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THE GLOBAL OUTLOOK

THE GLOBAL OUTLOOK. JUNE 2010 TREVOR WILLIAMS CHIEF ECONOMIST WHOLESALE MARKETS. CONSIDERABLE FISCAL SUPPORT HAS BEEN PROVIDED TO HEAD OFF GLOBAL RECESSION …. Fiscal balance, % of GDP. 2. Forecast. 0. -2. World. -4. Emerging and developing. -6. economies. -8. Advanced economies.

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THE GLOBAL OUTLOOK

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  1. THE GLOBAL OUTLOOK JUNE 2010 TREVOR WILLIAMS CHIEF ECONOMIST WHOLESALE MARKETS

  2. CONSIDERABLE FISCAL SUPPORT HAS BEEN PROVIDED TO HEAD OFF GLOBAL RECESSION … Fiscal balance, % of GDP 2 Forecast 0 -2 World -4 Emerging and developing -6 economies -8 Advanced economies -10 1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010 2014

  3. NOW, PRESSURE TO TACKLE FISCAL DEFICITS IS GROWING 15 Manageable, but Cause for concern UK deteriorating IRELAND GREECE US 10 Iceland France SPAIN PORTUGAL Poland Slovakia Japan Netherlands Public borrowing % GDP Belgium 5 ITALY Australia Germany Sweden Switzerland 0 Korea 0 20 40 60 80 100 120 140 160 180 200 - - 5 Fiscally prudent Path of fiscal rectitude (no one on it!) Norway - - 10 Public debt % GDP * OECD 2010 estimates Source: Thomson Datastream, OECD

  4. …WITH SMALL ECONOMIES IN THE EURO FACING HEADWINDS Spread over 10yr Bunds 7 6 Greece 5 4 3 Ireland 2 Portugal 1 Spain 0 -1 2005 2006 2007 2008 2009 2010 Source: Lloyds TSB Corporate Markets

  5. EQUITIES ARE UNDER SELLING PRESSURE… Global equity indices, Jan 2007 = 100 130 120 110 100 DAX 30 90 FTSE 100 80 DOW JONES 70 60 NIKKEI 225 50 40 2007 2008 2009 2010 Source: Lloyds TSB Corporate Markets

  6. 10yr Gov't bond yields, % 6.00 5.50 5.00 UK 4.50 4.00 3.50 3.00 Germany 2.50 US 2.00 2007 2008 2009 2010 BONDS ARE ATTRACTING SAFE-HAVEN FLOWS… Source: Lloyds TSB Corporate Markets

  7. 3m Libor, % Official interest rates, % 7 6 UK Bank Rate UK £ 6 5 5 4 4 3 3 Euro 2 2 ECB repo rate US $ 1 1 US Fed funds rate 0 0 2007 2008 2009 2010 2004 2005 2006 2007 2008 2009 2010 BUT MONETARY LOOSENING HAS BEEN AGGRESSIVE… Source: Thomson Datastream

  8. ‘UNCONVENTIONAL’ MONETARY MEASURES ADOPTED… Index of Central Bank's balance sheets, Jan 2007 = 100 350 Bank of England (£252bn) 300 250 US Federal Reserve ($2.3tn) 200 150 ECB (€2.1tn) 100 Bank of Japan (Y121tn) 50 2007 2008 2009 2010 Source: ltsb corporate markets

  9. Core CPI Inflation, annual rate, % Emerging economies 5.0 4.5 4.0 3.5 3.0 2.5 World 2.0 1.5 Advanced economies 1.0 0.5 0.0 Jun-03 Apr-04 Feb-05 Dec-05 Oct-06 Aug-07 Jun-08 Apr-09 Feb-10 INFLATION BACKDROP IS BENIGN Source: OECD

  10. % increase in year, CPI Forecast 18 inflation 16 Latin America 14 Africa 12 10 Eastern Europe 8 Middle East* 6 4 Asia 2 0 2002 2004 2006 2008 2010 2012 * IMF forecast EMERGING MARKET INFLATION NOT GOING TO BE A CONCERN FOR SOME YEARS

  11. Short term interest rates, % 6.5 Forecasts 6.0 5.5 5.0 4.5 4.0 3.5 3.0 US 2.5 Euro 2.0 1.5 1.0 UK 0.5 0.0 9.11 3.08 9.08 3.09 9.09 3.10 3.11 9.10 3.06 9.06 3.07 9.07 12.11 ACCOMMODATIVE SUPPORT CAN REMAIN IN PLACE Source: Datastream, Lloyds TSB Corporate Markets

  12. …SO WE STILL EXPECT GLOBAL RECOVERY TO PICK UP SPEED IN 2010 AND BEYOND… GDP %Yr 2008 2009 2010 2011 World 3.1 -0.9 3.9 4.4 Developed economies (G10) 0.4 -3.3 2.2 2.6 US 0.5 -2.4 3.4 3.4 UK 0.5 -4.9 0.7 2.2 Japan -0.7 -5.2 1.5 1.6 Eurozone 0.6 -4.0 1.0 1.7 Emerging economies (E10) 6.3 2.7 6.8 7.0 - China 8.9 8.7 9.5 8.7 - Brazil 5.1 -0.2 5.5 5.3 - India 7.5 6.5 7.5 9.1 - Russia 5.6 -8.5 4.7 5.2 Source: Lloyds TSB Corporate Markets

  13. % increase in year 10 F'cast Emerging and developing economies 8 6 World 4 2 0 Advanced economies -2 -4 1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010 2014 …IN A RANGE OF ECONOMIES… Source: Lloyds TSB Corporate Markets

  14. …SO GLOBAL ECONOMY TO FACE LONG TERM SHIFT… Global GDP trends, to 2035 Trillions $ PPP Countries 2007 Rank 2010 Rank 2015 Rank 2025 Rank 2035 Rank US 13.827 1 14.019 1 16.280 1 21.976 2 29.551 2 China 7.151 2 9.285 2 14.205 2 30.168 1 53.680 1 Japan 4.440 3 4.224 3 4.614 4 5.089 4 5.406 5 India 3.083 4 3.798 4 5.729 3 11.421 3 21.111 3 Germany 2.858 5 2.786 5 3.084 5 3.557 6 3.837 7 France 2.089 6 2.063 7 2.278 9 2.700 9 3.169 12 UK 2.064 7 1.994 8 2.308 8 2.878 8 3.524 10 Russia 2.037 8 2.081 6 2.627 6 3.845 5 5.502 4 Italy 1.793 9 1.695 10 1.823 10 2.019 14 2.092 15 Brazil 1.776 10 1.965 9 2.451 7 3.334 7 4.616 6 Mexico 1.464 11 1.451 11 1.810 11 2.575 10 3.704 9 Spain 1.380 12 1.329 12 1.428 13 1.643 16 1.748 17 South Korea 1.204 13 1.297 13 1.605 12 2.283 11 2.992 13 Canada 1.171 14 1.179 14 1.426 14 1.855 15 2.293 14 Turkey 0.947 15 0.963 15 1.315 15 2.216 12 3.464 11 Indonesia 0.805 16 0.943 16 1.268 16 2.132 13 3.705 8 Australia 0.702 17 0.751 17 0.893 17 1.171 18 1.446 18 Netherlands 0.647 18 0.641 19 0.718 19 0.860 20 0.994 20 Poland 0.591 19 0.650 18 0.815 18 1.230 17 1.848 16 South Africa 0.452 20 0.473 20 0.586 20 0.908 19 1.391 19

  15. GLOBAL CURRENT ACCOUNT IMBALANCES TO DIMINISH % share of global GDP 3 F'cast 2 1 0 -1 -2 2001 2003 2005 2007 2009 2012 -3 European excluding Germany Oil exporters German & Japan Other Asia US Source: IFSL

  16. BIG FLOWS OF CASH ARE BEING GENERATED, A LOT FINDS ITS WAY TO EUROPE SWF investment into EU countries Official foreign exchange reserves held in SWFs % share, end-2009 % share, completed investment transactions by SWFs, 1995 - Jun 2009, total $187bn Sovereign Asian Others Wealth reserves not Funds in Sovereign Italy 14% Wealth Funds 17% 4% Netherlands 6% 47% UK 49% 12% 36% France 15% Rest of world Germany Total: $7,520bn Source: IFSL

  17. ASSETS UNDER MANAGEMENT TO GROW Hedge funds Private equity Sovereign wealth funds Insurance funds Mutual Funds Pension funds 0 5 10 15 20 25 30 Source: IFSL $ trillion, end-2009

  18. SWF ASSETS UNDER MANAGEMENT BY CATEGORY $bn Forecast 6,000 5,000 4,000 3,000 2,000 1,000 - 1999 2001 2003 2005 2007 2009 2012 Commodity Non-commodity Source: IFSL

  19. SWFS MARKET SHARE BY COUNTRY AND REGION end-2009 By country $bn stake (%) China 928.0 24.0 United Arab Emirates 677.0 18.0 Norway 445.0 12.0 Saudi Arabia 436.0 11.0 Singapore 370.0 10.0 Kuwait 203.0 5.0 Russia 168.0 4.0 Others 573.0 15.0 By region Middle East 1,620 43 Asia 1,350 36 Europe 670 18 Americas 90 2 Other 70 2 Total 3,800 Source: IFSL

  20. SUBSTANTIAL MID-TERM RISKS REMAIN BUT WE REMAIN CONFIDENT THE CORNER HAS BEEN TURNED • Disorderly reversal of unprecedented policy measures - Leave it too late: inflationary risk, asset price bubble - Move too early: threaten the incipient recovery • Credit conditions fail to improve sufficiently • Rise in oil commodity prices squeezes western real incomes • Major economies fail to rebalance (particularly China and the US) • Rising tide of protectionism • Spread of contagion from Greece to other sovereigns

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