern evident in fourth quart
Page 14 and 15: Inflation forecast GDP forecast Sou
Page 16 and 17: Heavy falls in Investment and expor
Page 18 and 19: three quarters, the most rapid incr
Page 20 and 21: Gov’t finances and unemployment S
Page 22 and 23: this outlook, we also sketch an alt
Page 24 and 25: Finnish households have reduced the
Page 28 and 29: JAPAN Three more years of slump The
Page 30 and 31: EASTERN EUROPE Troubling times East
Page 32 and 33: CHINA Here’s one on the right tra
Page 34 and 35: Highly restrictive lending quotas w
Page 36 and 37: Slowdown to 5 percent growth in 200
Page 38 and 39: Aggressive cutting to catch-up with
Page 40 and 41: The ECB could adopt a policy of cre
Page 42 and 43: MONEY AND INFLATION Money matters W
Page 44 and 45: Money & price level in pooled data:
Page 46 and 47: spiral taking hold. In the late 199
Page 48 and 49: Global currency and interest rate f

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