Global Economic Outlook and Strategy - Kadin Indonesia

See the Disclosure Appendix for the Analyst
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ECONOMIC & February 28, 2008
MARKET
ANALYSIS
Economics/Strategy
Global
Lewis Alexander
1-212-816-9882
lewis.alexander@citi.com
Europe
Michael Saunders
44-20-7986-3299
Japan
Kiichi Murashima
81-3-5574-4730
United States
Robert V. DiClemente
1-212-816-9893
Australia/New Zealand
Paul Brennan
Stephen Halmarick
61-2-8225-6043
Canada
Dana Peterson
1-212-816-3549
Emerging Markets
Donald Hanna
1-212-816-9891
Global Economic
Outlook and Strategy
➤ Housing adjustment and tight financial conditions
continue to weigh on the U.S. economy. Aggressive
Fed easing and other policy measures should help, but
a sustained pickup in growth depends on improved
financial conditions.
➤ Activity in the United Kingdom is also slowing. We
expect the BoE to continue to ease policy gradually
through yearend. We do not anticipate ECB easing
until late in the second quarter.
➤ As the U.S. slowdown broadens to consumption and
investment, other countries should be more affected.
But we expect only a modest slowdown in emerging
economies.
➤ Inflation worries in emerging markets are probably
overblown but they will reduce the scope for monetary
loosening in the short run.
Figure 1. Currency and Interest Rate Forecasts (End of Period, Unless Specified), as of Feb 28, 2008
2Q 08 3Q 08 4Q 08 1Q 09
Feb 27, 2008 Forecast Forecast Forecast Forecast
United States: Federal Funds 3.00% 2.00% 2.00% 2.00% 2.00%
10-Yr. Treasuries (Period Average) 3.70 3.60 3.75 3.85 4.00
Euro Area: US$/€ 1.50 1.53 1.51 1.48 1.45
Euro Repo Rate 4.00% 3.75% 3.50% 3.50% 3.50%
10-Yr. Bunds (Period Average) 4.03 4.00 4.00 4.10 4.25
Japan: Yen/US$ 107 105 109 112 112
Call Money 0.50% 0.50% 0.50% 0.75% 0.75%
10-Yr. JGB (Period Average) 1.49 1.70 1.70 1.80 1.80
Source: Citi.

February 28, 2008
Global Economic Outlook and Strategy
Table of Contents
Page
Key Events Calendar 2
Summary of Main Views 3
Overview 4-9
Short-Term Economic Forecasts 10
Key Global Economic Indicators 11
Short-Term Currency, Interest Rate and Bond Forecasts 12-13
Foreign Exchange Strategy 14-15
Global Equity Strategy 16-17
Long-Term Economic and Market Forecasts 18-19
Country Commentary
United States 20
Japan 21
Euro Area 22-24
United Kingdom 25
Switzerland, Sweden, Denmark, and Norway 26
Canada 27
Australia and New Zealand 28
China 29
Emerging Markets 30-38
EMA Contact List 39
Recent Publications 40
Figure 2. Key Policy Events, 28 Feb – 31 Mar 08
Date Country Event
Mar 2 Russia Presidential Election, First Round
Mar 3-4 European Union Eurogroup Finance Ministers’ Meetings (Mar 3) and ECOFIN Meetings (Mar4)
Mar 4 Australia Reserve Bank of Australia Board Meeting
Mar 4 Canada Bank of Canada Interest Rate Announcement
Mar 4-5 Brazil Central Bank of Brazil Monetary Policy Meeting
Mar 5-6 United Kingdom Bank of England Monetary Policy Committee Meeting
Mar 5-19 China 11 th National People’s Congress Approves the Formation of the New Government
Mar 6 New Zealand Reserve Bank of New Zealand Monetary Policy Statement and Official Cash Rate Announcement
Mar 6-7 Japan Bank of Japan Monetary Policy Meeting
Mar 6 Euro Area ECB Monetary Policy Meeting and Press Conference
Mar 7 Korea Bank of Korea Monetary Policy Meeting
Mar 9 Spain General Election
Mar 9 France Municipal Elections, First Round (Second Round Mar 16)
Mar 9 United States & Canada Clocks Moved Forward One Hour
Mar 12 United Kingdom 2008 Budget
Mar 13 Philippines Central Bank of the Philippines Monetary Board Meeting
Mar 13 Switzerland Swiss National Bank Monetary Policy Assessment
Mar 13 Norway Norges Bank Monetary Policy Report and Interest Rate Announcement
Mar 13 Chile Central Bank of Chile Monetary Policy Meeting
Mar 13 Peru Central Reserve Bank of Peru Monetary Policy Announcement
Mar 13-14 European Union European Council of Heads of State and Government (Brussels)
Mar 14 Mexico Bank of Mexico Monetary Policy Announcement
Mar 14-16 G-8 G-8 Dialogue on Climate Change (Chiba, Japan)
Mar 18 United States FOMC Meeting
Mar 19 Turkey Central Bank of the Republic of Turkey Monetary Policy Meeting
Mar 25 Israel Bank of Israel Interest Rate Announcement
Mar 25 Slovakia National Bank of Slovakia Monetary Policy Report
Mar 25-26 Poland National Bank of Poland Monetary Policy Council Meeting
Mar 26 Romania National Bank of Romania Board Meeting
Mar 26 Czech Republic Czech National Bank Monetary Policy Board Meeting
Mar 28-29 European Union Informal Meeting of EU Foreign Ministers
Mar 31 Europe Clocks Moved Forward One Hour
Mar 31 Hungary Central Bank of Hungary Monetary Policy Meeting
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February 28, 2008
Global Economic Outlook and Strategy
Figure 3. Forecast Highlights and Changes from Last Month
G3
• United States • With tight financial conditions reinforcing economic weakness, the
Fed has taken a more aggressive tack, with only limited impact
thus far. We look for cuts in the funds rate to 2% by midyear,
barring a sharp recovery in risk appetite and housing leads.
• Euro Area • Growth has slowed to a subtrend pace, where it probably will stay
until late this year. Inflation remains high but should moderate
quickly. We expect the ECB to ease policy modestly later this year.
• Japan • Economic growth likely will remain near trend in 2008. The next
BoJ rate hike probably will be delayed until around yearend, as
uncertainties surrounding the global outlook have increased.
Others
• United Kingdom • The MPC will likely cut rates a lot more, but any easing will be
gradual in order to grind down inflation expectations.
• Canada • Moderating inflation and lingering downside risks likely will prompt
an additional 100 basis points of BoC easing before summer.
• Australia • The RBA is set to tighten policy again in March and May, with the
risk of further tightening beyond that, as the Bank attempts to drive
inflation back down toward the 2%-3% target range.
• China • Rising inflation and weakening exports could lead to a period of
tight monetary policy and loose fiscal policy.
• Other Emerging Markets • Inflation worries are probably overblown, but they will reduce
the scope for monetary loosening in the short run and dampen
growth.
3

February 28, 2008
Global Economic Outlook and Strategy
Lewis Alexander
(212) 816-9882
lewis.alexander
@citi.com
Financial conditions are
weighing on the U.S.
economy.
Most countries show few
signs of distress...
...but that may change.
Emerging economies are
well positioned for the
slowdown.
Overview: The United States and World Economic Outlook
The recent deterioration in financial conditions is having its biggest impact on the U.S.
economy. Europe is also slowing, but the spillover to most emerging economies
remains modest so far. Looking ahead, we expect a variety of factors — including the
waning of the drag from residential construction, fiscal stimulus, and improving
financial conditions driven by a more assertive Fed — to contribute to a modest
recovery in U.S. growth starting in the second half of the year.
The forces restraining the pace of U.S. economic activity have shown few signs of
easing in recent weeks. Incoming data from the housing sector point to ongoing
contraction. The prevailing mix of credit, equity, and other asset prices continues to be
a significant headwind for aggregate demand (see Figure 4). Consumption indicators
suggest that household spending has slowed markedly.
The U.S. slowdown is a drag on the Canadian and Mexican economies, and economic
activity in the United Kingdom and the euro area is also slowing, but less sharply than
in the United States.
However, most other countries still show few signs of being adversely affected by the
U.S.-led slowdown. Recent data for China point to a strong start to 2008, while resilient
demand for commodities is supporting many emerging economies and smaller highincome
countries with a comparative advantage in commodity production. The
underperformance of the U.S. economy relative to most other major economies is
contributing to downward pressure on the U.S. dollar (see Figure 5).
This pattern may change in coming quarters. The U.S. slowdown is spreading beyond
residential construction. A broader and deeper slowdown in U.S. consumption and
investment should generate a more significant slowdown in imports that will serve to
moderate growth in the rest of the world (see Figure 6).
Policy flexibility around the world is likely to play an important role in containing the
global slowdown. Unlike the past, many emerging economies (such as Brazil, Mexico,
and Korea) have strong public and private balance sheets, and they have established
Figure 4. United States — Citi Financial Conditions Index (Standard
Deviations) and the Output Gap (Percent of GDP), 1988-Jan 08
3σ 3
6% 6
Figure 5. United States and Other Major Industrial Countries —
Economic Surprises (100=1 Standard Deviation), Jan 07-27 Feb 08
100
100
2
4
75
75
1
2
50
50
0
-1
-2
-3
1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
FCI (Left)
GDP Gap (Right)
0
-2
-4
-6
25
0
-25
-50
United States
Other Major Economies
-75
-75
Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08
25
0
-25
-50
Note: Shaded regions denote recession. Sources: Bureau of Economic Analysis, Congressional
Budget Office and Citi.
Note: Citi Economic Surprise Indexes are weighted averages of the difference between
individual data releases and the consensus forecast. “Other Industrial Countries” includes the
euro area, Japan, Great Britain, Australia, and Canada. Source: Citi.
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February 28, 2008
Global Economic Outlook and Strategy
Slow growth should
contain inflation.
The course of global
growth depends on
financial conditions.
The Citi FCI has tightened
despite Fed easing.
The fiscal package will
provide a temporary
boost.
Inflation likely will cool in
the second half.
strong records of pursuing stable macroeconomic policies. This should make it possible
for these countries to ease policy, if needed, even in the midst of substantial turmoil in
global financial markets.
Strong commodity prices and declining output gaps in some countries are putting
upward pressure on inflation. Nonetheless, we expect the slowdown in the United
States and Western Europe to contain inflation in those countries (see Figure 7), and
slowing export growth should help to contain inflationary pressures in other key
countries such as China.
The evolution of financial conditions remains a key source of uncertainty. In recent
days, credit, equity, and other financial markets seem to have found a footing in
response to the significant shift in Federal Reserve policy in late January, the U.S. fiscal
stimulus package, and other policy measures intended to address some of the stress
points in the financial system. However, even if financial markets stabilize and improve
from here, the cumulative impact of the financial turmoil of the last six months is likely
to be a drag on the U.S. and global economy for many months. Moreover, given the
still considerable uncertainty about the magnitude and distribution of losses in the
financial system, we cannot be confident that we have seen the worst in financial
markets.
U.S. Financial Conditions Critical to the Outlook
Our composite measure of U.S. financial conditions has tightened since our last forecast
round (see Figure 4). Currently, the Citi financial conditions index (FCI) is about two
standard deviations tighter than normal, a reading consistent with anemic economic
growth. Recent data, particularly the deceleration of consumption since November,
appear consistent with the deterioration in financial conditions since last summer. The
Federal Reserve seems likely to lower policy rates further in an attempt to offset the
adverse dynamic starting to take hold. Importantly, forecasts of a sustained
improvement in the pace of activity later this year depend on a recovery in financial
conditions.
The recently enacted fiscal stimulus package will boost economic growth later this year
— most likely in the third quarter — but its impact on activity will be temporary. The
lift in household disposable income from the rebate checks could underpin consumer
spending growth that is about 2½ percentage points faster than otherwise would be the
case. But because this is a one-time boost to household income, the step up in spending
will be largely reversed out in ensuing quarters.
An additional 100-basis-point decline in the funds rate is likely despite the continued
stickiness in inflation. Consumer and wholesale inflation readings in January were
disappointing, and our latest forecast anticipates slightly higher core inflation this year.
As long as inflation expectations remain anchored near current levels, however, the
combination of soft demand, tight financial conditions, and falling home prices should
produce a cooling in price pressures. The timetable for such a cooling probably will be
deeper into the year than we previously envisioned. As key Fed officials continue to
remind market participants, an unmooring of pricing attitudes could upend expectations
of an easing in inflation. So, we will continue to monitor developments on this front
closely.
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February 28, 2008
Global Economic Outlook and Strategy
Improved financial
conditions will be
necessary to avoid the
worst outcomes.
Risks to euro area growth
are to the downside...
...while Japan may show
little impact from slower
global growth.
In recent days, however, financial markets have improved marginally in response to the
likelihood that Fed officials will continue to pursue a risk-management approach to
policy and hints that some regulators’ efforts may be reducing the probability of select
risk outcomes (see Figures 8 and 9). Considerable additional improvement remains
necessary.
The Euro Area Has Started to Slow
GDP growth in the euro area slowed markedly in late 2007, and confidence indicators
suggest that the expansion remains somewhat below trend early this year, although not
dramatically so. Still, the risks to the growth outlook remain on the downside, reflecting
not only the global slowdown, but also, and more importantly, disappointing domestic
consumption. Against a backdrop of less favorable labor market conditions, tighter
lending standards suggest that a significant rebound of consumer outlays is less likely
than before. The near-term inflation outlook is uncertain, as food and energy prices may
rise further. However, medium-term price prospects remain favorable because the
economic slowdown limits the risk of a rise in inflation expectations and wage growth.
The European Central Bank (ECB) probably will keep official rates unchanged until
near-term inflation and wage risks diminish. If inflation moderates rapidly starting in
the second quarter and wages are contained, the ECB probably will lower rates this
year, although not aggressively. The rise in the latest German ifo business survey will
no doubt encourage ECB officials to consider that growth will not be far below
potential.
Muted Impact on Japanese Economy
Japan’s economic outlook remains relatively favorable and stable among the major
industrialized countries. Real GDP grew a stronger-than-expected 3.7% annualized in
the fourth quarter of 2007, driven by strong gains in exports and business investment.
While exports will inevitably decelerate in 2008 in the context of the slower global
economy, we still expect near or slightly above-trend growth this year. Trade statistics
for January indicate that Japan’s exports remain on a solid upward track, driven by
exports not bound for the United States. Moreover, negative effects from the
Figure 6. United States — Year-to-Year Percent Change in Imports
and the Average of ISM New Orders and Imports (Six-Month Lag),
1996–Jan 08
25%
20
15
10
70
65
60
Figure 7. United States — Nominal Final Domestic Demand (Yearto-Year
Percent Change, Four-Quarter Lag) and Change in Two-Year
Annualized Core CPI (Percent), 1990–Jan 08
9% 9
1.2%
Final Demand (Left)
8
Core CPI (Right)
0.8
7
6
0.4
5
55
5
0.0
0
-5
-10
Growth of Imports (Left)
Imports&Orders (Right)
50
45
4
3
2
-0.4
-0.8
-15
1996 1998 2000 2002 2004 2006
40
1
1990 1993 1996 1999 2002 2005 2008
-1.2
Sources: Institute for Supply Management and Bureau of Economic Analysis.
Sources: Bureau of Economic Analysis and Bureau of Labor Statistics.
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February 28, 2008
Global Economic Outlook and Strategy
The change in BoJ
leadership will not alter
policy.
Rising commodity prices
have helped some
industrial economies.
Strong fundamentals have
insulated some emerging
economies...
...from deteriorating global
growth.
government’s economic policies — namely, the enforcement of the revised Building
Standard Law and tax and social security burden hikes for the household sector — will
diminish meaningfully or even reverse in 2008. Finally, financial conditions remain
much more favorable than in other industrialized countries as damages to banks’ capital
from subprime mortgage-related structured products have been limited.
Bank of Japan (BoJ) Governor Fukui will leave office on March 19. The government is
scheduled to announce its proposal for the next governor and two deputy governors
next week. Press reports suggest that Mr. Toshiro Muto, a current deputy governor, is
likely to be nominated to replace Mr. Fukui. The basic thrust of monetary policy (that
is, gradual rate hikes to more normal levels) will likely remain largely intact. While
uncertainties surrounding the U.S. economy and global financial markets will likely
continue to dissuade the BoJ from hiking rates until around the turn of this year, the
next policy action will probably be a rate hike unless the domestic economy slows
much more sharply than we now expect.
Strong Commodities Demand Is Boosting Some Industrial Countries
In contrast to developments in the major industrial economies, economic growth has
remained resilient in a number of smaller industrialized economies that principally are
leveraged to the boom in commodity prices, such as Australia. Indeed, many
commodity prices have continued to rise this year, especially energy-related
commodities, iron ore, food, and some base metals, despite the marking down of
prospects for global economic growth. The strength of commodity prices reflects
ongoing supply bottlenecks and still rampant demand in China and emerging
economies generally. Against this backdrop, a deteriorating outlook for inflation forced
both the Reserve Bank of Australia and the Riksbank to raise official interest rates in
February, and we expect more monetary policy tightening in Australia and Norway,
while the Reserve Bank of New Zealand is likely to maintain a tightening bias this year.
Strong Fundamentals Are Bolstering Many Emerging Economies...
Strong economic growth is likely to continue in emerging Asia, despite the weakening
of the U.S. economy. However, Asia’s resilient growth is not because it has decoupled
from the United States, but because it enjoys greater policy flexibility from improved
macroeconomic fundamentals. China is likely to step up public-sector dominated
spending on infrastructure and the resource sectors in the face of slowing exports. This
could also happen in many other economies, including Korea, Hong Kong, Singapore,
Thailand, the Philippines, and even Indonesia. This implies that, in the short term,
while headline growth could moderate, Asian economies could become more dependent
on investment. As a result, commodity demand intensity could increase.
Deteriorating global prospects, especially in the major economies, have so far had only
a modest impact on Latin American economies. Growth remains generally strong,
although somewhat slower than in 2007, and should remain above trend with a regional
average of 4.4% for 2008. After a temporary selloff, currencies have strengthened, with
the Brazilian real, Peruvian sol, and Colombian and Chilean pesos making new highs
against the U.S. dollar in recent weeks.
China will appoint its new government for the next five years at the National People’s
Congress meetings starting March 5. A new president just took office in Korea. In
general, we do not expect these political changes to have a significant impact on
7

February 28, 2008
Global Economic Outlook and Strategy
economic policies. However, economic policies in Taiwan and Thailand could show
significant improvement following the elections, generating an important
macroeconomic turnaround in these two sluggish economies.
Slowing exports may
harm some emerging
economies.
Reduced capital flows are
hurting countries that rely
on external financing.
However, financial stability remains a concern in a number of emerging European
economies thanks to a sustained decline in risk appetite, together with concerns about
the risks to net exports in the context of a slowdown in the Eurozone. The export shock
will be felt most acutely in central Europe, particularly in Hungary, Czech Republic,
and Slovakia, whose economies are highly dependent on exports, and whose recent
growth rates have benefited considerably from Eurozone demand. Poland, by contrast,
should be relatively insulated because it is a more closed economy reliant on domestic
spending growth.
The decline in capital flows is naturally proving most painful to those economies
heavily dependent on external financing: Romania, South Africa, and the Baltics are
key examples. The clearest expression of risk aversion in these countries has been the
continued rise in sovereign credit (particularly CDS) spreads. The rise in spreads has
been noticeably large even in countries with very low public debt burdens like
Kazakhstan (6% of GDP) or Romania (16% of GDP). In addition, currency volatility
has increased in a number of countries, particularly in South Africa and Romania.
...But Inflation Remains a Concern
Rates have risen in
countries at risk to higher
inflation.
Oil exports also are
experiencing rising
inflation.
The decline in capital flows and the rise in exchange rate volatility complicate the
inflation outlook in many countries, particularly in the context of higher global food
prices. Interest rates are under upward pressure in South Africa, Romania, Hungary, the
Czech Republic, Poland, and Egypt, among other countries. Our interest rate forecasts
are subject to the risk that we have underestimated food price shocks in the region.
Inflation is also a key issue for many of the “surplus” economies, notably the Gulf
Cooperation Council and Russia. For these economies it remains the case that currency
appreciation will be the most reliable disinflationary tool. Policymakers remain fearful
in many cases that stronger nominal exchange rates will hurt competitiveness. In time
we expect this dilemma to be resolved mostly in favor of local currency revaluation
against the dollar.
Figure 8. United States — Spreads for Indexes of Credit Defaults
Swaps and Leveraged Loans (Basis Points), Jan 07-26 Feb 08
Figure 9. United States — S&P 500 and S&P Financials Equity Price
Indexes (May 2007=100), Jan 07-26 Feb 08
180bp
800bp
110
110
160
140
CDX-IG5 (left)
CDX-HY5 (right)
LCDX (right)
700
600
100
FOMC Inter-Meeting
Interest Rate Cut
100
120
500
90
90
100
400
80
300
80
80
60
40
FOMC Inter-Meeting
Interest Rate Cut
200
100
70
S&P 500
S&P Financial Index
70
20
0
60
60
Jan-07 Apr-07 Jul-07 Oct-07 Jan-08
Jan-07 Apr-07 Jul-07 Oct-07 Jan-08
Source: Citi.
Source: Haver.
8

February 28, 2008
Global Economic Outlook and Strategy
Rising global food
prices...
...complicate monetary
policy.
Food inflation has become a key challenge in a number of economies, including China,
Hong Kong, Singapore, Taiwan, and Vietnam. This has led to tightening monetary
policies, including faster appreciation of Asian currencies, especially the Taiwanese
dollar and Vietnamese dong. In other economies where inflation is less of a challenge,
monetary policy easing is likely to continue following the Fed actions, especially in
Thailand, the Philippines, and Korea. While inflation complicates macroeconomic
policymaking, we think the chances of stagflation remain remote, as slowing activities
should help ease inflation rates, especially core rates. But food prices could stay high in
coming months, suggesting that tightening biases may continue in a number of
economies.
Given the high share of food in the typical CPI basket in Latin America, inflation
pressures should remain a concern for most regional central bankers in the coming
month. Interest rate markets reflect a lower risk of rate hikes in Brazil, and they are now
pricing in cuts in Mexico. But the central banks of Chile, Colombia, and Peru remain
under pressure to tighten further, as inflation rates continue to print well above their
targets. Our current forecasts show the region shifting into a current account deficit of
0.2% of GDP in 2008 on the back of rapidly growing imports. However, we believe
that sky-high commodity prices place our forecast at risk, and may lead to higher-thanexpected
reserves accumulation again this year.
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February 28, 2008
Global Economic Outlook and Strategy
Figure 10. Forecast Overview, 2007-09F
GDP Growth CPI Inflation Current Balance (% of GDP) Fiscal Balance (% of GDP)
2007 2008F 2009F 2007 2008F 2009F 2007 2008F 2009F 2007 2008F 2009F
Global 3.9% 3.2% 3.3% 3.0% 3.7% 2.8% 0.2% 0.1% 0.1% -0.6% -1.3% -1.4%
Based on PPP weights 4.8 4.1 4.2 3.6 4.2 3.3 1.0 0.7 0.4 -0.7 -1.4 -1.5
Industrial Countries 2.5% 1.7% 2.0% 2.1% 2.6% 1.8% -1.5% -1.2% -0.7% -1.0% -1.9% -1.9%
United States 2.2 1.6 2.1 2.9 3.6 2.0 -5.4 -4.9 -4.1 -1.1 -3.0 -3.0
Japan 2.1 1.9 1.7 0.0 0.7 0.3 4.8 4.8 5.2 -2.8 -3.0 -3.1
Euro Area 2.6 1.7 1.8 2.1 2.3 1.8 0.2 0.2 0.3 -1.0 -1.3 -1.2
Canada 2.5 1.0 1.5 2.1 1.4 2.0 0.9 -0.2 -0.8 0.2 0.1 0.1
Australia 3.8 2.7 3.4 2.3 3.3 2.8 -5.9 -5.2 -5.2 1.6 1.3 1.5
Germany 2.6 1.6 1.9 2.1 1.8 1.6 6.6 6.8 6.8 0.0 -0.5 -0.7
France 1.9 1.6 1.6 1.5 2.2 1.4 -1.5 -1.7 -1.6 -2.6 -2.9 -2.8
Italy 1.6 0.8 1.4 2.2 2.5 1.8 -2.0 -1.5 -1.5 -2.3 -2.7 -2.9
Spain 3.8 2.1 2.2 2.7 3.4 2.3 -9.6 -8.9 -7.5 2.2 1.2 0.0
United Kingdom 3.1 1.7 1.9 2.3 2.5 2.0 -5.2 -4.5 -3.3 -3.0 -3.3 -3.5
Emerging Markets 7.2% 6.5% 6.4% 5.2% 6.1% 5.4% 4.6% 3.5% 2.3% 0.4% -0.1% -0.4%
China 11.4 10.5 10.0 4.8 5.0 4.0 10.8 8.8 7.0 -1.8 -2.0 -1.5
India 8.7 8.3 8.5 4.5 4.3 4.0 -1.2 -1.9 -1.8 -6.0 -5.8 -5.2
Korea 4.9 4.6 4.8 2.5 3.3 2.5 0.6 -1.3 -0.6 2.0 2.0 1.5
Poland 6.5 5.0 4.7 2.5 4.2 3.0 -3.7 -4.7 -4.6 -1.5 -2.1 -2.5
Russia 8.1 6.6 6.5 9.0 12.9 8.9 5.9 6.2 3.3 5.4 5.6 5.0
South Africa 5.1 3.5 4.3 7.1 6.1 5.4 -7.1 -7.7 -7.7 0.8 0.3 0.2
Turkey 3.8 4.2 5.2 8.8 7.8 6.5 -7.7 -8.3 -6.8 -2.2 -2.4 -3.2
Brazil 5.3 4.4 4.0 3.6 4.7 4.5 0.3 -0.6 -1.0 -1.4 -0.7 -0.4
Mexico 3.3 2.9 3.7 4.0 3.9 3.5 -0.9 -1.8 -2.3 0.0 0.0 0.0
Note: Aggregation based on nominal GDP except where noted. F Citi forecast. For India, inflation forecast is for WPI.
Source: Citi.
10

February 28, 2008
Global Economic Outlook and Strategy
Key Economic Indicators
Figure 11. Euro Area, Japan, and the United States — Business Activity Survey Measures, 1987-Feb 2008
3.0
Standard Deviations from Mean d
2.0
1.0
0.0
-1.0
-2.0
-3.0
-4.0
-5.0
87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08
3.0
2.0
1.0
0.0
-1.0
-2.0
-3.0
-4.0
-5.0
Standard Deviations from Mean
U.S. ISM Euro Area Japan Tankan
Note: The figure shows business activity survey indexes in the euro area, Japan and the United States, measured in units of standard deviations from the ten-year mean.
Sources: Bank of Japan, EU Commission and the U.S. Institute for Supply Management.
Figure 12. Commodity Prices, 1987-Feb 2008
$ per Barrel
240
220
200
180
160
140
120
100
80
87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08
Economist Index (Left)
Oil Prices (Right)
100
90
80
70
60
50
40
30
20
10
0
Figure 13. Selected Countries — Global Industrial Production
(Year-to-Year Percent Change), 2007-09F
2007 2008F 20009F
World 4.2% 3.5% 3.9%
United States 2.1 1.7 2.5
Japan 2.9 2.3 2.5
Euro Area 2.5 1.9 1.6
United Kingdom 0.3 0.8 0.8
Canada -0.1 -3.0 1.0
China 18.5 16.8 16.5
India 9.0 8.5 10.0
Korea 8.2 7.7 8.0
Brazil 3.0 4.8 4.2
Note: “World” includes 22 countries based on industrial production weights.
Sources: National sources and Citi.
Note: Brent crude. Sources: The Economist and OECD.
Figure 14. Euro Area, Japan, United Kingdom, and United States — Forecasts for 2008 GDP (Left) and 2008 Inflation (Right), 2006-Feb 2008.
4.0% 4.0%
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.5
Jan-06 Apr Jul Oct Jan-07 Apr Jul Oct Jan-08
U.S. Euro U.K. Japan
3.5
3.0
2.5
2.0
1.5
1.0
4.0%
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
-0.5
Jan-06 Apr Jul Oct Jan-07 Apr Jul Oct Jan-08
U.S. Euro U.K. Japan
4.0%
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
-0.5
Source: Citi.
11

February 28, 2008
Global Economic Outlook and Strategy
Figure 15. Short Rates (End of Period), as of Feb 28, 2008
Current 1Q 08 2Q 08 3Q 08 4Q 08 1Q 09
United States 3.00 % 2.50 % 2.00 % 2.00 % 2.00 % 2.00 %
Japan 0.50 0.50 0.50 0.50 0.75 0.75
Euro Area 4.00 4.00 3.75 3.50 3.50 3.50
Canada 4.00 % 3.50 % 3.00 % 3.00 % 3.00 % 3.00 %
Australia 7.00 7.25 7.50 7.50 7.50 7.50
New Zealand 8.25 8.25 8.25 8.25 8.25 8.25
Denmark 4.25 % 4.25 % 4.00 % 3.75 % 3.75 % 3.75 %
Norway 5.25 5.25 5.50 5.50 5.75 5.75
Sweden 4.25 4.25 4.25 4.25 4.00 3.75
Switzerland 2.75 2.75 2.75 2.75 2.75 2.75
United Kingdom 5.25 5.25 4.75 4.50 4.25 4.25
China 7.47 % 7.74 % 7.74 % 7.74 % 7.74 % 7.74 %
Source: Citi.
Figure 16. 10-Year Yield Forecasts (Period Average), as of Feb 28, 2008
Current 1Q 08 2Q 08 3Q 08 4Q 08 1Q 09
United States 3.71 % 3.65 % 3.60 % 3.75 % 3.85 % 4.00 %
Japan 1.43 1.50 1.70 1.70 1.80 1.80
Euro Area 4.00 4.00 4.00 4.00 4.10 4.25
Canada 3.73 % 3.90 % 3.90 % 4.00 % 4.05 % 4.15 %
Australia 6.44 6.50 6.50 6.35 6.35 6.25
New Zealand 6.40 6.50 6.50 6.25 6.25 6.05
Denmark 4.11 % 4.10 % 4.05 % 4.05 % 4.15 % 4.30 %
Norway 4.40 4.63 4.76 4.90 5.08 5.23
Sweden 4.09 4.10 4.14 4.25 4.50 4.59
Switzerland 3.00 2.80 2.90 2.95 3.15 3.35
United Kingdom 4.60 4.55 4.55 4.55 4.65 4.79
Notes: Bond yields measured on local market basis (semi-annual for the United States, United Kingdom, Canada, Australia, and New Zealand; annual for the
rest). The 10-year yield for the euro area is the Bund yield. Source: Citi.
Figure 17. 10-Year Yield Spreads (Period Average), as of Feb 28, 2008
Spread vs. US$
Spread vs. Germany
Current 1Q 08 2Q 08 3Q 08 4Q 08 1Q 09 Current 1Q 08 2Q 08 3Q 08 4Q 08 1Q 09
United States NA NA NA NA NA NA -20 bp -21 bp -21 bp -11 bp -21 bp -21 bp
Japan -241 bp -229 bp -209 bp -219 bp -209 bp -224 bp -261 -250 -230 -230 -230 -245
Euro Area 20 21 21 11 21 21 NA NA NA NA NA NA
Canada -13bp 15bp 15bp 15bp 20bp 15bp -23bp -6bp -6bp 4bp -1bp -6bp
Australia 259 275 275 250 250 225 245 261 261 245 235 210
New Zealand 263 275 275 240 240 205 249 261 261 235 225 189
France 32 bp 33 bp 31 bp 20 bp 29 bp 29 bp 12 bp 12 bp 10 bp 9 bp 8 bp 8 bp
Italy 61 61 59 46 56 54 41 40 38 35 35 33
Spain 34 36 35 25 33 31 14 15 14 14 12 10
Netherlands 29 30 29 18 27 27 9 9 8 7 6 6
Belgium 47 46 39 27 36 34 27 25 18 16 15 13
Denmark 31 bp 31 bp 26 bp 16 bp 26 bp 26 bp 11 bp 10 bp 5 bp 5 bp 5 bp 5 bp
Norway 55 84 97 101 119 119 56 63 76 90 98 98
Sweden 24 31 35 36 61 55 10 10 14 25 40 34
Switzerland -84 -99 -89 -94 -74 -69 -104 -120 -110 -105 -95 -90
United Kingdom 85 80 80 70 80 79 65 60 60 60 60 60
NA Not applicable. Note: Spreads calculated on annual basis (except those of the United Kingdom, Canada, Australia and New Zealand over the United States).
Source: Citi.
12

February 28, 2008
Global Economic Outlook and Strategy
Figure 18. Foreign Exchange Forecasts (End of Period), as of Feb 28, 2008
vs USD
vs EUR
Current Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Current Mar-08 Jun-08 Sep-08 Dec-08 Mar-09
United States NA NA NA NA NA NA 1.51 1.51 1.53 1.51 1.48 1.45
Japan 106 105 105 109 112 112 160 159 161 165 166 162
Euro Area 1.51 1.51 1.53 1.51 1.48 1.45 NA NA NA NA NA NA
Canada 0.98 1.01 1.02 1.03 1.04 1.04 1.48 1.53 1.56 1.56 1.54 1.51
Australia 0.94 0.92 0.95 0.92 0.90 0.88 1.60 1.64 1.61 1.64 1.64 1.65
New Zealand 0.81 0.80 0.78 0.76 0.75 0.73 1.86 1.89 1.96 1.99 1.97 1.99
Norway 5.20 5.07 4.84 4.83 4.90 4.97 7.87 7.65 7.40 7.30 7.25 7.20
Sweden 6.20 6.16 5.95 6.03 6.22 6.41 9.37 9.30 9.10 9.10 9.20 9.30
Switzerland 1.06 1.06 1.04 1.03 1.03 1.03 1.60 1.60 1.59 1.56 1.52 1.50
United Kingdom 1.98 1.97 1.96 1.95 1.92 1.93 0.76 0.77 0.78 0.77 0.77 0.75
China 7.11 7.06 7.00 6.90 6.75 6.55 10.8 10.7 10.7 10.7 10.0 9.5
India 39.9 39.0 38.5 38.0 37.5 37.0 60.3 58.9 58.9 57.4 55.5 53.7
Korea 938 960 960 940 920 870 1418 1450 1469 1419 1362 1262
Poland 2.33 2.34 2.42 2.44 2.42 2.43 3.52 3.53 3.70 3.68 3.58 3.52
Russia 24.1 24.2 23.9 24.1 24.3 24.6 36.4 36.5 36.6 36.3 36.0 35.7
South Africa 7.56 7.70 7.90 8.10 8.00 8.10 11.43 11.63 12.09 12.23 11.84 11.75
Turkey 1.18 1.22 1.24 1.27 1.29 1.32 1.79 1.84 1.90 1.92 1.91 1.91
Brazil 1.67 1.79 1.80 1.80 1.80 1.85 2.52 2.70 2.75 2.72 2.66 2.68
Mexico 10.7 10.8 10.9 11.0 11.0 11.0 16.2 16.3 16.7 16.6 16.2 16.0
Source: Citi.
Figure 19. Foreign Exchange Forecasts (End of Period), as of Feb 28, 2008
vs JPY
Current Mar-08 Jun-08 Sep-08 Dec-08 Mar-09
United States 106 105 105 109 112 112
Japan NA NA NA NA NA NA
Euro Area 160 159 161 165 166 162
Canada 108 104 103 106 108 108
Australia 100 97 100 100 101 99
New Zealand 86.1 84.0 81.9 82.8 84.0 81.8
Norway 20.4 20.7 21.7 22.5 22.9 22.6
Sweden 17.1 17.0 17.7 18.1 18.0 17.5
Switzerland 100 99 101 105 109 108
United Kingdom 211 207 206 213 215 216
China 15 15 15 15 17 17
India 2.66 2.69 2.73 2.87 2.99 3.03
Korea 8.84 9.14 9.14 8.62 8.21 7.77
Poland 45.6 44.9 43.4 44.7 46.3 46.1
Russia 4.4 4.3 4.4 4.5 4.6 4.5
South Africa 14.0 13.6 13.3 13.5 14.0 13.8
Turkey 89.6 86.1 84.7 85.8 86.8 84.8
Brazil 63.6 58.7 58.3 60.6 62.2 60.5
Mexico 9.9 9.7 9.6 9.9 10.2 10.2
Source: Citi.
13

February 28, 2008
Global Economic Outlook and Strategy
Stephen Halmarick
011-612 8225-6043
stephen.halmarick
@citi.com
Currency Outlook
With the depth of the near-term deceleration of the U.S. economy still in doubt, and
financial conditions continuing to deteriorate, we expect downward pressure on the
U.S. dollar to persist in coming months. The dollar downtrend should, however,
remain modest. Aggressive action by the Federal Reserve should help to stabilize
financial conditions and prospects for growth in coming quarters. In addition, the
outlook for growth in the euro area appears to be deteriorating, and this change in
cyclical outlooks should eventually turn the tide on USD/EUR.
The USD will likely depreciate modestly relative to the Japanese yen in the first half of
2008. Japan appears to be the least affected by the money and credit market strains
among the major economies and should benefit from any further heightened risk
aversion. However, we expect the JPY to start weakening against the USD in the second
half of the year. As global economic and financial risks wane, in part thanks to policy
actions in major countries, Japanese households are likely to resume diversifying their
portfolios into foreign currency denominated assets, weighing down the yen.
We continue to expect the British pound to be one of the weakest of the G10 currencies in
2008. While markets currently are discounting an easing cycle, we expect growth is likely
to undershoot MPC forecasts, thus opening up scope for an extended easing cycle, even
with the short-term inflation worries.
Led by the renminbi, emerging Asian currencies continued to gain ground during the
past month. A broad pickup in inflation has generated incentives for central banks
across the region to tolerate greater exchange rate flexibility — especially for the
Taiwanese dollar and Vietnamese dong. We continue to expect emerging Asian
currencies to lead the next leg of U.S. dollar weakness. However, we also warn
against excessive optimism regarding the outlook of Asian currencies, given that the
expected slowing in exports will likely add caution to currency policymaking. We
maintain our expectation of 7.5% renminbi appreciation against the USD, which is
less aggressive than market expectations.
We continue to favor the AUD among commodity currencies. Markets could be
surprised by the extent to which the Reserve Bank of Australia (RBA) tightens
monetary policy in coming months. We project a tightening of at least 50 basis points
by May. Indeed, further tightening beyond that could be required to ensure inflation
returns to the 2%-3% target zone. Along with rising interest rates, gains in key
Australian commodity prices, as indicated by the recent 65% price rise in iron ore
exports to Japan for the coming financial year, should continue to provide the AUD
with fundamental support.
In the near term, the NZD should remain in a range, as the Reserve Bank of New
Zealand (RBNZ) holds monetary policy steady, balancing the inflation risks from
higher dairy prices and a tight labor market against clear signs of a slowdown in the
housing sector. The CAD is also likely to remain range-bound in the near term, with
some modest retreat from parity amid a slowing Canadian economy, ongoing financial
market strains, and tighter credit conditions. While the BoC is now expected to lower
policy rates by 100 basis points by midyear, this will only match the expected easing in
the United States. As a result, continued commodity price strength and the weak U.S.
economic outlook argue against a meaningful depreciation of the CAD.
The Swiss franc (CHF) has been a star performer so far this year, rising about 4% in
trade-weighted terms, and it is likely to remain strong. Markets have scaled back the
amount of Swiss National Bank (SNB) easing priced in for the second and third
quarters, as the economy holds up better than expected and inflation remains above the
14

February 28, 2008
Global Economic Outlook and Strategy
SNB’s 2% target ceiling. Therefore, the SNB will likely keep rates on hold in coming
months, unless the CHF rises more sharply. The outlook for the CHF also should be
reinforced by the currency’s longstanding safe-haven status, with a strong and positive
correlation between equity market volatility and the trade-weighted CHF.
While the Norges Bank has recently expressed concerns about money market strains
and heightened global economic uncertainty, we still expect further monetary policy
tightening to combat inflation risks amid heightened capacity pressures and
accelerating wages. Oil prices are a double-edged sword for the NOK. Recent high
prices have supported the NOK, but the sharp rise over the past year also raises the
risk of a correction. In Sweden, the Riksbank is expected to keep rates steady near
term, following the surprise rate hike in February. The next move is likely to be a cut
around yearend to offset the negative effects from the credit crisis and weakening U.S.
and global economic growth. But interest rate spreads remain in the SEK’s favor.
Also, while periods of financial instability normally do not favor the SEK, the SEK
should strengthen again once the dust settles in financial markets.
Currencies across CEEMEA continue to feel the effects of conflicting forces. Amid
ongoing financing concerns, currencies of external deficit countries such as South Africa
and Romania remain under pressure relative to the EUR. Inflationary pressures across the
region, however, continue to put upward pressure on domestic interest rates, providing
some support to currencies of countries with better economic prospects, including Poland,
Israel, and Slovakia. Slovakia is also experiencing capital inflows in anticipation of a
revaluation of the koruna’s central parity against the EUR next quarter as part of the euroadoption
process. Hungary, by abandoning its band, reversed much of its January selloff.
Latin American currencies have so far shown no vulnerability to deteriorating global
prospects. In fact, with the United States cutting rates and commodity prices making
new highs, Latin currencies have continued to appreciate. Inflationary challenges in
Chile, Peru, and Colombia will likely keep those central banks vigilant, with a bias
toward maintaining a hawkish discourse, and possibly even hiking rates. Rate cuts are
likely in Mexico, but not until September, given the likelihood that yearly inflation will
increase above the top of Banxico’s band during most of the second quarter.
Figure 20. Currency Recommendations, as of Feb 28, 2008
Current
3-Month
Forecast
Annual Return vs
FWD Implied Vol.
12-Month
Forecast
Annual Return vs
FWD Implied Vol.
United States NA NA NA NA NA NA NA
Japan 106 105 1.9 10.7 112 -7.2 9.6
Euro Area 1.51 1.52 4.1 9.1 1.46 -2.1 8.8
Canada 0.98 1.02 -14.4 11.6 1.04 -5.2 10.9
Australia 0.94 0.94 3.5 13.1 0.89 -0.7 12.7
New Zealand 0.81 0.80 -6.3 14.8 0.74 -3.6 14.8
Norway 5.20 4.92 25.3 12.2 4.94 8.2 11.8
Sweden 6.20 6.02 13.0 11.8 6.35 -0.5 11.3
Switzerland 1.06 1.05 4.7 10.0 1.03 2.7 9.0
United Kingdom 1.98 1.96 -1.7 8.6 1.93 -0.4 8.5
China 7.11 7.02 -5.2 3.4 6.62 -2.2 4.9
India 39.9 38.7 12.7 6.0 37.2 7.7 6.4
Korea 938 960 -8.8 5.3 887 6.0 4.9
Poland 2.33 2.39 -7.6 11.0 2.43 -0.7 10.5
Russia 24.1 24.0 3.7 5.9 24.5 1.4 6.7
South Africa 7.56 7.83 -5.5 19.6 8.07 2.2 19.3
Turkey 1.18 1.23 -3.9 14.1 1.31 1.9 16.2
Brazil 1.67 1.80 -23.7 13.6 1.83 -2.6 14.6
Mexico 10.7 10.9 -2.3 5.3 11.0 1.6 6.6
Source: Citi.
15

February 28, 2008
Global Economic Outlook and Strategy
Global Equity Strategy
Robert Buckland
011-44-20-7986-3947
robert.buckland
@citi.com
Our economics colleagues now forecast recessionary conditions in the United States.
What have previous U.S. recessions meant for global corporate earnings and stock
prices and what are the implications for the current situation
Earnings Impact
Figure 21 plots U.S. and world ex-U.S. trailing earnings growth for the listed
corporate sector, with shaded regions denoting U.S. recessions. Given reporting
delays, earnings will tend to lag the economic data, so this series does not yet reflect
the recent earnings collapse among financials.
Earnings are much more volatile than real GDP given the impact of financial and
operational leverage. For example, annual U.S. earnings growth has ranged from
-40% to +40% over a period when real U.S. GDP growth has ranged between -3% and
+8%. Although GDP seems to have become less volatile, corporate earnings have
become more volatile. There is no sign of the “great moderation” here. Figure 21 also
shows that world ex-U.S. earnings growth tracks U.S. earnings closely but with even
greater volatility recently. The key message is clear. U.S. recessions have been bad
news for the United States and world earnings.
In the past, U.S. recessions have been associated with contractions of at least 20% in
both U.S. and world ex-U.S. earnings. To put this into context, the IBES consensus
expects U.S. and global earnings growth of 14% and 13%, respectively, in 2008. So,
investors should prepare themselves for a period of earnings downgrades.
U.S. Recessions and Global Equities
If the United States is heading into recession, the outlook for global corporate
earnings looks bleak. What does that mean for share prices
Figure 22 shows that, on average, global earnings have fallen by 31% around U.S.
recessions. Share prices have fallen by slightly more (36%). As for the current
situation, the 15% share price decline from last July’s high suggests that, even though
earnings are only just starting to roll over, global equities are already halfway through
Figure 21. U.S. and World Ex-U.S. Earnings Growth (Percent),
1990-2007
Figure 22. World Market Price and Earnings Decline in U.S.
Recessions (Percent), 1973-2007
60
60
0
0
40
40
-10
-10
20
20
-20
-20
0
0
-30
-30
-20
-20
-40
-40
-40
-60
70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08
US World ex-US
-40
-60
-50
-60
Price
Earnings
Mid 70s Early 80s Early 90s Early 00s Average Now
-50
-60
Note: Shaded regions denote recession. Sources: MSCI and Datastream.
Sources: MSCI and Datastream.
16

February 28, 2008
Global Economic Outlook and Strategy
the selloff associated with a typical U.S. recession and are rapidly approaching the
mild correction seen in the early 1980s (19%).
Valuations
Could it be that the recent fall in prices has already priced a U.S. recession into global
equities It seems that the bear market associated with the last U.S. recession was as
severe as it was because global equities traded at a record 35 times PE heading into
the worst earnings slump in 40 years. Now, global equities trade on a much more
reasonable 15 times trailing PE, similar to valuations at the bottom of the early 1990s
correction. Even if earnings do fall significantly, current valuations look reasonable.
We also point out that global equities entered each of the last two recessions with a
major valuation bubble. In 1990, Japan traded on a PE of 52 times. In 2000, global
Technology (TMT) traded on a PE of 65 times. Both accounted for around 40% of the
total global market cap and then bore the brunt of the subsequent selloff. This spared
the rest of the global equity market from the worst of the pain. It is difficult to point to
any such obvious major valuation anomalies this time round. Emerging markets have
performed strongly, but they are hardly in bubble territory.
Interest Rates
Thus, the current valuation case in favor of global equities is better than it was during
the last recession but still probably not enough to counter the impact of major
earnings downgrades. Perhaps it is still too early to buy back into equities — stick
with defensive cash and government bonds instead.
But there is a problem with this defensive strategy — interest rates are already low.
U.S. real rates have gone negative much earlier than in the early 1980s, 1990s, or
2000s downturns. Not only do negative real rates help to reduce the severity of the
U.S. recession, but they also undermine the attractiveness of cash as an asset class.
The other obvious place to take refuge is government bonds. But value here also looks
poor.
Market Timing
How do global equities perform around a U.S. recession Previously, the worst
performance through the whole period has been in the first half. The best performance
has been during the second half. What about now We start the clock ticking from
January of this year. History suggests that the recession will last around a year. It also
suggests that investors should not be in too much of a hurry to buy. Falling rates and
increasingly attractive valuations are not enough to counter the rising wave of bad
economic and earnings news in the first half of the recession. At least the selloff this
year is already approaching the average selloff for the first half, although it is still far
from the worst.
This supports our general suspicion that, despite aggressive Fed cuts and cheap
valuations against government bonds, global equities may struggle to find a floor in
the first half of this year as the barrage of poor economic and earnings news builds.
Later in the year, the economic and earnings data should be just as bad (if not worse),
but equity market expectations will be more realistic and the Fed’s magic will have
had more time to work. This could leave global equities better placed later in the year
to enjoy the rally traditionally seen in the second half of a U.S. recession.
17

February 27, 2008
Global Economic Outlook and Strategy
Figure 23. Long-Term Forecasts (Calendar Average), as of Feb 28, 2008
GDP CPI Short-Term Interest Rates
2008 2009 2010 2011 2012 2008 2009 2010 2011 2012 2008 2009 2010 2011 2012
United States 1.6% 2.1% 2.7% 2.7% 2.7% 3.6% 2.0% 2.0% 2.0% 2.0% 2.35% 2.00% 3.50% 4.25% 4.25%
Japan 1.9 1.7 2.0 2.0 1.2 0.7 0.3 0.5 0.6 2.3 0.56 0.88 1.38 1.75 2.00
Euro Area 1.7 1.8 2.0 2.0 2.0 2.3 1.8 1.8 1.8 1.8 3.65 3.50 3.75 3.75 3.75
Canada 1.0 1.5 2.2 2.4 2.5 1.4 2.0 2.0 2.1 2.1 3.15 3.00 3.25 3.50 3.50
Australia 2.7 3.4 3.5 3.3 3.3 3.3 2.8 2.5 2.5 2.5 7.45 7.05 6.00 5.50 5.50
New Zealand 2.1 2.0 3.0 3.0 3.0 2.8 2.4 2.3 2.3 2.3 8.25 7.80 7.00 6.75 6.50
Germany 1.6 1.9 2.1 1.7 1.7 1.8 1.6 1.6 1.5 1.5
France 1.6 1.6 2.0 2.3 2.3 2.2 1.4 1.6 1.6 1.5
Italy 0.8 1.4 1.2 1.3 1.2 2.5 1.8 1.9 1.8 1.7
Spain 2.1 2.2 2.1 2.2 2.1 3.4 2.3 2.4 1.7 1.8
Norway 4.0 3.0 2.5 2.5 2.5 3.4 2.5 2.5 2.5 2.5
Sweden 2.3 2.2 2.3 2.3 2.3 3.4 2.3 2.1 2.1 2.0
Switzerland 2.2 2.0 2.2 2.0 1.9 1.5 0.8 1.1 0.8 0.8 2.90 3.00 3.00 3.00 3.00
United Kingdom 1.7 1.9 2.6 2.8 2.9 2.5 2.0 2.2 1.9 2.1 4.75 4.30 4.90 5.00 5.25
China 10.5 10.0 10.5 9.8 9.0 5.0 4.0 4.2 3.5 4.0 7.7 7.7 8.0 8.0 8.3
India 8.3 8.5 8.7 9.5 9.5 4.3 4.0 4.0 4.0 3.5 6.0 6.0 6.0 5.5 5.5
Korea 4.6 4.8 4.8 4.8 4.8 3.3 2.5 2.5 2.5 2.5 4.9 5.0 5.2 5.3 5.3
Poland 5.0 4.7 5.2 5.9 5.5 4.2 3.0 2.3 2.5 2.7 5.5 5.5 5.5 5.5 5.5
Russia 6.6 6.5 6.5 6.5 6.6 12.9 8.9 7.0 5.9 4.8 11.0 9.5 8.3 7.5 6.8
South Africa 3.5 4.3 5.3 5.1 5.5 6.1 5.4 5.5 5.0 5.2 10.3 8.9 9.0 9.3 9.0
Turkey 4.2 5.2 5.8 6.0 6.2 7.8 6.5 5.1 4.5 4.2 16.3 13.8 11.1 10.0 9.2
Brazil 4.4 4.0 4.0 4.0 4.0 4.7 4.5 4.1 4.0 3.7 11.3 10.5 9.8 9.3 8.5
Mexico 2.9 3.7 4.1 3.8 4.3 3.9 3.5 3.2 3.1 3.1 7.3 6.5 6.5 6.5 6.5
Note: For Norway, mainland GDP. For India inflation forecast is for WPI.
Source: Citi forecasts.
18

February 27, 2008
Global Economic Outlook and Strategy
Figure 24. Long-Term Forecasts (Calendar Average), as of Feb 28, 2008
Ten-Year Yields Exchange Rate vs. U.S. Dollar Exchange Rate vs. Euro
2008 2009 2010 2011 2012 2008 2009 2010 2011 2012 2008 2009 2010 2011 2012
United States 3.75% 4.25% 4.75% 5.00% 5.00% NA NA NA NA NA 1.50 1.45 1.47 1.50 1.52
Japan 1.68 1.90 2.50 2.75 2.25 108 110 100 95 95 162 160 147 143 144
Euro Area a 4.05 4.40 4.40 4.40 4.40 1.50 1.45 1.47 1.50 1.52 NA NA NA NA NA
Canada 3.91 4.41 4.75 4.90 4.90 1.04 1.06 1.08 1.13 1.15 1.56 1.54 1.59 1.70 1.75
Australia b 6.35 6.40 6.75 6.50 6.50 0.92 0.87 0.82 0.78 0.78 1.63 1.67 1.79 1.92 1.95
New Zealand c 6.35 6.30 6.75 6.75 6.75 0.77 0.72 0.69 0.66 0.65 1.95 2.01 2.13 2.27 2.34
Denmark 4.10 4.45 4.45 4.45 4.45 NA NA NA NA NA NA NA NA NA NA
Norway 4.85 5.30 5.20 5.10 5.10 4.99 5.00 4.90 4.74 4.61 7.48 7.25 7.21 7.11 7.01
Sweden 4.25 4.65 4.65 4.65 4.65 6.13 6.31 6.16 6.00 5.92 9.20 9.15 9.05 9.00 9.00
Switzerland 3.20 3.50 3.50 3.50 3.50 1.04 1.11 1.10 1.08 1.06 1.56 1.61 1.62 1.62 1.61
United Kingdom d 4.75 5.10 5.10 5.10 5.10 1.95 1.93 2.10 2.17 2.20 0.77 0.75 0.70 0.69 0.69
China e 4.1 4.0 4.5 5.0 5.5 6.98 6.35 5.89 5.58 5.40 10.5 9.2 8.7 8.4 8.2
India 7.3 7.5 7.5 7.0 7.0 38.5 36.0 35.0 33.0 31.0 57.8 52.2 51.5 49.5 47.1
Korea e 4.9 5.2 5.5 5.5 5.5 950 890 850 800 800 1425 1291 1250 1200 1216
Poland 5.9 5.7 5.5 5.5 5.4 2.41 2.43 2.32 2.21 2.12 3.61 3.52 3.42 3.32 3.22
Russia 6.6 6.7 6.6 6.6 6.5 24.0 24.5 24.4 24.2 24.0 36.0 35.5 35.9 36.2 36.4
South Africa 8.0 8.1 8.7 9.0 9.3 7.37 8.00 8.20 8.55 8.90 11.05 11.60 12.05 12.83 13.53
Turkey NA NA NA NA NA 1.26 1.34 1.34 1.34 1.34 1.90 1.94 1.97 2.00 2.04
Brazil 10.7 9.7 9.4 9.1 9.0 1.79 1.88 1.93 1.98 2.03 2.69 2.72 2.83 2.96 3.08
Mexico 7.4 7.1 7.2 7.2 7.2 10.9 11.0 11.1 11.3 11.5 16.3 15.9 16.3 17.0 17.5
a
Ten-year bund yield. Exchange rate versus U.S. dollar shows US$/€ . b US$/A$. c US$/NZ$. d US$/£. e Five-year bond yield.
Source: Citi forecasts.
19

February 28, 2008
Global Economic Outlook and Strategy
Robert V. DiClemente
(1-212) 816-9894
robert.diclemente
@citi.com
Peter D’Antonio
Christopher Wiegand
Steven Wieting
United States
Recessionary conditions may be unfolding in the U.S. economy as the slowdown appears
to be spreading with reinforcement from harsh financial conditions. Policy efforts have
aided liquidity, but credit availability has tightened and lower rates have failed to ease
strains on capital markets. With housing activity still declining and joblessness creeping
higher, headwinds are forming against a timely and sustained return to trend growth
despite a prospective boost from recent fiscal action.
Given the threat of an especially adverse dynamic, Fed officials have turned more
aggressive, and are expected to lower the funds rate by another percentage point by
midyear. Nonetheless, any end to rate cuts would likely first require some improvement in
the financial setting, reflected in a revival of risk assets and signs that large overhanging
imbalances in housing markets are beginning to clear.
Figure 25. United States — Economic Forecast, 2007-09F
Economic growth appears to have stalled, reflecting slowdowns in consumer and business
spending and continued sharp declines in homebuilding. Although many industries exhibit
solid finances and have not overreached in recent years, business caution has increased,
mirroring the pronounced retreat in risk appetites among financial markets. Lower equity
prices are threatening to compound pressures on consumers from declining home values
and faltering job growth.
The improvement in inflation measures has stalled, but continued Fed easing indicates that
officials still see scope for easing price pressures later this year. Oncoming financial
restraint on demand along with rising slack and protracted housing weakness should
impose stiff competitive pressures on firm pricing. As long as inflation expectations
remain checked in this setting, we expect underlying inflation to recede somewhat, aiding
policy flexibility and shortening recession.
2007 2008
2007F 2008F 2009F 2Q 3Q 4Q 1QF 2QF 3QF 4QF
GDP SAAR 3.8% 4.9% 0.6% -0.1% 0.9% 3.0% 2.2%
YoY 2.2% 1.6% 2.1% 1.9 2.8 2.5 2.3 1.6 1.1 1.5
Consumption SAAR 1.4 2.8 2.0 0.6 0.6 3.5 1.2
YoY 2.9 1.6 1.8 2.9 3.0 2.5 1.7 1.5 1.7 1.5
Business Investment SAAR 11.0 9.3 7.5 0.3 -1.2 -0.3 0.3
YoY 4.8 3.0 0.7 4.1 5.1 7.4 7.0 3.9 1.5 -0.2
Housing Investment SAAR -11.8 -20.5 -23.9 -23.9 -15.4 -6.4 -1.6
YoY -16.9 -17.9 -0.2 -16.5 -16.5 -18.3 -20.2 -21.0 -17.7 -12.2
Government SAAR 4.1 3.8 2.6 -1.2 1.4 1.7 2.0
YoY 2.1 1.5 1.7 1.9 2.7 2.5 2.3 1.6 1.1 1.0
Exports SAAR 7.5 19.1 3.9 4.9 5.1 5.6 5.1
YoY 7.9 6.7 5.5 7.1 10.3 7.7 8.7 8.1 4.9 5.2
Imports SAAR -2.7 4.4 0.3 0.3 -1.2 2.1 -0.8
YoY 2.0 0.5 1.8 2.0 1.7 1.4 0.5 0.9 0.4 0.1
CPI YoY 2.9 3.6 2.0 2.7 2.4 4.0 4.2 3.7 3.6 2.8
Core CPI YoY 2.3 2.5 2.0 2.3 2.1 2.3 2.5 2.6 2.5 2.4
Unemployment Rate % 4.6 5.4 5.9 4.5 4.7 4.8 5.1 5.3 5.6 5.7
Govt Balance (Fiscal Year) % of GDP -1.1 -3.0 -3.0 — — — — — — —
Assumed WTI Spot Price US$ 72.3 91.6 89.2 65.0 75.5 90.9 93.2 91.6 91.0 90.4
Current Account US$bn -751 -693 -607 -756 -714 -748 -743 -700 -682 -647
% of GDP -5.4 -4.8 -4.1 -5.5 -5.1 -5.3 -5.3 -4.9 -4.7 -4.4
S&P 500 Profits (US$ Per Share) YoY -1.7 -0.6 5.0 9.4 -5.7 -19.2 -9.7 -11.5 1.8 22.4
Notes: F Citi forecast. YoY Year-to-year percent change. SAAR Seasonally adjusted annual rate.
Sources: Bureau of Economic Analysis, Bureau of Labor Statistics, I/B/E/S, Treasury Department, Wall Street Journal, and Citi.
20

February 28, 2008
Global Economic Outlook and Strategy
Kiichi Murashima
(81-3) 5574-4730
kiichi.murashima
@nikkocitigroup.com
Japan
We expect Japan’s economic growth to stabilize near the potential growth rate of the
economy (slightly below 2%) this year after a bumpy ride in 2007. Last year, higher input
costs including energy costs, the resulting deterioration in the profit outlook for small
firms, and the enforcement of the revised Building Standard Law temporarily distorted
economic growth. However, real GDP advanced at an annualized 3.7% in the fourth
quarter, reflecting strong export and business investment growth.
Major demand components are likely to expand. Private consumption will likely maintain
modest but stable expansion on somewhat higher income growth in 2008. Business
investment likely will increase amid capacity shortages and healthy profits at large firms,
but investment at small firms should be soft. The negative impact of the revised Building
Standard Law on housing has already come to an end. Finally, exports are likely to
maintain slower but solid growth because Japan’s exports are now much more diversified
than in the past. For example, exports to oil-producing countries alone are pushing up
overall exports by almost three percentage points. Exports to Asia will likely slow
gradually as the negative impact of the U.S. slowdown dampens growth in the region.
Underlying inflation will likely remain low in 2008. While year-to-year changes in core
CPI are expected to reach the 1% mark in coming months, this is mostly attributable to
surging energy and manufactured food prices. Core inflation adjusted for energy and food
will likely remain low against the backdrop of near-trend growth and persistent declines in
unit labor costs. Core inflation probably will slip again to about 0.3% by the end of 2008.
We expect the next rate hike by the Bank of Japan (BoJ) to be delayed until the end of
2008 or early 2009. Continued uncertainties surrounding the U.S. economy and global
financial markets, combined with ambiguity regarding domestic growth prospects, will
likely continue to dissuade the BoJ from raising policy rates until after the release of its
October economic outlook. BoJ Governor Fukui will step down in March, but the basic
thrust of monetary policy (that is, policy normalization) will be maintained.
Figure 26. Japan — Economic Forecast, 2007-09F
2007 2008
2007F 2008F 2009F 2Q 3Q 4Q 1QF 2QF 3QF 4QF
Real GDP YoY 2.1% 1.9% 1.7% 1.7% 1.9% 1.8% 1.4% 2.2% 2.3% 1.9%
SAAR -1.4 1.3 3.7 2.0 2.0 1.5 2.0
Domestic Demand YoY 1.0 1.2 1.4 0.7 0.8 0.4 0.2 1.2 1.7 1.6
SAAR -1.9 -0.7 2.1 1.5 1.8 1.5 1.7
Private Consumption YoY 1.5 1.0 1.3 1.1 2.0 1.1 0.8 0.9 1.1 1.1
SAAR 0.7 0.5 0.8 1.0 1.3 1.2 1.0
Business Investment YoY 2.5 4.2 2.5 0.4 0.7 2.1 3.0 5.3 5.2 3.1
SAAR -6.0 4.5 12.1 2.1 2.9 4.0 3.4
Housing Investment YoY -9.3 0.4 4.8 -3.0 -11.4 -21.4 -13.5 -5.0 6.1 17.8
Public Investment YoY -2.3 -4.6 -3.3 -1.9 1.0 -1.8 -7.0 -4.7 -3.3 -3.3
Exports YoY 8.7 6.6 4.2 7.9 8.6 10.8 8.5 8.2 5.8 3.9
SAAR 4.6 12.1 12.1 5.5 3.3 2.4 4.3
Imports YoY 1.7 1.9 3.0 1.4 1.5 1.9 1.4 1.5 2.3 2.6
SAAR 2.2 -0.5 1.9 2.0 2.5 2.9 2.9
Core CPI YoY 0.0 0.7 0.3 -0.1 -0.1 0.4 0.9 0.8 0.7 0.5
Nominal GDP YoY 1.3 1.4 1.8 1.2 1.1 0.7 0.3 1.5 1.8 2.0
Current Account ¥ tn 25.0 25.0 27.9 26.1 24.9 26.3 26.1 25.2 23.8 24.8
% of GDP 4.8 4.8 5.2 5.1 4.8 5.1 5.0 4.8 4.5 4.7
Unemployment Rate % 3.9 3.9 3.7 3.8 3.8 3.9 3.9 3.9 3.9 3.8
Industrial Production YoY 2.9 2.3 2.5 2.3 2.7 2.8 3.0 3.4 1.7 1.2
Corporate Profits (Fiscal Year) YoY 6.0 4.0 5.0
General Govt. Balance (Fiscal Year) % of GDP -2.8 -3.0 -3.1
F Citi forecast. SAAR Seasonally adjusted annual rate. YoY Year-on-year percentage change. Corporate profits are TSE-I non-financials consolidated recurring profits. Source: Citi.
21

February 28, 2008
Global Economic Outlook and Strategy
José Luis Alzola
(44-20) 7986-3281
jose.alzola
@citi.com
Euro Area
Our GDP growth forecast continues to inch down, following the deterioration in retail
sales and many confidence indicators in late 2007 and early this year. The economy
entered into a period of slightly subtrend growth, which will extend at least into the third
quarter. In addition to worsening global growth prospects, the downward revisions to GDP
growth — and the persistence of downside risks — mainly reflect the disappointing
performance of consumer spending in recent months. Tightening financial conditions,
aggravated since last summer by rising risk premia and the impact of higher food prices on
real incomes, is weighing on consumer outlays across the euro area. We also look for
slowing export demand and a correction from the tax-induced rise in business fixed
investment in Germany.
Unfavorable base effects and the late-2007 jump in food prices are proving more protracted
than expected. Headline inflation probably will remain above 2% until late 2008, assuming
these prices recede only gradually. Despite some well-publicized sizable pay deals, signs
of broad-based wage acceleration are absent, and worsening labor market conditions reduce
the probability of a major upturn. The strong euro also is limiting import price inflation.
Thus, we still expect inflation to settle below 2% late this year and in 2009, but this
forecast is subject to relatively high uncertainty.
Following the admission that downside risks to growth are materializing, the ECB has
opened the door for an eventual rate cut if inflation starts to slow and wage restraint
prevails. The ECB probably will maintain its key policy rate at 4% for now, but we expect
some easing later this year, probably by 50 basis points, with a first 25-basis-point cut in
the second quarter. The ECB staff’s new economic projections (to be released on March 6)
likely will downgrade GDP growth this year to somewhat below trend and keep the 2009
inflation projection below target. This combination would be an indication that the ECB is
ready to lower rates if activity indicators continue to weaken in coming months.
Figure 27. Euro Area — Economic Forecast, 2007-09F
2007 2008F
2007F 2008F 2009F 2Q 3Q 4QF 1Q 2Q 3Q 4Q
Real GDP YoY 2.6% 1.7% 1.8% 2.5% 2.6% 2.2% 1.7% 1.7% 1.4% 1.6%
SAAR 1.2 2.9 1.7 1.1 1.1 1.8 2.4
Final Domestic Demand YoY 2.2 1.6 1.8 2.2 2.3 1.8 1.6 1.6 1.5 1.8
Private Consumption YoY 1.4 1.4 1.5 1.5 1.6 1.0 1.5 1.3 1.2 1.6
Government Consumption YoY 1.9 1.5 1.4 2.0 2.1 1.7 1.4 1.5 1.4 1.8
Fixed Investment YoY 4.8 2.3 2.9 4.2 4.3 3.6 2.1 2.6 2.2 2.3
- Business Equipment YoY 5.1 1.7 2.8 4.3 4.9 4.9 2.8 2.2 1.2 0.6
- Construction YoY 4.5 2.9 2.8 4.2 3.7 2.5 1.5 3.1 3.3 3.8
Stocks (contrib. to GDP) YoY -0.1 0.1 0.0 -0.4 -0.2 0.2 0.0 0.2 0.1 0.1
Exports YoY 6.1 4.0 4.7 5.8 7.3 4.8 4.7 4.2 3.2 3.7
Imports YoY 5.3 4.3 4.9 4.8 5.9 4.3 4.1 4.8 3.7 4.5
CPI YoY 2.1 2.3 1.8 1.9 1.9 2.9 3.0 2.3 2.1 1.7
Core CPI YoY 2.0 1.9 1.8 1.9 2.0 2.3 2.3 1.9 1.8 1.6
Unemployment Rate (s.a.) % 7.4 7.3 7.3
Current Account Balance € bn 15 15 25
% of GDP 0.2 0.2 0.3
General Gov’t Balance € bn -90 -115 -115
% of GDP -1.0 -1.3 -1.2
Public Debt % of GDP 68.0 67.8 67.3
Gross Operating Surplus YoY 6.4 4.0 4.5
Oil Prices (Brent) $/barrel 72.6 94.1 91.1
F Citi forecast. SAAR Seasonally adjusted annual rate. YoY Year-to-year growth rate. The annual forecasts for GDP and its components are consistent with the quarterly (seasonally and work-day adjusted)
figures. Sources: Eurostat, national government sources, and Citi.
22

February 28, 2008
Global Economic Outlook and Strategy
Jürgen Michels
(44-20) 7986-3294
juergen.michels
@citi.com
Jürgen Michels
(44-20) 7986-3294
juergen.michels
@citi.com
Michael Saunders
(44-20) 7986-3299
michael.saunders
@citi.com
Euro Area
Germany
While German consumption disappointed again at the end of 2007, recent activity and
confidence data suggest solid growth in the manufacturing sector. With ongoing job
creation and rising wages, we continue to forecast a modest recovery in private
consumption in 2008. However, we do not expect excessive wage gains that would be a
threat to price stability. The recently negotiated 5% wage gain in the steel sector probably
will not be the pattern for other sectors, although there is a chance that public sector trade
unions will get a big increase from their 8% wage claim. With the shift to the left in the
recent state elections, the grand coalition probably will ease fiscal policy somewhat and is
unlikely to implement structural reforms before the 2009 general election.
France
The moderation in French GDP growth at the end of 2007 was in line with expectations, but
final domestic demand surprised to the upside due to a pickup in capital spending growth.
Buoyant construction activity is likely to boost investment growth at the beginning of 2008,
but tighter financing conditions probably will lead to moderation in the rest of the year.
However, the plunge in consumer confidence suggests that private consumption growth is
likely to moderate further in early 2008. Furthermore, sluggish export growth probably will
cap GDP growth in 2008. As the French government is unlikely to find support for
undermining the value of the euro, President Nicolas Sarkozy’s administration probably will
have to ease fiscal policy to keep growth from moderating, which could lead to further
deterioration of the government’s public support.
Italy
Italian GDP growth probably sank into negative territory in the fourth quarter, prompting
us to lower our 2008 forecast to well below trend. The expansion continues to
underperform that of the euro area, reflecting worsening export performance and weak
consumption. Political uncertainty — the government had to call snap elections after
losing a confidence vote — is also making a dent in business and consumer confidence,
and has virtually eliminated the chances of new reforms in the near term. The 2008 budget
proposal was less ambitious than that of 2007. The implementation of the welfare accord is
postponed, fiscal consolidation is diluted, and spending cuts are delayed. On a positive
note, unemployment reached a record low in 2007.
Figure 28. Germany, France, and Italy — Economic Forecast, 2007-09F
Germany France Italy
2007F 2008F 2009F 2007F 2008F 2009F 2007F 2008F 2009F
Real GDP YoY 2.6% 1.6% 1.9% 1.9% 1.6% 1.6% 1.6% 0.8% 1.4%
Final Domestic Demand YoY 1.2 1.0 1.4 2.3 1.8 2.0 1.7 1.2 1.3
Private Consumption YoY -0.5 1.0 1.2 2.0 1.6 1.9 1.8 0.8 1.4
Fixed Investment YoY 5.3 1.1 2.6 3.9 3.0 3.1 2.9 2.3 2.2
Exports YoY 8.0 5.2 6.0 2.7 1.1 2.8 2.1 0.6 3.2
Imports YoY 5.0 4.0 5.9 3.6 2.1 3.7 2.3 1.5 2.9
CPI YoY 2.1 1.8 1.6 1.5 2.2 1.4 2.2 2.5 1.8
Unemployment Rate % 8.4 7.8 7.6 8.1 8.0 8.0 6.0 6.1 6.1
Current Account bn 160.8 170.8 174.3 -23.5 -28.3 -30.3 -30.5 -25.0 -25.0
% of GDP 6.6 6.8 6.8 -1.5 -1.7 -1.6 -2.0 -1.5 -1.5
General Govt. Balance bn 0.4 -12.7 -17.6 -48.2 -55.8 -55.5 -35.7 -43.5 -48.0
% of GDP 0.0 -0.5 -0.7 -2.6 -2.9 -2.8 -2.3 -2.7 -2.9
General Govt. Debt % of GDP 62.7 61.3 60.6 66.8 67.6 68.1 104.5 103.0 102.4
Gross Trading Profits YoY 6.9 3.5 6.5 4.1 2.6 3.8 5.0 3.5 3.6
F Citi forecast. YoY Year-to-year growth rate. Note: The German annual figures are derived from quarterly Bundesbank data, and thus, adjusted for working days. The forecasts for GDP and its
components are calendar adjusted. Sources: Deutsche Bundesbank, Statistisches Bundesamt, and Citi.
23

February 28, 2008
Global Economic Outlook and Strategy
José Luis Alzola
(44-20) 7986-3281
jose.alzola
@citi.com
Jürgen Michels
(44-20) 7986-3294
juergen.michels
@citi.com
Tina Mortensen
(44-20) 7986-3284
tina.mortensen
@citi.com
Euro Area: Others
Spain
Spanish GDP growth remained surprisingly strong at 0.8% in the fourth quarter (not
annualized). However, a number of activity indicators declined sharply in December and
January, suggesting a significant loss of momentum, particularly of domestic demand.
Residential construction continues to moderate and probably will be a drag on overall GDP
growth later this year. Higher mortgage rates, which impinge on elevated household
indebtedness, also are limiting spending power by consumers. On the favorable side,
exports remain relatively dynamic (especially to emerging markets). In addition, the
government achieved a budget surplus of 2.2% of GDP last year, providing some room for
the automatic stabilizers to cushion the economic downturn and, perhaps, for some
expansionary measures after the March 9 elections.
Benelux
Thanks to a strong increase in net exports, Dutch GDP growth surprised again on the
upside in the fourth quarter. Furthermore, consumption accelerated at the end of last year,
and ongoing job creation, in combination with some wage acceleration, is likely to support
consumption in 2008. However, private consumption growth will be overstated this year
by about one-half percentage point due to reform of the public health plan. Facing tighter
financial conditions, investment growth is likely to slow and exports should moderate. In
Belgium, the government crisis has not had substantial negative repercussions for the
economy so far. While the interim government has managed to propose a 2008 budget,
targeting a balanced position, the country’s large parties made some progress in reforming
the constitution. However, if these talks fail, the political crisis probably will escalate
again at the end of March.
Finland
The pace of Finnish growth is expected to ease further this year, in line with the global
growth slowdown, as consumer demand is capped by intensifying price pressures and less
stimulus from the housing market. The tight labor market is fueling wage pressures,
suggesting upside inflation risks. The government will continue to strive for a prudent
fiscal policy stance, with the focal point being an improvement of long-term growth
prospects via enhanced job creation and tax cuts. However, high pay increases in recent
wage agreements pose a minor setback to planned income tax cuts.
Figure 29. Spain, Belgium, the Netherlands, and Finland — Economic Forecast, 2007-09F
Spain Belgium The Netherlands Finland
2007F 2008F 2009F 2007F 2008F 2009F 2007F 2008F 2009F 2007F 2008F 2009F
Real GDP YoY 3.8% 2.1% 2.2% 2.6% 1.7% 1.9% 3.5% 2.8% 1.8% 4.3% 2.5% 2.9%
Final Dom. Demand YoY 4.4 2.4 1.6 2.8 2.1 2.3 2.9 2.5 1.7 3.7 3.2 2.3
Public Consumption YoY 5.1 4.5 4.4 1.7 1.8 1.8 2.9 2.0 1.6 1.5 1.7 1.4
Private Consumption YoY 3.1 1.8 1.7 2.5 1.9 1.9 2.1 2.4 1.2 3.9 3.3 2.6
Investment (excl. Stocks) YoY 6.3 2.3 2.3 5.0 2.9 3.8 4.9 3.3 2.9 5.3 4.4 2.4
Exports YoY 5.3 4.1 4.0 4.6 4.2 3.7 6.4 4.6 3.7 6.2 4.5 4.9
Imports YoY 6.6 4.5 3.9 4.9 4.6 4.2 5.6 4.7 3.9 3.5 4.1 3.8
CPI (Average) YoY 2.7 3.4 2.3 1.8 2.6 1.8 1.6 2.1 2.5 2.5 2.8 2.1
Unemployment Rate % 8.1 8.4 8.8 7.5 7.2 7.1 4.6 4.5 4.5 6.8 6.3 6.0
Current Account % of GDP -9.6 -8.9 -7.5 3.0 2.5 2.4 7.6 7.3 7.2 6.1 5.7 5.4
General Govt. Balance % of GDP 2.2 1.2 0.0 -0.2 -0.3 -0.3 -0.2 0.2 0.7 4.4 4.5 4.3
General Govt. Debt % of GDP 37.3 35.8 34.4 83.7 80.0 77.9 45.7 43.5 41.0 36.5 34.0 33.0
F Citi forecast. YoY Year-on-year growth rate. The forecasts for GDP and its components are calendar adjusted.
Source: Citi.
24

February 28, 2008
Global Economic Outlook and Strategy
Michael Saunders
(44-20) 7986-3299
michael.saunders
@citi.com
United Kingdom
The U.K. economy continues to show signs of economic slowdown, and further marked
weakness is likely in coming months as the credit crunch and last year’s rate hikes bite.
We expect GDP growth this year to be about 1¾%, with consumption growth the weakest
since 1992. The MPC has already made two 25-basis-point cuts, and we expect the MPC
to cut by an additional 100 basis points over the course of the year. The gradual pace of
easing is recognition that, with rising near-term inflation and a sharp recent pickup in
inflation expectations, the MPC wants to allow a disinflationary cushion of economic
weakness to build up. Easing aims to limit the extent of the slowdown, not prevent it from
happening. In turn, this lack of aggressive early stimulus raises the likelihood that growth
remains subdued and interest rates stay low in 2009.
The United Kingdom is especially sensitive to the crisis in money and credit markets
because of the interplay between high private debt, low private savings, the massively
overstretched housing market, and the big role played by wholesale lenders in the
mortgage market. Housing demand is dropping amid tightening lending standards and
widening mortgage spreads. Commercial property values also are plunging, with the
sharpest drop since data began more than 20 years ago. In turn, consumer spending is now
starting to slow as savings begin to rise and surveys of retailers show marked weakness.
Given that sales usually lag housing by about six months, retail sales growth is likely to
slow a lot more in coming months. The labor market remains quite strong so far but
usually lags the economy by a quarter or two. Hence, employment will probably start to
weaken around midyear.
The MPC faces a tricky job in balancing downside risks to growth against upside inflation
risks. Recent surveys suggest that firms are very confident in their ability to raise selling
prices, and food and energy price increases are likely to lift CPI inflation to about 3.0%
this year. Inflation expectations already are elevated, and there is a risk that rapid easing,
amid rising inflation, could destabilize inflation expectations further and worsen the
growth-inflation tradeoff. Balancing these risks suggests that easing will be gradual.
Figure 30. United Kingdom — Economic Forecast, 2007-09F
2007 2008
2007F 2008F 2009F 2Q 3QF 4QF 1QF 2QF 3QF 4QF
Real GDP YoY 3.1% 1.7% 1.9% 3.2% 3.2% 3.0% 2.5% 1.9% 1.3% 1.2%
SAAR 3.3 2.9 2.5 1.3 0.8 0.6 2.1
Domestic Demand YoY 3.8 1.6 1.4 3.4 4.0 3.9 3.0 2.3 0.7 0.4
(Incl. Inventories) SAAR 2.6 6.2 2.8 0.4 -0.1 -0.4 1.7
Consumption YoY 3.1 0.9 1.4 2.7 3.6 3.0 2.1 1.3 0.3 0.0
SAAR 2.9 4.5 1.5 -0.3 -0.5 0.6 0.3
Investment YoY 6.6 4.6 1.5 6.4 6.0 4.9 4.8 6.7 4.3 2.5
SAAR -3.0 9.8 9.1 3.9 4.3 0.1 1.9
Exports YoY -4.6 4.0 6.9 -11.7 2.1 2.4 3.7 4.3 3.4 4.7
SAAR 1.0 8.1 1.6 4.4 3.3 4.3 7.0
Imports YoY -2.3 3.4 4.7 -10.3 4.3 5.3 5.2 5.7 1.1 1.6
SAAR -1.9 20.0 3.3 0.8 0.1 0.5 5.3
Unemployment Rate % 5.4 5.5 5.8 5.4 5.4 5.4 5.4 5.4 5.5 5.6
CPI Inflation YoY 2.3 2.5 2.0 2.6 1.8 2.1 2.4 2.3 2.7 2.4
Merch. Trade £bn -86.2 -90.1 -81.0 -19.3 -22.4 -24.7 -25.2 -22.4 -21.4 -21.1
% of GDP -6.2 -6.2 -5.3 -5.6 -6.4 -7.0 -7.0 -6.2 -5.8 -5.7
Current Account £bn -72.1 -66.2 -51.0 -13.7 -20.0 -21.8 -21.0 -16.1 -14.8 -14.3
% of GDP -5.2 -4.5 -3.3 -4.0 -5.7 -6.1 -5.9 -4.4 -4.0 -3.8
PSNB £bn FY -42.9 -48.8 -54.6
% of GDP -3.0 -3.3 -3.5
General Govt. Balance % of GDP -3.0 -3.4 -3.6
Public Debt % of GDP 42.9 44.2 45.8
Gross Nonoil Trading Profits YoY 13.2 5.9 5.8
F Citi forecast. SAAR Seasonally adjusted annual rate. YoY Year-to-year growth rate. Investment excludes inventories. Source: Citi.
25

February 28, 2008
Global Economic Outlook and Strategy
Michael Saunders
(44-20) 7986-3299
michael.saunders
@citi.com
Tina Mortensen
(44-20) 7986-3284
tina.mortensen
@citi.com
Tina Mortensen
(44-20) 7986-3284
tina.mortensen
@citi.com
Tina Mortensen
(44-20) 7986-3284
tina.mortensen
@citi.com
Switzerland
Swiss GDP will probably continue to grow at an above-average pace this year but may
moderate slightly. In light of upbeat employment prospects, domestic demand will probably
remain the main growth engine in 2008. However, the net contribution of exports to GDP
growth could decline on the back of a slowdown in global economic activity. The Swiss
National Bank will probably keep its key rate on hold at 2.75%, unless there is a clear
deterioration in the inflation outlook through a sharp weakening of the Swiss franc and a
surge in imported inflation.
Sweden
The Swedish economy is shifting into low gear with signs of slowing activity, fading
employment growth, and a leveling out of unemployment. Nevertheless, private
consumption will continue to benefit from a loose fiscal policy and healthy disposable
income growth, partly offsetting weaknesses in exports and capital spending. The
Riksbank lifted the policy rate in February amid rising cost pressures, a tight labor market,
and low productivity growth. However, the ongoing credit crisis and weakening U.S. and
global economic growth will likely turn the Bank more dovish eventually. We expect the
next move to be a cut, probably late this year.
Denmark
Growth is set to moderate further this year, reflecting the persistent sluggishness in the
housing market, the lagged effect of rising interest rates, and lower growth among
Denmark’s key export markets. Lower domestic demand growth is a welcome
development in Denmark because of the historically tight labor markets and the elevated
risks of outsized wage demands. The big challenge in coming years will be to find a way
to increase the labor supply while coping with age-dependent retirement. The central bank
is expected to continue to shadow the ECB, with a 25-basis-point interest rate spread,
leading to two rate cuts this year.
Norway
Intensifying capacity strains, lower global growth, the lagged effect of higher domestic
interest rates, and a cooler housing market will cap Norwegian growth this year. The
combination of rising cost pressures and a cyclical slowdown in productivity will lift unit
labor costs markedly in 2008 and, in turn, domestic inflation. But subdued import prices
will remain an offset. The ongoing credit crisis, a slowing global economy, and a strong
NOK prompted the Norges Bank to lower its rate path in October, indicating a 50% chance
of a final rate hike next quarter. However, intensifying cost pressures might force the Bank
to lift the policy rate further, unless external factors derail Norwegian growth prospects or
cause the NOK to strengthen sharply.
Figure 31. Switzerland, Sweden, Denmark, and Norway — Economic Forecast, 2007-09F
Switzerland Sweden Denmark Norway
2007F 2008F 2009F 2007F 2008F 2009F 2007F 2008F 2009F 2007F 2008F 2009F
Real GDP a YoY 2.6% 2.2% 2.0% 2.7% 2.3% 2.2% 1.7% 1.6% 1.6% 6.0% 4.0% 3.0%
Public Consumption YoY -0.8 0.0 0.2 0.6 1.0 0.7 1.6 1.8 1.7 3.2 3.2 3.1
Private Consumption YoY 1.8 1.6 1.7 3.1 2.5 2.4 2.1 1.7 1.7 6.5 4.1 3.7
Investment (Ex Stocks) YoY 3.9 3.0 3.2 8.0 3.7 2.5 4.9 2.5 2.3 9.8 5.3 3.6
Exports YoY 8.3 3.8 4.0 5.0 4.4 5.1 3.9 4.0 4.4 3.1 1.8 2.1
Imports YoY 3.9 4.3 4.4 9.0 6.0 5.3 5.5 4.7 4.8 8.6 4.7 4.0
CPI (Average) YoY 0.7 1.5 0.8 2.2 3.4 2.3 1.7 2.3 2.0 0.7 3.4 2.5
Unemployment Rate % 2.8 2.5 2.3 6.2 5.7 5.7 3.4 3.2 3.5 2.6 2.5 2.5
Current Account % of GDP 15.1 19.0 26.4 6.2 6.3 6.9 1.4 1.3 1.2 16.1 16.2 16.2
General Govt Balance % of GDP -0.4 0.8 0.2 2.8 2.5 2.4 4.3 3.6 3.0 17.3 16.0 16.0
General Govt Debt % of GDP 50.9 49.7 48.4 42.0 39.0 35.0 25.0 21.0 16.0 40.5 37.0 35.0
a For Norway, mainland GDP. F Citi forecast. YoY Year-on-year growth rate. Source: Citi.
26

February 28, 2008
Global Economic Outlook and Strategy
Dana M. Peterson
(1-212) 816-3549
dana.peterson
@citi.com
Canada
Anemic U.S. final demand growth, last year’s rapid appreciation of the Canadian dollar
(CAD), and ongoing financial market strains will continue to weigh on the Canadian
economy over the medium term. Flagging output and moderating inflation likely will
prompt an additional 100 basis points of easing by June.
Tighter credit conditions, a considerable net exports drag, and slower domestic demand
growth probably will result in significantly subpar growth in 2008. Accommodative policy,
against a backdrop of hearty global growth, an improved U.S. outlook, healthy Canadian
balance sheets, and elevated commodity prices should help place the expansion back on
track by late 2009.
The disinflationary effects of last year’s rapid currency appreciation and the 1% cut in the
Goods and Services Tax will keep both overall and core inflation in the lower bound of the
Bank of Canada’s (BoC) operational guide in 2008. Headline CPI should move back to the
2.0% target in 2009, but the core measure likely will settle just below 2.0%.
Key downside risks to the inflation outlook include a protracted period of net exports drag
amid a U.S. recession, the dampening effects of past and recent CAD appreciation, and a
disorderly resolution to global imbalances. Furthermore, possible moderation in global
growth or curbed investment by top Asian trading partners present an uncertain outlook for
commodity prices — a key driver of the Canadian expansion in recent years. Meanwhile,
excess consumer demand remains the main upside risk. As downside risks are likely to
dominate near term, we expect the BoC to lower its policy rate to 3% before the summer.
The stronger CAD and stricter lending standards are squeezing corporate profits in certain
key sectors, limiting investment and hiring intentions. A peak in the housing boom this year
should diminish construction spending and quell excess demand for housing-related
products. But slower demand overall should alleviate capacity pressures, limiting outsized
employment gains and wage inflation. In addition, we anticipate that a cooler economy will
likely trigger a modest retreat in the CAD versus the USD.
Figure 32. Canada — Economic Forecast, 2007-09F
2007 2008
2007F 2008F 2009F 2Q 3Q 4QF 1QF 2QF 3QF 4QF
Real GDP YoY 2.5% 1.0% 1.5% 2.5% 2.9% 2.7% 1.8% 1.0% 0.6% 0.6%
SAAR 3.8 2.9 0.7 0.1 0.4 1.0 0.9
Final Domestic Demand YoY 3.9 2.9 2.1 3.8 4.0 4.2 4.0 3.3 2.6 1.9
SAAR 4.9 4.6 4.4 2.2 2.1 1.6 1.7
Private Consumption YoY 4.2 3.3 2.6 4.5 4.0 4.1 4.0 3.3 3.1 2.7
SAAR 5.9 3.0 4.2 3.0 2.8 2.5 2.4
Government Spending YoY 2.9 2.7 2.4 2.3 3.4 3.4 3.5 3.2 2.3 2.0
SAAR 2.9 5.9 3.2 2.0 2.0 2.0 2.0
Private Fixed Investment YoY 4.1 1.9 0.2 3.7 4.6 4.7 4.2 3.1 0.9 -0.4
SAAR 4.4 7.6 4.7 0.1 0.2 -1.1 -0.8
Exports YoY 1.4 -0.3 3.1 2.3 2.2 0.1 -0.4 -1.2 -0.7 1.3
SAAR 3.1 2.3 -5.4 -1.5 0.1 4.0 2.7
Imports YoY 5.2 6.8 4.6 3.2 6.1 7.8 9.0 8.3 5.0 4.9
SAAR 7.7 18.6 5.5 4.9 4.9 4.9 4.9
CPI YoY 2.1 1.4 2.0 2.2 2.1 2.4 1.7 1.1 1.3 1.4
Core CPI YoY 2.1 1.1 1.9 2.4 2.2 1.6 1.2 0.9 0.9 1.4
Unemployment Rate % 6.0 6.3 6.4 6.1 6.0 5.9 6.1 6.3 6.4 6.4
Current Account Balance, SA C$bn 13.6 -2.5 -12.4 25.4 4.2 -0.5 -0.2 -5.0 -2.3 -2.6
% of GDP 0.9 -0.2 -0.8 1.7 0.3 0.0 0.0 -0.3 -0.1 -0.2
Net Exports (Pct. Contrib.) -1.7 -3.1 -0.9 -1.4 -4.9 -4.5 -2.7 -2.1 -0.7 -1.2
Inventories (Pct. Contrib.) 0.0 1.0 0.2 0.5 2.9 1.7 0.6 0.4 0.0 0.4
Budget Balance % of GDP 0.2 0.1 0.1
F Citi forecast. YoY Year-to-year percent change. SAAR Seasonally adjusted annual rate. Sources: Statistics Canada and Citi.
27

February 28, 2008
Global Economic Outlook and Strategy
Stephen Halmarick
Paul Brennan
Annette Beacher
(61-2) 8225-6043
Australia and New Zealand
Economic growth in Australia probably slowed slightly since the third quarter of 2007, but
not by enough to alleviate inflation pressures. The Reserve Bank of Australia’s underlying
inflation measures accelerated further in the fourth quarter, the unemployment rate fell to a
new low of 4.1% in January, and credit provided by banks has continued to grow briskly.
Moreover, lead guides such as job vacancies have remained at high levels despite a sharp
drop in business confidence. In addition, higher contract prices for iron ore and most likely
coal will help boost Australia’s terms of trade by a further 5% this year.
With inflation continuing to rise, measures of monetary policy such as the real cash rate
remain only slightly above neutral levels, even though the nominal cash rate is high.
Another 100 basis points of tightening would be required to align the real cash rate with its
peak in 2000 of just over 4%. Markets are priced for an increase of around half of this
magnitude. While we agree with market expectations, the risks are very much slanted
toward a third tightening early in the third quarter. This, in turn, could prompt economic
growth to dip below potential by the end of the year.
In New Zealand, two trends appear to be emerging: a weakening housing sector and slower
retail spending. The trend in the housing sector is more pronounced, with lower house
sales and prices. Moreover, the cooling housing sector and increased borrowing costs also
will impact consumer spending over the medium term. Lower house prices could be a
trigger for possible easing by the Reserve Bank of New Zealand, just as it raised rates in
the past due to rapidly appreciating house prices. But an easing cycle is still some way off
in our view. A tight labor market, rising wages and terms of trade, and a prospective fiscal
stimulus will underpin consumer spending this year. With significant inflationary pressures
to worry policymakers, we expect monetary policy to be on hold for all of 2008.
Figure 33. Australia and New Zealand — Economic Forecast, 2007-2009F
Australia
New Zealand
2007F 2008F 2009F 2007F 2008F 2009F
Real GDP a 3.8% 2.7% 3.4% 3.1% 2.1% 2.0%
Real GDP (4Q versus 4Q) 3.5 2.8 3.4 3.2 2.2 1.7
Real Final Domestic Demand 5.0 3.5 3.5 4.1 1.6 1.4
Consumption 4.1 3.3 3.2 4.3 0.9 0.9
Govt. Current & Capital Spending 3.1 4.4 3.4 2.1 4.0 4.6
Housing Investment 4.1 0.7 4.9 3.8 -9.2 2.0
Business Investment 11.8 4.0 3.7 5.3 4.6 4.1
Exports of Goods & Services 3.8 1.3 6.2 2.2 2.1 3.2
Imports of Goods & Services 10.4 6.5 5.3 7.0 0.6 2.0
CPI 2.3 3.3 2.8 2.4 2.8 2.4
CPI (4Q versus 4Q) 3.0 3.0 3.1 3.2 2.3 2.4
Unemployment 4.4 4.3 4.6 3.6 4.0 4.4
Merch. Trade, BOP (Local Currency, bn) -17.9 -18.5 -20.5 -3.2 -2.9 -2.9
Current Account, (Local Currency, bn) -63.6 -59.4 -63.2 -14.1 -13.6 -12.3
Percent of GDP -5.9 -5.2 -5.2 -8.2 -7.5 -6.6
Budget Balance b (Local Currency, bn) 17.2 14.4 15.3 6.1 5.2 5.2
Percent of GDP 1.6 1.3 1.5 3.6 2.9 2.9
General Govt. Debt (% of GDP) c -2.9 -1.1 -2.5 3.5 4.0 4.0
Gross Trading Profits d 13.5 5.4 7.1 NA NA Na
BOP Balance of payments basis. CPI Consumer Price Index. F Citigroup forecast. NA Not available. a Averaged-based GDP in Australia; Production in New Zealand. b Fiscal year ending June. Australia’s
underlying cash balance c Australia and New Zealand Budget definition and forecasts. – debt equals an asset. d Company gross operating surplus. Source: Citi.
28

February 28, 2008
Global Economic Outlook and Strategy
Yiping Huang
(852) 2501-2735
yiping.huang@citi.com
Minggao Shen
86 (10) 6510-2933
ext. 71068
minggao.shen@citi.com
China: Renewed Inflation Challenge
After a temporary dip in December, January consumer inflation rose to 7.1%, another 11-
year high. The elevated inflation rate is probably the result of several factors — a slow
supply response to rising demand, inclement weather, and the Chinese New Year holiday.
February CPI could rise even further. High inflation complicates macroeconomic
policymaking in China, especially with increasing weakness in the global economy, and
could result in a combination of tight monetary policy and expansionary fiscal policy.
As long as inflation remains high, the central bank will likely retain its tightening
language. High inflation could create political as well as economic instability, as evidenced
by the Tiananmen Incident in 1989. But we expect the year-to-year inflation rate to
moderate starting in March, as snowstorms and the holiday effects recede and a higher base
lowers year-to-year comparisons. Slowing exports also could ease inflation pressures by
softening aggregate demand. During the past ten years, export growth slumped twice, first
in 1998 and then in 2001. Both instances were followed by deflation.
The relatively resilient Chinese trade data for January alongside weak U.S. retail sales in
December led some investors to believe that “de-coupling” might be at work. January
export and import data, however, were likely distorted, as traders rushed to have their
products delivered ahead of the lunar holiday. More importantly, U.S. consumption
remained relatively strong until December. Weak U.S. consumption probably translates
into slowing Chinese exports with a lag of a couple of months.
We expect the government to move decisively once economic momentum slows. As in
earlier economic slowdowns, the authorities could boost domestic demand by increasing
direct spending, encouraging state sector investment, and relaxing some existing controls.
While distribution of additional funds may take some time, the authorities could accelerate
the spending process once the annual budgets are allocated after the National People’s
Congress meeting in early March.
China’s GDP growth should remain strong this year, but its structure could shift
significantly. Investment could again serve as an important countercyclical force, while
consumption is likely to soften alongside weakening exports. Demand for nontraded goods
should outperform that of traded goods, especially if cautious yuan appreciation continues,
which we expect.
Figure 34. China — Economic Forecast, 2007-09F
2007F 2008F 2009F
Real GDP YoY 11.4% 10.5% 10.0%
Real Final Domestic Demand YoY 12.7 13.3 12.4
Consumption YoY 11.3 12.2 11.4
Fixed Capital Formation YoY 15.3 14.0 13.0
Exports YoY 25.7 18.0 15.0
Imports YoY 20.8 19.5 18.0
Industrial Production YoY 18.5 16.8 16.5
Merchandise Trade Balance $bn 262.2 295.1 305.0
FX Reserves $bn 1528 1900 2000
Current Account % of GDP 10.8 8.8 7.0
Fiscal Balance % of GDP -1.8 -2.0 -1.5
General Govt. Debt % of GDP 56.1 54.2 49.2
Urban Unemployment Rate % 4.0 4.0 4.1
CPI YoY 4.8 5.0 4.0
Exchange Rate CNY/$ 7.61 6.98 6.35
One-Year Base Lending Rate %, p.e. 7.47 7.74 8.10
Source: Citi estimates.
29

February 28, 2008
Global Economic Outlook and Strategy
Don Hanna
(1-212) 816-7919
don.hanna
@citigroup.com
A weaker G3 outlook is
compromising the
emerging market outlook.
Fears of stagflation are
rising as inflation exceeds
expectations.
Inflation concerns in
emerging markets are
probably misplaced.
Emerging Markets: Food for Thought
Two developments have complicated the outlook for emerging markets in the past month:
the worsening financial stress in the United States and continued inflation shocks in food
and energy. These developments are likely to generate a combination of slow growth and
rising inflation in emerging markets, which already is garnering worries about stagflation.
However, we believe that fears of higher inflation coming from higher food and energy
prices are misplaced. While the shift to biofuels should add to food prices, we do not
expect that this will generate a lasting pickup in overall inflation in emerging markets.
With the continued deterioration in financial conditions in the United States (see Figure 4),
the risks to U.S. import demand and, thereby, growth in emerging markets is rising. The
high correlation between U.S. and emerging market share price indexes provides another
avenue for the weakening U.S. economy to influence emerging markets: Lower emerging
market share prices feed into lower emerging market wealth and, in turn, into lower
consumption. At the same time, tighter credit conditions seem to be feeding a continued
retreat from risk that damages emerging market asset values, as the widening of credit
spreads and the downdraft in stock prices indicates (see Figure 35).
Despite a softening global demand outlook, food and energy prices and headline inflation
measures continue to rise, fueling concerns about stagflation. Oil surged back over $100
per barrel, platinum reached a record high in the middle of February, and the combination
of wheat, corn, soybean, and palm oil prices are high and rising (see Figure 36). In
January, actual inflation was higher than expectations across a wide swathe of countries
including the United States, Australia, and 16 of the 19 emerging market countries that had
reported by mid-February.
Concerns about inflation in most emerging markets, though, are likely misplaced. First, the
recent softer data out of the United States, the EU, and Japan point to weakening demand
that should, with a lag, soften prices. Indeed, trends in core inflation look less worrisome
than in headline inflation (see Figures 37 and 38). 1
Figure 35. ESBI and MSCI Emerging Markets, Jun 06-19 Feb 08
Figure 36. Commodity Price Indexes, Jun 07-21 Feb 08
1450
285
170
170
1350
265
160
160
1250
245
150
150
1150
225
140
140
1050
205
950
185
850
165
750
145
650
125
Jun-06 Aug-06 Oct-06 Dec-06 Feb-07 Apr-07 Jun-07 Aug-07 Oct-07 Dec-07 Feb-08
MSCI Emerging Markets US$ (Left)
ESBI Spread (Right)
Sources: Citi and MSCI.
130
120
110
100
90
2-Jul-07 18-Aug-07 4-Oct-07 20-Nov-07 6-Jan-08 22-Feb-08
Grains Fats and Oils Energy
Note: Grains and energy are from Reuters-CRB Futures Continuous Commodity Index. Fats and
Oils prices are from CRB Spot Commodity Price Index. Source: Haver.
130
120
110
100
90
1
The alarming rise in inflation in Latin America is largely due to the seasonally adjusted surge in Venezuelan inflation to over 50% on an
annualized basis. Ex-Venezuela, Latin American inflation is up 5.5% at an annual rate.
30

February 28, 2008
Global Economic Outlook and Strategy
The recent supply shock
is small relative to past
shocks.
Rising food prices are a
particular concern.
Demand for biofuels has
pushed up food prices...
...but the boost is not
large.
Food price increases are
relative price increases.
To affect inflation, relative
price increases have to be
large and persistent.
Richer economies spend a
smaller proportion of
income on food.
Second, stagflation would need to arise from large supply shocks that drive up costs
significantly. Much of the rise in commodity prices in the past few months can be linked to
supply shocks, but in the aggregate they do not look as abrupt and large as the oil price
shocks of 1973 and 1979 that prompted ensuing periods of stagflation. The average price
of WTI crude oil shot up 168% between 1973 and 1974, 166% between 1979 and 1980,
and just 58% year to year in February 2008.
Some investors cite concerns about a secular rise in agricultural prices, driven by a
combination of higher demand for some foods as a source of biofuel, rising incomes in
emerging markets, and more unpredictable weather. While arguments that these forces will
continue to drive up food prices may have some merit, the increases in overall emerging
market inflation in 2008 should be much more muted for several reasons.
First, some researchers do find sustained pressure on wheat, corn, soybean, and palm oil
prices from aggressive expansion of biofuels. However, the implied increases are small
relative to recent price gains. For example, an International Food Policy Research Institute
study finds increases that cumulate to 15%-30% for wheat over the next 12 years and 20%-
40% for corn. 2 But these figures are all less than the price rises in these products in the
past 18 months as oil prices have nearly doubled. A renewed surge in energy prices could
fuel another round of food price increases, as it would shift demand toward biofuels. But
any increase in energy prices is unlikely to be as steep as the runup in the past year. That
alone should dampen food price inflation.
Furthermore, the pressure on food prices from increased demand for biofuels would occur
mainly under circumstances that are unlikely to persist — that is, no improvement in the
efficiency of biofuels production and the continuation of U.S. and EU government
subsidies. The rise in oil prices has boosted the profitability of producing biofuels, which
is likely to encourage improved efficiency. Rising food prices may alter some of the
public’s support for subsidies to biofuel production and eliminate the need for government
programs to artificially restrain agricultural production as a support for farm incomes.
Second, increases in food prices are an increase in relative prices, not in the absolute price
level. With a larger proportion of income spent on food bills, less money is available to
spend on other products, which tends to dampen those other product’s prices and offset the
initial shock, leaving the general price level unchanged.
Relative prices can influence inflation if adjusting prices is costly so that firms absorb
small changes rather than pass them on to consumers. Thus, only large changes get
reflected in price measures. 3 In the case of a relative price shock, such as the recent rise in
food prices, a large price change in one sector is not offset by small opposite adjustments
in prices of other products. However, for inflation to persist, future large shocks would
need to occur.
Third, rising incomes can alter the sorts of food that people demand and, over time, reduce
the proportion of income spent on it. This can be seen in the lower share of consumer
baskets spent on food in high-income countries (15%-20% versus 35%-40% in emerging
markets). The shifting pattern of food consumption can also be seen in the rising demand
2
See von Braun, Joachim, and P. K. Pachauri, Essay: The Promises and Challenges of Biofuels for the Poor in Developing Countries,
International Food Policy Research Institute, 2006.
3
For a discussion of inflation, relative prices, and the skew in their changes, see Ball, Laurence and Greg Mankiw, “Relative-Price Changes as
Aggregate Supply Shocks,” Quarterly Journal of Economics, Vol. 110: No. 1 (Feb, 1995) pp. 161-193.
31

February 28, 2008
Global Economic Outlook and Strategy
Figure 37. Headline Consumer Price Inflation in Emerging Markets
(Sequential Three-Month Seasonally Adjusted Percent Change),
Jun 03-Jan 08
4.0% 4.0%
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
-0.5
Jun-03 Dec-03 Jun-04 Dec-04 Jun-05 Dec-05 Jun-06 Dec-06 Jun-07 Dec-07
Asia ex China China CEEMEA Latin America
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
-0.5
Figure 38. Core Consumer Price Inflation in Emerging Markets
(Sequential Three-Month Seasonally Adjusted Percent Change),
Jun 03-Jan 08
9% 9
9% 9
8
8
7
7
6
6
5
5
4
4
3
3
2
2
1
1
0
0
Jun-03 Dec-03 Jun-04 Dec-04 Jun-05 Dec-05 Jun-06 Dec-06 Jun-07 Dec-07
Asia Latin America CEEMEA
Note: GDP weighted. Asia — Hong Kong, Indonesia, Korea, Philippines, Singapore, Taiwan,
Thailand. CEEMEA — Czech Republic, Hungary, Poland, Slovakia, Turkey, Israel, South Africa.
Latin America — Argentina, Brazil, Chile, Mexico, Peru, Venezuela.
Sources: Haver and Citi.
Note: Core inflation is defined as 20% trimmed in Asia and by respective government national
statistics offices in CEEMEA and Latin America. GDP weighted. Asia — Hong Kong, Indonesia,
Korea, Philippines, Singapore, Taiwan, Thailand. CEEMEA — Czech Republic, Hungary, Poland,
Slovakia, Turkey, Israel, South Africa. Latin America — Argentina, Brazil, Chile, Mexico, Peru,
Venezuela. Sources: Haver Analytics and Citi.
for meat in China and India. Spending a lower share of income does not preclude an
absolute rise in food demand, but it does lower the increase in that demand relative to
income growth, giving supply adjustments a better chance of keeping pace.
Low food inventories are
exacerbating price
movements.
Food price inflation
probably is complicating
monetary policy in the
short run.
Other measures to
stabilize food prices are
widespread but could
prove destabilizing in the
future.
Third, the rise in food prices is in part a reflection of the low levels of stocks that translate
demand surges more directly into price increases and increase the volatility of prices. In
the United States, for example, wheat stocks are at their lowest levels since the 1930s. But
price increases that stem from demand shocks and low inventories should, over time, lead
to substitution to cheaper foods and/or innovations that improve yields and thereby supply.
While food price inflation is, in our view, likely to moderate, its current elevated level
constrains the scope of some central banks to use countercyclical monetary policy in the
face of weakening external demand. Food price inflation threatens the credibility of
inflation targets, forcing inflation-targeting central banks to take a more hawkish stance, as
has been the case in Slovakia, Turkey, and Brazil. Elsewhere, rising food prices can feed
into inflation expectations, forcing central banks into a tighter stance. However, the yield
curves of most countries do not reflect large changes in steepness that would be consistent
with higher expected future inflation.
Besides constraining monetary policy, high food prices have engendered a spate of market
interventions in a variety of countries — price controls, export bans, tax increases, import
tariff cuts — designed to shelter domestic consumers. Such interventions have been
especially prominent in China, India, Vietnam, Indonesia, Argentina, and Mexico. While
designed to lessen the social disruption and unrest that higher food prices can foster, the
export bans and price controls either shift burdens to trading partners or risk shortages.
Prominent price controls also risk future spikes in inflation if ensuing shortages become
unmanageable.
32

February 28, 2008
Global Economic Outlook and Strategy
Even if stagflation
subsides, the long-term
trend for the relative price
of food to rise looks
intact.
Higher food prices could
moderate the pressure for
urbanization by lifting
rural incomes.
While the risk of food price inflation appears set to ease over the course of this year in the
face of weaker aggregate demand and more stable energy prices, the long-term trend for
food prices to increase relative to manufactured products looks robust. As mentioned, the
increased demand for food as a source of energy will tend to inflate grain and oil seeds.
Meanwhile, the average level of manufacturing productivity remains low in emerging
markets relative to the G7. Relocating manufacturing production to emerging markets and
raising productivity there can generate higher profits or lower selling prices.
Finally, a relatively higher price for commodities, especially food, could diminish some of
the pressure for urbanization and the associated stress on emerging market cities. Higher
food prices would tend to boost rural incomes relative to urban wages, lessening the
attractiveness of migrating to cities.
33

February 28, 2008
Global Economic Outlook and Strategy
Latin America
Argentina. The main focus of attention starting in March will be wage negotiations. The
government wants wages to increase by 20%, while some unions are demanding about
30%. We believe that the final hike will be closer to the government target, although risks
are high. The harvest will likely be flat this year and the summer tourism season was
disappointing. In addition to the prospects of energy restrictions, these developments
provide some counterbalance to strong demand growth, high commodity prices, and
expansionary policies. The January inflation report showed that the government will likely
continue to introduce “methodological innovations” in the calculation of the CPI. The
focus will be on the discussions between Finance Minister Lousteau and Secretary of
Domestic Commerce Moreno regarding these statistical reforms. We have lowered our
yearend official inflation forecast to 10% from 11.3% to reflect greater manipulation. We
believe that interbank rates will likely increase in March, but a lax monetary policy may
result in a slower-than-expected rise. We expect strong fiscal figures during the first
quarter due to healthy growth, strong imports, and higher export taxes.
Mexico. GDP grew by an annual 3.8% in the fourth quarter of 2007, and 3.3% for the year
as a whole. But the first signs of an economic slowdown appeared at the end of last year.
We think low growth rates are very likely for the first half of 2008 due to the effect of the
U.S. slowdown on export-oriented manufacturing output. However, we estimate that this
impact will be partially cushioned by a reasonable expansion in local demand. Our GDP
growth forecast for this year remains at 2.9%. Although annual headline inflation in
January dropped to 3.7% from 3.8% in December, we expect a rebound in the next few
months with readings above 4%, the upper limit of Banxico’s tolerance range. We think
Banxico is unlikely to cut interest rates until inflation readings show a definitive
downward trend and return to below the 4% threshold, probably in the second half. Our
yearend inflation and overnight rate forecasts remain at 3.8% and 6.75%, respectively. We
also continue to expect a relatively strong peso in the first half of 2008. However, by the
second half, a smaller spread in policy rates between Mexico and the United States, along
with a larger current account deficit from lower oil prices, may push the USD/MXN to
11.0. Congressional negotiations on energy reform should be followed closely, as many
local analysts expect a bill on this issue to be submitted by President Calderón to Congress
in March.
Venezuela. Developments this month will be influenced by the aftermath of the U.K. court
hearing, where ExxonMobil seeks to uphold a court order to freeze US$12 billion in the
state oil company’s (PDVSA) assets pending an outcome on arbitration proceedings.
PDVSA will defend its case in that court on February 27, likely arguing that the amount
frozen is far above the fair value of ExxonMobil’s expropriated share in the Cerro Negro
oilfield (between US$2 billion and US$5 billion by most accounts), and showcasing its
willingness to negotiate and compensate appropriately. If the freeze is upheld, it could
have important negative cash flow consequences for PDVSA, which has less than 5% of its
assets in cash, and would hamper the company’s ability to raise new financing. This ability
is, in turn, crucial to the government, which is squeezing the company’s resources to
finance fiscal expenditure growth ahead of important regional elections set for November
2008. Meanwhile, macroeconomic imbalances will likely continue to deepen. In particular,
inflation of over 24% and scarcity levels of up to 90% in some basic products have
triggered social discontent and are meaningfully denting the political capital of President
Chávez. However, oil prices near US$100 will allow the country to maintain a comfortable
stock of assets and a balance of payments surplus over the near term, sustaining the
34

February 28, 2008
Global Economic Outlook and Strategy
country (and PDVSA’s) ability to meet debt service payments comfortably. However, the
high dependence on oil sales to the United States means that threats of retaliation in the
wake of the ExxonMobil case are unlikely to be carried out.
Asia
India. We expect growth to moderate from 8.7% in fiscal year 2008 to 8.3% in fiscal year
2009, amid a deteriorating global economic environment coupled with continuing higher
domestic interest rates. Growth would have been slower had it not been for positive
structural changes and the uptrend in savings and investment. With 2008 being a preelection
year, we expect renewed focus on infrastructure, health, education, and
agriculture/rural development.
In January, the central bank kept all rates unchanged and said that risks to inflation have
demanded priority over growth. After keeping domestic fuel prices on hold since it cut
them in February 2007, when oil prices were US$58 per barrel, the government raised
transport fuel prices by 4%. As this price hike is far lower than what is necessary to meet
import costs, the government has increased the quantity of oil bonds, an off-balance sheet
fiscal item, to compensate domestic oil companies. If all the off-balance sheet items are
included in the budget arithmetic, the headline deficit would rise by roughly 120 basis
points. Against this backdrop, we expect the pace of rupee appreciation to be limited to 5%
and thus maintain our yearend target of R37/US$.
Philippines. Fundamentals remain solid, even as the global economy slows down. Fourth
quarter GDP grew by 7.3% year to year. The downside risk from potential export
weakness, investor risk aversion, and heightened political risk premia relating to the latest
corruption allegations are likely to weaken the upbeat momentum. In late January, shortterm
bank rates spiked to the low double-digit range, well above the policy rate of 5%.
Special deposit accounts increased as liquidity sought safer outlets. If credit and monetary
conditions continue to tighten without a corresponding policy rate response, interest rate
volatility could be negative for consumer and business sentiment.
A possible stall of infrastructure spending remains the major threat to domestic demand
this year. Persistent financial market tightening could also aggravate downside risks. This
worst-case scenario could transpire if tax collection efficiency fails to improve the
government’s cash flow. The deficit may balloon in the first half of 2008 if the bulk of the
PHP200 billion infrastructure program is front-loaded as a fiscal hedge against offshore
downside influences. We expect peso appreciation to the 37.50 range against the USD in
the second half. Easing inflation risk in the second quarter, a strong peso, and a less robust
cyclical environment set the stage for a policy rate cut of another 50 basis points later this
year.
Singapore. The fairy-tale combination of strong growth and low inflation has come to an
end. Fourth-quarter real GDP grew 5.4%, below market expectations of 6%. The
government has revised down its 2008 GDP growth forecast range to 4%-6% from 4.5%-
6.5%. Our GDP forecast for 2008 stands at 5.6%, taking into account a manufacturing
contraction in the first half. But further downgrades closer to 4% are possible if the U.S.
recession proves deeper or longer than we currently foresee.
Despite a slowdown in potential growth, we expect inflation to accelerate to 5% from 2.2%
in 2007. The combined impact of fuel and food price increases, hikes in electricity tariffs,
and a 20% upward revision in imputed rents to public housing (HDB annual values) in
January may push inflation through 6% in the first half, before moderating to around 4% in
35

February 28, 2008
Global Economic Outlook and Strategy
the second half when the sales tax base effects kick in. The government also raised its
inflation forecast to 4.5%-5.5% for 2008, from 3.5%-4.5%. Despite sharply higher
inflation, downside risks to growth may make it difficult for the Monetary Authority of
Singapore to tighten further in April. Instead, fiscal measures, including generous rebates
and handouts, have been used to offset higher living costs for households, especially in the
lower income groups.
Taiwan. GDP growth at the end of 2007 came in higher than expected on strong export
growth. While this growth will likely diminish in 2008, we expect the USD/NTD to
appreciate. First, diminishing political risks and expected liberalization of the government’s
mainland China policy should boost investor sentiment and encourage a net capital inflow.
Second, with narrowing interest rate differentials between the United States and Taiwan,
exporters and dollar-holding retail investors have started to sell dollars more aggressively.
This also imposes higher sterilization costs for the central bank’s currency intervention.
Third, rising labor costs and continuous RMB appreciation concerns in China have forced
some Taiwan enterprises to shift their FDI funds back to Taiwan. Fourth, the central bank
has been reluctant to loosen monetary policy on enduring inflation concerns. The key event
to watch is the March presidential election. If the KMT party candidate Ma Ying-jeou wins,
the NTD could gain more significantly. Our yearend NTD forecast is 30.6.
We believe the central bank will hike policy rates once more by 12.5 basis points in March
and thereafter shift policy measures to allow more appreciation of the currency. The
market, however, increasingly expects no change in policy rates at the March meeting. Net
capital inflows and a limited supply of government bonds likely will boost bond prices and
benchmark ten-year government bond yields likely will consolidate in the first half of
2008.
Central Europe, Middle East, Africa
Israel. Economic growth will probably slow in 2008 in response to weaker import demand
in Israel’s major partners, particularly the United States. Nonetheless, leading indicators of
expansion so far remain well oriented, suggesting continued resilience in the domestic
economy (including export-oriented sectors). Dynamic job creation and a gradual
acceleration in wages — as the labor market tightens — is boosting consumer demand,
while more stable economic and policy conditions also are boosting fixed investment
growth. Consequently, we still expect somewhat above-par growth of 4.6% in 2008.
The implications for policy are mixed: While strong growth, the closing of the output gap,
and faster unit labor cost growth are boosting domestic price pressures, upside pressure on
the shekel and downside global growth risks improve the inflation outlook. Surprisingly,
the central bank opted for an aggressive 50-basis-point rate cut on February 25, even after
hinting at a neutral stance in earlier weeks. Additional easing cannot be ruled out, but we
lean toward no policy change in coming months because we do not expect the shekel to
appreciate further. We still believe that equilibrium short-term rates are somewhat higher
than their current levels, though the long end of the bond market offers attractive returns,
in our view — even if short rates end up rising again somewhat.
Romania. In view of forward-looking growth indicators, we estimate that GDP growth
softened to 5.8% in 2007 from 7.7% in 2006 and forecast further weakening to around 5%
this year. Volatile food prices and further currency weakness — along with the possibility
of administrative price hikes — continue to cloud the inflation outlook. Barring
36

February 28, 2008
Global Economic Outlook and Strategy
unexpected shocks, we believe that yearend 2008 inflation is likely to be around 5.8%,
which is above the 4.8% upper band of the target.
While the large external gap calls for a strong policy response, fiscal tightening is unlikely
ahead of the upcoming elections. Therefore, the onus will be on the central bank, which
has hiked rates aggressively since the beginning of the year. The tight international
financing picture exposes the country to a sudden halt in capital inflows and introduces
additional uncertainty to the exchange rate outlook. However, we think the probability of a
soft landing is still reasonably high.
Russia. The trade, services, and construction sectors are likely to drive sustainable
economic growth of around 6.6% this year. Russia’s dependence on commodities and the
continuing high rate of inflation remain serious constraints to faster growth. Stronger-thanexpected
energy export revenues have led the government to revise up the 2008 federal
government fiscal surplus to 3% of GDP from 0.2%. We expect the surplus to exceed 5%
of GDP.
We forecast a moderation of the net foreign exchange inflows — the sum of the current
account surplus and net capital inflows — to 9% of GDP from 12.3% in 2007. In principle,
this should ease inflationary and ruble appreciation pressures, although inflation is set to
accelerate in the short run. While the central bank likely will continue to target inflation
and real ruble appreciation, we expect the bank gradually to shift its interest rate policy,
with the aim of making short-term interest rates less negative in real terms.
Saudi Arabia. High oil prices have not helped Saudi Arabia as much as other oil
exporters, since the Kingdom is the swing producer in OPEC and produced below its
production quota for most of last year. With the oil sector accounting for 55% of GDP in
2006, the slowdown in oil production last year pushed down growth to 3.5% against a
figure of 4.3% in 2006. With oil prices again firming and Saudi production increasing
since last September, we expect real growth to hit 5.5% in 2008. This will be
complimented by robust nonoil growth, which we project at 7.5%.
As we expect the OPEC basket to average US$73.8 per barrel in 2008 against $70.5 per
barrel in 2007, Saudi Arabia will remain in comfortable surpluses on the fiscal side and the
external sector side. We project the fiscal surplus at 14.8% of GDP this year and the
current account surplus at 17.3%. Both have narrowed slightly, reflecting the impact of
strong domestic growth driven by an expansionary fiscal stance. However, inflation is a
growing problem with the year-to-year increase of 6.5% in December, a 16-year high.
With a strong political commitment to the fixed dollar peg, Saudi Arabia is unable to
contain imported inflation from a weak dollar and it is unable to resist the direction of U.S.
Federal Reserve policy. We expect inflation to remain a problem, as the trend increase in
private-sector credit growth will continue to feed demand pressures and an adequate fiscal
policy contraction in the face of surging government revenue looks unlikely.
37

February 28, 2008
Global Economic Outlook and Strategy
Figure 39. Selected Emerging Market Countries — Economic Forecast Overview, 2007-09F
GDP Growth CPI Inflation Current Balance (% of GDP) Fiscal Balance (% of GDP)
2007F 2008F 2009F 2007F 2008F 2009F 2007F 2008F 2009F 2007F 2008F 2009F
Asia 8.7% 8.1% 8.1% 4.1% 4.5% 3.9% 7.0% 5.6% 4.7% -1.1% -1.7% -1.4%
Bangladesh 6.2 6.0 6.5 7.5 6.5 6.5 1.2 -0.1 -1.1 -4.4 -4.6 -4.7
China 11.4 10.5 10.0 4.8 5.0 4.0 10.8 8.8 7.0 -1.8 -2.0 -1.5
Hong Kong 6.3 5.3 5.5 2.0 3.7 4.8 11.3 9.1 7.0 7.2 -0.4 2.6
India* 8.7 8.3 8.5 4.5 4.3 4.0 -1.2 -1.9 -1.8 -6.0 -5.8 -5.2
Indonesia 6.3 6.2 6.5 6.4 6.7 6.9 2.0 1.4 0.8 -1.3 -1.5 -1.7
Korea 4.9 4.6 4.8 2.5 3.3 2.5 0.6 -1.3 -0.6 2.0 2.0 1.5
Malaysia 6.3 5.6 6.5 2.0 2.8 2.6 15.0 12.5 12.0 -3.2 -3.3 -3.1
Philippines 7.3 6.5 7.5 2.8 3.9 3.5 3.7 3.3 2.8 -0.1 -0.4 0.0
Singapore 7.7 5.6 6.8 2.1 5.0 2.6 29.2 26.0 25.0 10.7 8.0 7.0
Sri Lanka 6.7 6.0 6.5 16.0 12.0 9.0 -2.8 -3.1 -2.7 -7.2 -7.1 -7.2
Taiwan 5.7 4.5 5.0 1.8 2.3 1.8 8.3 7.2 6.2 -0.2 -0.4 -0.3
Thailand 4.8 4.5 5.3 2.3 3.5 2.8 6.1 5.6 5.4 2.1 -1.7 -0.5
Vietnam 8.5 8.1 8.3 8.3 8.8 7.0 -9.0 -8.5 -5.1 -1.8 -2.3 -2.5
Latin America 5.3% 4.4% 3.8% 5.2% 6.6% 7.1% 0.8% -0.2% -1.0% 0.1% 0.1% -0.3%
Argentina 8.6 5.7 3.0 8.8 9.1 13.7 2.7 2.8 1.2 0.1 0.8 -0.6
Brazil 5.3 4.4 4.0 3.6 4.7 4.5 0.3 -0.6 -1.0 -1.4 -0.7 -0.4
Chile 5.1 4.5 4.7 4.4 6.5 3.3 4.3 0.8 1.1 8.9 7.0 4.0
Colombia 7.1 5.3 4.8 5.3 5.3 4.5 -3.7 -4.1 -4.1 -0.6 -1.5 -1.5
Ecuador 2.0 2.5 3.5 2.3 4.2 3.2 3.3 2.3 2.0 3.3 2.3 1.2
Mexico 3.3 2.9 3.7 4.0 3.9 3.5 -0.9 -1.8 -2.3 0.0 0.0 0.0
Panama 10.3 9.0 8.0 4.2 5.7 4.7 -5.3 -6.8 -6.9 0.0 0.0 0.0
Peru 8.5 7.5 6.5 1.8 4.1 3.2 1.4 0.1 0.2 6.5 5.1 2.2
Uruguay 7.2 6.0 4.5 8.1 6.7 6.0 -2.0 -1.3 -2.0 0.0 -0.5 -0.5
Venezuela 8.4 5.9 1.5 18.7 27.8 32.5 8.5 5.4 0.9 -1.5 -2.0 -3.9
Europe 6.5% 5.5% 5.8% 7.4% 9.5% 6.8% -0.6% -0.4% -1.5% 1.1% 1.1% 0.8%
Czech Republic 6.6 4.7 5.2 2.8 6.3 3.4 -3.1 -2.8 -2.1 -2.1 -1.9 -2.1
Hungary 1.3 2.2 3.2 8.0 5.9 3.8 -5.3 -4.7 -4.2 -5.7 -4.0 -3.7
Poland 6.5 5.0 4.7 2.5 4.2 3.0 -3.7 -4.7 -4.6 -1.5 -2.1 -2.5
Romania 5.8 4.9 5.8 4.8 6.8 4.5 -14.0 -13.0 -12.5 -2.4 -2.6 -2.6
Russia 8.1 6.6 6.5 9.0 12.9 8.9 5.9 6.2 3.3 5.4 5.6 5.0
Slovak Rep. 9.8 7.5 6.6 2.8 3.1 2.9 -4.8 -2.9 -2.5 -2.3 -1.9 -1.8
Turkey 3.8 4.2 5.2 8.8 7.8 6.5 -7.7 -8.3 -6.8 -2.2 -2.4 -3.2
Ukraine 7.3 6.6 5.8 12.8 14.8 9.9 -4.6 -6.9 -8.0 -0.9 -2.1 -2.8
Africa/Mideast 5.5% 5.3% 4.8% 6.4% 6.3% 6.0% 10.1% 7.8% 3.6% 6.2% 4.7% 1.7%
Egypt 7.9 6.1 4.5 9.5 8.1 8.5 1.1 -0.7 -2.1 -4.8 -6.5 -6.6
Israel 5.4 4.6 4.4 0.5 1.6 1.4 3.1 3.1 3.8 0.1 -0.1 0.5
Jordan 5.9 5.0 5.1 5.4 5.0 3.7 -9.3 -6.0 -6.9 -5.5 -5.3 -5.6
Kazakhstan 8.5 5.7 6.6 10.8 15.6 12.2 -1.9 -1.2 -0.9 -1.8 -2.0 -1.6
Kuwait 4.4 4.9 2.3 5.3 4.0 3.8 52.2 51.4 46.1 28.0 24.7 16.7
Lebanon 2.0 2.9 2.3 5.7 5.2 2.3 -2.9 -6.7 -9.0 -15.5 -17.7 -19.8
Nigeria 5.7 6.9 7.1 5.4 8.2 9.5 0.8 4.9 2.2 -3.5 -2.8 -2.3
Pakistan 6.0 6.6 6.5 8.8 6.0 6.4 -5.7 -4.8 -5.0 -5.4 -5.5 -5.3
Qatar 7.2 6.2 7.0 12.1 10.7 8.3 16.1 9.3 3.5 6.3 2.3 -2.0
Saudi Arabia 3.5 5.5 4.0 4.1 3.9 3.8 23.1 17.3 8.0 18.1 14.8 6.2
South Africa 5.1 3.5 4.3 7.1 6.1 5.4 -7.1 -7.7 -7.7 0.8 0.3 0.2
United Arab Emirates 7.6 5.6 4.0 9.2 8.4 8.0 17.4 11.9 2.2 12.7 12.5 8.4
Total 7.2% 6.5% 6.4% 5.2% 6.1% 5.4% 4.6% 3.5% 2.3% 0.4% -0.1% -0.4%
Source GDP and CPI are expressed as year-to-year percent change. Calendar years except fiscal years for Bangladesh, India, and Pakistan. F Citi forecasts. Source: Citi.
38

February 28, 2008
Global Economic Outlook and Strategy
Figure 40. Citi Economic and Market Analysis (EMA) Team
Name Office Number Email Address Responsibilities
NEW YORK Lewis Alexander (1-212) 816-9888 lewis.alexander@citi.com Chief Economist
Kim Schoenholtz (1-212) 816-9866 kim.schoenholtz@citi.com Economic Advisor
North America
Robert DiClemente (1-212) 816-7942 robert.diclemente@citi.com Head, North America
Peter D’Antonio (1-212) 816-9889 peter.dantonio@citi.com U.S. Forecast
Steven Wieting (1-212) 816-7148 steven.wieting@citi.com Equity Themes
Christopher Wiegand (1-212) 816-9892 christopher.wiegand@citi.com U.S. Economic and Fiscal Outlook
Ken Peng (1-212) 816-7184 ken.peng@citi.com Equity Themes
Dana Peterson (1-212) 816-3549 dana.peterson@citi.com U.S. Forecast and Canada
Emerging Markets
Donald Hanna (1-212) 816-7919 don.hanna@citi.com Global Head, Emerging Markets
Alberto Ades (1-212) 816-2735 alberto.ades@citi.com Head, Latin America
Tania Reif (1-212) 816-6281 tania.reif@citi.com Equity Themes, Venezuela
Jose Wynne (1-212) 816-9895 jose.wynne@citi.com Peru, Ecuador
LONDON
Western Europe
Michael Saunders (44-20) 7986-3299 michael.saunders@citi.com Head, Western Europe and U.K. Coverage
José Luis Alzola (44-20) 7986-3281 jose.alzola@citi.com Euro Area and ECB Specialist
Juergen Michels (44-20) 7986-3294 juergen.michels@citi.com Euro Area (Germany)
Tina Mortensen (44-20) 7986-3284 tina.mortensen@citi.com Nordics
Ann O’Kelly (44-20) 7986-3297 ann.okelly@citi.com Europe
Richard Reid (44-20) 7986-4307 richard.reid@citi.com Equity Themes
Stuart Block (44-20) 7986-3293 stuart.block@citi.com Equity Themes
Emerging Markets
David Lubin (44-20) 7986-3302 david.p.lubin@citi.com Head, CEEMEA
Ali Al-Eyd (44-20) 7986-4356 ali.aleyd@citi.com Kazakhstan, Ukraine
David Cowan (44-20) 7986-3285 david.cowan@citi.com Sub-Sahara Africa
Mushtaq Khan (44-20) 7986-3291 mushtaq.khan@citi.com Middle East
TOKYO Kiichi Murashima (813) 5574-4729 kiichi.murashima@nikkociti.com Head, Japan
SYDNEY Paul Brennan (612) 8225-4899 paul.brennan@citi.com Co-Head, Australia and New Zealand
Stephen Halmarick (612) 8225-6043 stephen.halmarick@citi.com Co-Head, Australia and New Zealand
Annette Beacher (612) 8225-6183 annette.beacher@citi.com Australia, New Zealand
Shane Lee (612) 8225-6042 shane.lee@citi.com Australia
HONG KONG Yiping Huang (852) 2501-2735 yiping.huang@citi.com Head, Emerging Asia
Joe Lo (852) 2868-8442 joe.lo@citi.com Hong Kong
Patricia Pong (852) 2868-8449 patricia.pong@citi.com Hong Kong
SINGAPORE Hak Bin Chua (65) 6432-2057 hak.bin.chua@citi.com Equity Themes, Asia
Kit Wei Zhang (65) 6328-5079 kit.wei.zheng@citi.com Singapore, Malaysia
MUMBAI Rohini Malkani (91) 22-6631-9876 rohini.malkani@citi.com India, Bangladesh, Sri Lanka
Anushka Shah (91) 22-6631-9878 anushka.shah@citi.com India, Bangladesh, Sri Lanka
JOHANNESBURG Jean-François Mercier (27) 11 944-0813 jean.mercier@citi.com South Africa, Israel
BUENOS AIRES Marcos Buscaglia 54 (11-4) 329-1104 marcos.buscaglia@citi.com Argentina, Chile, Uruguay, Paraguay
SAO PAULO Marcelo Kfoury 55 (11) 4009-3470 marcelo.kfoury@citi.com Brazil
BEIJING Minggao Shen 86 (10) 6510-2933, x7141 minggao.shen@citi.com China
SHANGHAI Ken Peng 86 (21) 2896-6600 ken.peng@citi.com China
TAIPEI Cheng-Mount Cheng 886 (2) 2777-7070 chengmount.cheng@citi.com Taiwan
Renee Chen 886 (2) 2777-7063 renee.chen@citi.com Taiwan, Vietnam
JAKARTA Anton Gunawan 62 (21) 5290-8423 anton.gunawan@citi.com Indonesia
SEOUL Suktae Oh 82 (2) 2077-4014 suktae.oh@citi.com Korea
MANILA Jun Trinidad 63 (2) 894-7270 jun.trinidad@citi.com Philippines, Thailand
39

February 28, 2008
Global Economic Outlook and Strategy
Figure 41. Recent Publications from the Citigroup Economic and Market Analysis (EMA) Team
Title Contact Name Date of Publication
Annual Report
Industrial Countries
Prospects for Financial Markets Lewis Alexander November 21, 2007
Monthly Reports
Industrial Countries
Global Economic Outlook and Strategy Lewis Alexander January 2008
Emerging Markets
Emerging World Don Hanna January 2008
Weekly Reports
Industrial Countries
Comments on Credit (North America)
Robert V. DiClemente
“Right Here, Right Now” February 22, 2008
“No Let Up” February 15, 2008
“Markets Struggle to Discount Recession” February 8, 2008
“Another Step in the Right Direction” February 1, 2008
Euro Weekly
Michael Saunders
“Confusing Price Expectations” February 21, 2008
“Changing Fortunes” February 14, 2008
“Language Acrobatics” February 7, 2008
“Toward A Policy Debate” January 31, 2008
Sterling Weekly (United Kingdom)
Michael Saunders
“The Crunch Goes On” February 22, 2008
“MPC’s Flinty Message” February 15, 2008
“MPC On Gradual Easing Path” February 8, 2008
“The MPC’s Dilemma” February 1, 2008
Issues and Prospects (Japan)
Kiichi Murashima
“Resilient Consumer Spending through 2008” February 21, 2008
“Q4 GDP Surprises to the Upside” February 15, 2008
“Solid Exports albeit Moderating” February 7, 2008
“Will Industrial Production Peak Out” January 31, 2008
Australia and NZ Weekly: Economy and Markets
Stephen Halmarick
“Australia: The Upside on Rates” February 22, 2008
“Australia: Smash Through or Smashed Up” February 15, 2008
“The AUD, Interest Rates, Commodities and Inflation” February 8, 2008
“Heading In Different Directions” February 1, 2008
Emerging Markets
Asian Economic Weekly
Eastern Europe/Middle East/Africa Weekly
Latin America: The Week Ahead
EMA research is available through your sales representative via mail or the Internet.
Don Hanna
40

February 28, 2008
Global Economic Outlook and Strategy
Notes
41

February 28, 2008
Global Economic Outlook and Strategy
Notes
42

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