Global Economic Outlook and Strategy - Kadin Indonesia

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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
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