Global Economic Outlook and Strategy - Kadin Indonesia

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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
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