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4th Quarter 2012

                              Global Economic                                                               He says that “plenty of things could go wrong” and that the UK is headed for a “shaky and tepid

                              Outlook                                                                           In my article on Japan, I indicate that Japan’s economy remains on shaky ground. With severe
                                                                                                            external headwinds, a highly valued currency, continued deflation, declining real wages, and stag-
                                                                                                            nant consumer spending, Japan is not experiencing a significant recovery. Moreover, the central

                              Q4 2012
                                                                                                            bank has chosen not to expand its policy of quantitative easing despite falling prices. Finally, a
                                                                                                            political dispute with China appears to be having a negative impact on the industrial economy.
                                                                                                            Thus, the outlook for Japan is not especially good.
    Ira Kalish, Deloitte
                                                                                                                In his article on India, Pralhad Burli discusses the fact that India’s economy is
                                                                                                            operating below potential. He says that the outlook for a return to high growth           Global Economic Outlook
    Research in the
    United States             Will 2013 Be a Turning Point?                                                                                                                                           published quarterly by
                                                                                                            is not especially good. The country faces a number of downside risks, including
    (Deloitte Services LP)                                                                                                                                                                            Deloitte Research
                                                                                                            uncomfortably high inflation, which has restrained the central bank; external
                                                                                                            headwinds; and an uncertain policy environment. On the other hand, the govern-            Editor-in-chief
                                                                                                            ment has proposed several new reforms that, if enacted, would likely lead to better       Ira Kalish
                                                                                                            long-term growth. The problem is that severe political opposition remains. Thus,

    I t has probably been said too many times, but it is worth repeating now. The world economy is at a     uncertainty prevails.                                                                     Managing editor
      crossroads. Every major region seems to be at a potential turning point. In Europe, the leaders of        Next, I discuss the outlook for Russia. Against the wind of much of the global        Ryan Alvanos

    the Eurozone are moving slowly toward more integration, while periodically fighting back against        economy, Russia’s central bank is tightening monetary policy in order to restrain
    new crises. In the United States, slow growth continues, but various forces seem destined to push       inflation. In the midst of a global slowdown, this is likely to lead to a slowdown in     Pralhad Burli
    the economy either toward recession or faster growth. In China, the economy has landed softly,          growth. Indeed, there are signs that this is already happening.                           Alexander Börsch
    but the next steps depend on the decisions of a new leadership. And in India, the government has            Brazil, on the other hand, is moving in a different direction. In my article on       Carl Steidtmann
    attempted to kick-start the reform process just as the economy seems to have stalled. At the very       Brazil’s economy, I note that the central bank has cut its benchmark interest rate        Ian Stewart
    least, the next year will be an interesting one.                                                        by over 500 basis points in the past year. It has clearly chosen to focus on growth
                                                                                                                                                                                                      Editorial address
        In this issue of the Global Economic Outlook, our economists from around the world offer their      rather than inflation, which remains above the central bank’s target. The outlook,
                                                                                                                                                                                                      350 South Grand Street
    perspectives on these and other issues. First, Alexander Borsch discusses the Eurozone situation.       therefore, is for stronger growth next year. The most notable short-term issue is         Los Angeles, CA 90013
    He notes that, while the crisis appears to have ebbed in the wake of new policies by the European       the potential impact of US monetary policy on Brazil’s exchange rate.                     Tel: +1 213 688 4765
    Central Bank, the underlying problems remain unresolved. He suggests that, other than collapse,             Finally, Neha Jain and Satish Raghavendran offer a perspective on the econ- 
    the Eurozone has four options to move forward. These range from modest efforts to enforce existing      omy of South Korea. At a time when South Korea has achieved an enviable level
    constraints to full-scale integration in the form of a political union.                                 of affluence, it now faces short-term obstacles to growth. With export demand
        Next, Carl Steidtmann looks at the US economy and notes that the situation is historically          weakening, the domestic economy is at risk due to excessive consumer debt, accumulated to fund
    unique. That is, never before has growth “been so anemic for so long.” He demonstrates that, histor-    an increasingly consumer-driven economy. Longer term, Neha and Satish point out that South
    ically, such slow growth usually leads to a recession, or sometimes to accelerated growth, but never    Korea needs to shift the focus of its economy away from manufacturing in favor of services.
    to simply more of the same. Thus, we appear to be in new territory. He suggests that the economy
    has been the beneficiary of “luck and resilience” that are likely to be severely tested in 2013. This
    will be due to a range of factors, including fiscal policy, headwinds from Europe, and risky mon-
    etary policy. Consequently, he sees a high risk of recession.
        In my examination of China’s economy, I point to evidence that a soft landing is underway.
    Moreover, I suggest that the current policy regime is likely to modestly boost economic output          Dr. Ira Kalish
    in the coming months. Yet many questions remain, not the least of which concern the policy              Director of Global Economics
                                                                                                            Deloitte Research
    choices to be made by the incoming leadership. As such, there is some degree of uncertainty about
    China’s outlook.
        In his article on the British economy, Ian Stewart says that the UK may be turning the corner
    but not perhaps in the way that many would like. He says that although growth should resume in
    2013, the situation warrants concern, given all the remaining problems—both external and internal.

2                                                                                                                                                                                                                               3

     6   Geographies                                                                         India: Cautious Optimism              |    30
                                                                                           Uncomfortably high inflation, external headwinds, and an uncertain
            Eurozone: Four Models for Future Governance                        |      6    policy environment are adding downside risk to India’s economy,
                                                                                           which is operating below its potential. The government has proposed
          The Eurozone’s crisis appears to have ebbed after the European Central
                                                                                           several reforms that could improve long-term growth, but political
          Bank’s recent policy responses. However, many of the region’s underly-
                                                                                           opposition is adding a dose of uncertainty to India’s economic outlook.
          ing problems remain unresolved. Discounting a complete collapse, the
          Eurozone has four fundamental governance models to choose from.
                                                                                             Russia: Slowing Down              |   36
    12      United States: Uncharted Waters                  | 12                          Despite a global economic slowdown, Russia’s central bank decided
                                                                                           to tighten monetary policy in an attempt to curtail inflation. This may
          The US economy has benefitted from a combination of luck and resil-
                                                                                           lead to a slowdown in growth.
          ience, and ongoing anemic growth in the United States is historically
          unprecedented. A wide range of factors, including fiscal policy, head-
          winds from Europe, and risky monetary policy may loom over the US                  Brazil: Chasing Growth | 38
          economic outlook into 2013.                                                      Brazil’s central bank decided to focus on growth rather than inflation,
                                                                                           which will likely result in stronger growth next year. The US monetary
            China: When Exports Decline                | 20                                policy could have a significant impact on Brazil’s exchange rate.

    20    The current policy regime may continue to boost economic output in the
          coming months, paving the way for a soft landing. Uncertainty pertain-             Korea: S(e)oul Searching |                42
          ing to China’s economic outlook stems from the policy choices that will          South Korea has achieved an enviable level of affluence, but weaken-
          be made by the country’s incoming leadership.                                    ing export demand and excessive consumer debt may put the brakes
                                                                                           on economic growth. In the longer term, South Korea may need to
            United Kingdom: Turning the Corner, Slowly                      | 22           consider a move away from manufacturing in favor of developing a
                                                                                           service-based economy.
          The United Kingdom’s current downturn is likely coming to an end, but
          myriad internal and external problems remain, which could result in a
          shaky and tepid recovery.
    22                                                                                    Appendix
            Japan: An Elusive Recovery |                26
          External headwinds, a highly valued currency, continued deflation,
          stagnant consumer spending, and declining real wages are hindering
                                                                                             Charts and Tables |             46
          Japan’s economic recovery. Furthermore, despite falling prices, the gov-         GDP growth rates, inflation rates, major currencies vs. the US dollar,
          ernment has decided against expanding its policy of quantitative easing,         yield curves, composite median GDP forecasts, composite median cur-
          and a political dispute with China is having a negative impact on Japan’s        rency forecasts, OECD composite leading indicators
          industrial economy.


4                                                                                                                                                                         5
                                                                                                                                                                                                             Eurozone     Geographies

           Dr. Alexander Börsch
           is head of Research,
           Deloitte Germany

   Eurozone: Four Models
   for Future Governance
   by Dr. Alexander BÖrsch

           T    he euro crisis is now officially in its fourth
                year. It started in October 2009 when the
           Greek government admitted that its budget
                                                                 a renewal of the Eurozone’s original guid-
                                                                 ing principles with a focus on member state
                                                                 responsibility to a political union with nation-
                                                                                                                    of the German constitutional court that the
                                                                                                                    euro rescue strategy is in principle consistent
                                                                                                                    with the German constitution, given certain
                                                                                                                                                                       fact that there is no clear vision about where
                                                                                                                                                                       the Eurozone is heading in terms of gover-
                                                                                                                                                                       nance structures and architecture. The euro
           deficit was much higher than it previously            state-like features.                               limitations, removed doubts about the future       crisis includes a debt crisis, a banking crisis,
           stated. In the years that followed, the crisis not        In early October, the euro looks as if it is   of the rescue mechanism. The Dutch elections       a growth crisis, and a competitiveness crisis.
           only deepened in Greece and spread to other           on a slow road to recovery, at least measured      resulted in a stable pro-euro coalition. Taken     That is why it is unrealistic to hope for grand
           countries, it also exposed serious flaws in the       against recent expectations. Many experts con-     together, and contrary to more apocalyptic         bargains and comprehensive solutions to cut
           governance of the euro and the Eurozone.              sidered September to be the decisive month for     predictions made during the summer months,         the Gordian knot. However, a clear vision for
               There are basically four options to reform        the fate of the euro, and expectations tended to   early autumn has been a comparatively quiet        the future of the Eurozone’s governance struc-
           the Eurozone’s governance. The two main               be pessimistic. From that perspective, things      time for the Eurozone.                             tures is a precondition for political action and
           dimensions that will determine the future             developed fairly well. The decision of the             However, this situation is not a reliable      for kicking the can in the right direction.
           shape of the Eurozone are the possible com-           European Central Bank to renew its bond pur-       predictor of future events. Part of the dif-
           binations of extended political integration           chase program has reassured the financial mar-     ficulty in solving the euro crisis is due to the
           and fiscal transfers. The options range from          kets and bought important time. The decision

   6                                                                                                                                                                                                                          7
Global Economic Outlook: 4th Quarter 2012                                                                                                                                                                          Eurozone   Geographies

          Is there a light at the end                          deteriorating. The ifo Business Climate Index
                                                                                                                   Figure 2: Current account
                                                                                                                   [% of GDP]
          of the recession tunnel?                             continued to fall in October, the sixth consecu-    10
                                                               tive monthly decline.
              At first glance, no. The latest data on the          Nevertheless, there are some cautious signs                                                                                             France
          economic sentiment in the Eurozone reinforce         that reforms in the crisis countries are begin-                                                                                             Germany
          the trend of the last months. The European           ning to gain traction and yield positive results.     0                                                                                     Greece
          Economic Sentiment Indicator, which mea-             Among these are the reduction in the current                                                                                                Ireland
          sures the outlook on the part of business,           account deficit and the improvement in price         -5
          consumers, industry, and services, continues         competitiveness. Unit labor costs in Greece,
                                                                                                                   -10                                                                                     Spain
          to decline for the Eurozone as a whole as well       Spain, and Ireland have fallen quite substan-
          as for the crisis countries, with the exception      tially and are forecasted to continue to do so                                                                                              Eurozone
                                                                                                                   -15                                                                                     (17 countries)
          of Spain. Also, the outlook for Germany is           (see figure 1).
          Figure 1: Unit labor costs                                                                                     2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
          [2000 = 100]                                                                                             Source: OECD
          140                                                                                        Germany

                                                                                                                   resort to devaluations. Second, rules to prevent     future crisis and support the way out of the
          130                                                                                        Greece
                                                                                                                   excessive budget deficits in the form of the         current crisis.
                                                                                                                   Maastricht criteria are enough to guarantee the          Conceptually, there are two main dimen-
          120                                                                                        France        stability of the euro. Third, specific provisions    sions of Eurozone reform. The first is politi-
                                                                                                     Italy         for crisis management are not needed. Crises         cal integration. The question is whether the
          110                                                                                        Ireland       will not happen if members stick to their obli-      Eurozone needs deeper political integration
                                                                                                                   gations and follow the Maastricht rules.             and a transfer of decision making to the
          100                                                                                                          The euro crisis has made it blatantly obvi-      European level or whether the primacy of
                                                                                                                   ous that these assumptions do not hold any           the member states needs to be preserved and
                                                                                                                   longer. Crisis management has become the             strengthened. The second dimension concerns
                                                                                                                   almost-exclusive focus of European political         fiscal transfers between member states. Fiscal
                2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
          Source: Eurostat
                                                                                                                   leaders. The rules of the Maastricht treaty have     transfers can, in principle, be used for emer-
                                                                                                                   prevented neither excessive budget deficits nor      gency measures or in an institutionalized form.
                                                                                                                   the resulting threats to the euro. The euro did
                                                                                                                   not initiate a broad dynamic toward reforms          Options for the Eurozone
              Equally remarkable is the development of         other main pillar is the governance of the          and higher competitiveness. The burning ques-           Combining these two dimensions in
          the current account deficits of the crisis coun-     euro itself.                                        tion, therefore, is how to redesign and amend        a matrix illustrates the main options for
          tries. Greece managed to reduce its current                                                              the euro’s governance structure to prevent           European policy makers.
          account deficit from an extremely high level.        Governing the Eurozone
          Spain achieved the same, and Ireland managed
                                                                                                                                                              Fiscal transfers between member states
          to turn its deficit into a surplus (see figure 2).       The institutional architecture of the
          In other words, fundamentals are beginning           Eurozone was built on three main assumptions.                                                           Low                       High
          to improve. While this is not yet reflected in       First, mechanisms compensating for the loss
                                                                                                                      Degree of further
          business expectations, the conditions for an         of the exchange rate as an adjustment tool are        political integration
                                                                                                                                               Low                     Maastricht 2.0            Emergency union
          improvement are being built.                         not needed. Countries will adjust to the new
                                                                                                                                               High                    Coordinated association   Political union
              While reforms in the crisis countries are        currency regime by internal reforms and will
          crucial for a recovery in the Eurozone, the          modernize their economies once they cannot

8                                                                                                                                                                                                                                 9
Global Economic Outlook: 4th Quarter 2012                                                                                                                                                                  Eurozone      Geographies

          Maastricht 2.0                                           While it is obvious that the European            sanction mechanisms; the method works            similar intention, and so has the European
             The original Maastricht treaty from 1992          Union cannot become a nation-state overnight,        mainly through peer pressure.                    Stability Mechanism, the main instrument to
          includes three main elements:                        it could assume the functions of a nation-state          A greater coordination of the economic       guarantee the liquidity of governments that
                                                               in key areas to guarantee the survival of the        policies of member states would require          lose access to financial markets.
           •	 Member states must not run a budget defi-        euro. These key functions would include a            enlarging the scope and the depth of coor-          Whether this approach can work and bring
              cit of more than 3 percent of GDP.               banking union, common deposit insurance,             dination, as well as pal-                                                  the euro into shallow
                                                               at least some mutualization of debt, and larger      pable sanctions. Areas that                                                waters depends on
           •	 They must have a debt level of no more           redistribution through fiscal transfers between      offer themselves to greater                                                whether the crisis is
              than 60 percent of GDP.                          the Eurozone’s member states.                        coordination in order to                                                   due to a temporary
                                                                   These moves would imply a centralization         support a smooth function-                                                 exceptional situation
           •	 Eurozone members should not be liable for,       of fiscal policies and therefore a much stronger     ing of the euro include wage                                               or to deeper insti-
              nor assume, the commitments or debts of          role of the EU in fiscal policy, if not a European   policy, pension policy, and                                                tutional flaws in the
              any other member state.                          finance ministry with corresponding compe-           fiscal policy. For example,                                                governance of the
               In this original Maastricht framework,          tencies. As this would touch upon the core           a coordinated association                                                  Eurozone. If the lat-
          it is the member states that are exclusively         functions of national parliaments, a political       could aim at preventing the                                                ter is true, the case-
          accountable and responsible for healthy              union might need to follow to ensure demo-           emergence of large imbal-                                                  by-case approach is
          public finances. As long as the rules work, the      cratic control. In other words, in economic and      ances in the Eurozone by                                                   unlikely to work, and
          stability of the euro is not threatened as over-     financial matters, the EU would become the           mutually adjusting national                                                bridge financing is
          indebtedness and resulting instability cannot        main actor and decision maker. While there           economic policies.                                                         not enough to let the
          be an issue.                                         are many proposals and plans on how and in                                                                                      storm pass.
               However, the rules obviously failed, and        which areas European integration should move         Emergency union
          the main elements of the original Maastricht         forward, concrete steps have not been taken,                                                                                   Outlook
          provisions, such as the debt ceilings, are under     and workable plans have not been developed.              The model of an emer-
          pressure. Others, such as the no-bailout clause,                                                          gency union comes quite                                                        The most con-
          have been totally pushed aside. The option of a      Coordinated association                              close to the current working                                               sistent options of
          Maastricht 2.0 scenario would need to include                                                             of the Eurozone in the face                                                the four are the
          strengthening the original provisions, ensuring          Currently, the European Union is a com-          of the crisis. It is a series of                                           Maastricht 2.0 sce-
          compliance, and providing a framework that           plex combination of national, supranational,         rather unsystematic emer-                                                  nario and the political
          puts national responsibility for public finances     and intergovernmental decision making.               gency measures that try to                                                 union as they define
          first. This implies that future crises of the euro   While the big political decisions regarding          prevent the worst on a case-                                               clear responsibilities
          are to be prevented by an improved version           the Eurozone are taken in the Council of             by-case basis. The worst, of                                               for decision making,
          of the original framework. Some of the recent        the European Union by the national govern-           course, is a fragmentation of                                              either on the level of
          reforms in the EU—above all, the debt brake—         ment leaders, the day-to-day business in the         the Eurozone. This process                                                 the nation-state or on
          go arguably in the direction of Maastricht 2.0.      EU’s areas of competence is carried out by           does not have a well-for-                                                  the European level.
                                                               the European Commission. National eco-               mulated goal, but is highly                                                Both are ambitious.
          Political union                                      nomic policies remain firmly in the hands of         event-driven.                                                              The Maastricht 2.0
                                                               national governments.                                    While it is true that the                                              would need to address
             A future political union is being widely              To be sure, there have been some attempts        European Union has been                                                    and overcome obvious
          discussed. It builds on the idea that the funda-     to achieve a higher coordination of national         built in times of crisis and that a step-by-     weaknesses in the old institutional architec-
          mental reason for the euro crisis is the fact that   economic policies. The last decade saw the           step process is not a bad thing in itself, the   ture. The formation of a political union would
          there is no nation-state standing behind the         introduction of the “open method of coordina-        question is whether the measures add up to       imply a transfer of authority unseen in the his-
          euro that defends it unconditionally. So, saving     tion.” This method aims at directing national        something that prevents future crises. So far,   tory of the nation-state with many foreseeable
          the euro may require the establishment of a          policies toward common and agreed goals. It          the bailouts—especially in the case of Greece—   and unforeseeable challenges. The main issue,
          European nation-state—or at least something          rests on instruments such as evaluation and          bought time, tried to keep states liquid, and    however, is what the preferred option for the
          that resembles a nation-state.                       benchmarking of policies. There are no hard          forced them to introduce reforms. The ECB’s      future of the Eurozone actually is.
                                                                                                                    announced bond purchase program has a

10                                                                                                                                                                                                                           11
                                                                                                           United States   Geographies

      Dr. Carl Steidtmann is
      Chief economist at
      Deloitte Research

 United States: Uncharted Waters
 by Dr. Carl Steidtmann

      F   Rom the performance of the US economy
          to the unprecedented policy mix being
      employed to address the current malaise, the
                                                          growth has neither accelerated nor fallen
                                                          into recession.
                                                              What is also unprecedented about the
      United States is in uncharted economic waters.      weakness of the current recovery is that it is
      The US economy’s performance over the past          following a deep recession. Historically, deep
      18 months has been unprecedented. There             recessions create pent-up demand. During
      has never been a time when growth has been          a recession, businesses put off investments,
      so anemic for so long. There have been 14           and inventories are drawn down. Consumers
      instances since the end of the Second World         put off purchases of cars and homes. Young
      War when real economic growth fell to less          people stay at home with their parents, put-
      than 2 percent. In 11 of those cases, a reces-      ting off marriages and delaying the process of
      sion followed within two quarters of hitting        household formation to save money. When a
      the 2 percent stall level. In three cases, expan-   recovery comes, much of this pent-up demand
      sion reaccelerated. This is the first case where    gets released, producing a strong recovery. In

 12                                                                                                                            13
Global Economic Outlook: 4th Quarter 2012                                                                                                                                                                               United States   Geographies

          the three years following the end of the Great                The performance of the labor force has also       However, the mix of the decline in overall        Figure 3:
                                                                                                                                                                            Real per capita disposable income
          Depression in 1933, real GDP rose a sizzling               been uncharacteristic. Throughout the past       labor force participation does not fit the nar-       Five-year growth
          38.9 percent. That has not been the case this              50 years, labor force participation has risen    rative of retiring baby boomers. Over the past        Percentage change over the past five years
          time; growth is up a modest 5.8 percent in the             as women and baby boomers moved into the         five years, even as participation rates for other      25
          two and a half years since the end of the reces-           work force. With the baby boomers approach-      age cohorts have fallen, boomers have lingered
          sion, which is the slowest pace of growth for              ing their retirement years, one would expect     in the labor force. Since the beginning of the         20
          any recovery since 1948 (see figure 1).                    labor force participation to begin to fall.      last recession in December 2007, labor force
                                                                                                                      participation among the 55–64-year-old cohort          15
                                                                                                                      has actually risen slightly from 69.2 to 69.6 (see
                                                                                                                      figure 2).                                             10
          Figure 1: Real GDP change—recession and recovery
          % change                                                                                                        Over the same period of time, participa-
                                                             Recession         10 quarters of recovery
                                                                                                                      tion among 16–24-year-olds has plummeted
                                                                                                                      from 61 to 55.6. Of the 4.3 million jobs created        0
              20                                                                                                      since 2010, nearly 3 million of them went to
                                                                                                                      workers over the age of 55. The inability of           -5
              15                                                                                                      young people to gain a footing in the labor              1964 1970 1976 1982 1988 1994 2000 2006 2012
                                                                                                                      market will stunt their career development            Source: US Bureau of Economic Analysis
              10                                                                                                      and earning power for years to come. It will
                                                                                                                      also make it more difficult for them to service       Household net worth
                                                                                                                                                                            In trillions of dollars
                  5                                                                                                   their student loans. The default rate for the first
                                                                                                                      three years on student loans has jumped $120          80.0

                  0                                                                                                   billion or roughly 13.4 percent of all outstand-      70.0
                                                                                                                      ing student debt.
                      1948       1953       1957   1960      1969      1973    1981      1990      2001   2007        A falling standard of living                          50.0
          Source: Bureau of Economic Analysis                                                                                                                               40.0
                                                                                                                          Weakness in the labor market has translated
                                                                                                                      into an unprecedented decline in the standard
          Figure 2: Labor force participation
          Percentage of the cohort population
                                                                                                                      of living (see figure 3). Real per capita income      20.0
                                                                                                                      has dropped over a five-year period for the first     10.0
           75.0                                                                                                       time in the post-World War II era not once but
                                                                                                                      twice in the past five years. Slow job growth          0.0
                                                                                                                                                                               1964 1970 1976 1982 1988 1994 2000 2006 2012
           70.0                                                                                                       coupled with declining labor market partici-
                                                                                                                                                                            Source: Federal Reserve Board of Governors
                                                                                                                      pation has made for a toxic combination for
                                                                                                                      income growth. In addition, record low inter-
                                                                                                                      est rates have cut deeply into interest income,

                                Over 16
                                55 to 64
                                16 to 24

               1997           2000          2003     2006           2009       2012
          Source: US Department of Labor

14                                                                                                                                                                                                                                          15
Global Economic Outlook: 4th Quarter 2012                                                                                                                                                                         United States     Geographies

               sending it down from $1.4 trillion in May 2008     The Fed’s response                                     the previous efforts at QE, this one has no end      give a boost to exporters, it will result in higher
               to $986 billion in August 2012.                        Faced with a weak labor market and a               date and no set amount. The Fed will buy $40         import prices, particularly for energy.
                   In addition to the decline in per capita       declining standard of living, the Federal              billion in Treasuries and mortgage-backed               The case for quantitative easing is that by
               income, the household sector has also experi-      Reserve’s response to the current business con-        securities every month until unemployment            suppressing interest rates, the Federal Reserve
               enced an unprecedented decline in net worth.       ditions has also been unprecedented. Founded           falls below a level that is deemed acceptable by     will force investors to take more risk in both
               After peaking at $67.3 trillion in the third       in 1913, it took the Federal Reserve 95 years to       the Fed. Most Fed watchers expect QE3 to go          the bond market and the stock market. The
               quarter of 2007, household net worth fell to       grow its balance sheet to just under $1 tril-          on through 2013 at the very least, resulting in      reduction in interest rates and the increase in
                                                                                         lion. In the fall of 2008, in   a $600 billion expansion of the Fed’s balance        investor risk taking will give a boost to asset
Figure 4: Federal Reserve’s balance sheet                                                response to the collapse of     sheet at the very least.                             prices in the housing market, the stock market,
Trillions of assets
                                                                                         Lehman Brothers, the Fed            Quantitative easing is not a risk-free policy.   and the bond market. The corresponding rise
                                                                                         pursued its first round of      Printing money for the purpose of buying             in wealth from these three developments will
                                                                                         quantitative easing (QE),       government debt risks higher inflation and a         bring about a recovery in the housing market
                                                                                         purchasing a wide variety       weaker dollar. While a weaker dollar would           and induce consumers to spend more and
     3.00                                                                                of financial assets in the                                                           businesses to invest more.
                                                                                         process of doubling its
                                                                                         balance sheet to just over
     2.50                                                                                $2 trillion (see figure
                                                                                         4). The purpose of the
                                                                                         first round of QE was to
                                                                                         provide liquidity to the
                                                                                         banking system that was
     1.50                                                                                reeling from the shock of
                                                                                         the Lehman bankruptcy.
                                                                                             In the fall of 2012, the
     1.00                                                                                Fed initiated a second
                                                                                         round of quantitative
                                                                                         easing, adding another $1
                                                                                         trillion to its balance sheet
                                                                                         through the purchase of
     0.00                                                                                mortgage backed secu-
        2007           2008       2009        2010        2011     2012                  rities and US Treasury
                                                                                         bonds. While the bank-
                                                                                         ing system no longer
Source: Federal Reserve Board
                                                                                         needed liquidity, the
                                                                                         Fed’s objective was to lift
               $51.2 trillion in the first quarter of 2009, a     asset prices in an attempt to encourage invest-
               stunning $16.1 trillion destruction of wealth.     ment from banks and businesses and spending
               Since then, wealth has climbed due entirely to     from consumers.
               the rise in the value of financial assets. Even        Two years later, with unemployment still
               with the rebound, net worth is still down $4.7     above 8 percent and the economy still growing
               trillion from its peak, and it actually fell by    at a subpar rate of growth, the Fed has initiated
               $300 million in the second quarter of this year.   a third round of quantitative easing. Unlike

16                                                                                                                                                                                                                                      17
Global Economic Outlook: 4th Quarter 2012                                                                                                                                                                                                                                   United States   Geographies

                                                                                                                          Figure 5: The fiscal cliff components
              The downside argument against more quan-                 Taken together, the tax increases and              In billions of dollars
          titative easing is that it results in a mispricing       spending cuts that make up this year’s fiscal
          of risk. It reduces the income of retirees who           cliff come to roughly $600 billion. While there
          depend on low-risk, interest-bearing assets.             is no guarantee, there does seem to be some              $250            $221
          It also gives a boost to the price of food and           agreement on at least some of the elements
          energy, reducing the purchasing power of                 of the fiscal cliff. Both sides are on record as         $200
          all consumers.                                           favoring a phase out of the payroll tax cuts. The
                                                                   2 percent payroll tax holiday that went into             $150
          The fiscal cliff                                         effect in 2010 represents roughly $95 billion in                                                                                                                                                          $105
                                                                   additional taxes. The automatic minimum tax              $100
              The debate in                                                                         gets bigger every                                                             $65                                        $65

          the United States                                                                         year. The fix for        $50
                                                                                                                                                                                                         $18                                    $26
          over fiscal policy                                                                        the automatic                                                                                                                                          $11
          revolves around              If the fiscal cliff isn’t                                    minimum tax               $0
          the pending                                                                               plus the “Doc fix”                          s                   s                   s                     s                  n                   s          fix                ts
                                                                                                                                             ut                  ut                                                                               fit
          fiscal cliff (see            addressed, as I’ve said, I                                   for Medicare are
                                                                                                                                                         ll t
                                                                                                                                                                                a xe
                                                                                                                                                                                                    r  et
                                                                                                                                                                                                                                                                        d ing

          figure 5). What                                                                           also likely to gain                                ro               Ot                                           q
                                                                                                                                                                                                                                          s                          en
                                                                                                                                Bu                  ay                                      ble                   Se                                                p
          is remark-                   don’t think our tools are                                    bipartisan sup-
                                                                                                                                                                                    rda                                             Jo

          able about this                                                                           port as they have
          debate is how                strong enough to offset                                      in the past.
                                                                                                                          Source: Congressional Budget Office
          unremarkable                                                                                  The big stick-
          it really is. Over           the effects of a major fiscal                                ing point will be
          the past decade,                                                                          extending the
          more and more                shock, so we’d have to                                       Bush tax cuts         significant increase in the fiscal contraction                                          off into uncharted waters. Current monetary
          of the tax code                                                                           for high-earning      and a sharp recession in early 2013.                                                    policy risks higher inflation and lower incomes
          has become a                 think about what to do in                                    households. This                                                                                              for retirees and lower spending power for

          part of a year-                                                                           was the point of      Conclusions and observations                                                            everyone else. The fiscal cliff impasse all but
          end dance                    that contingency.”                                           contention back                                                                                               guarantees a more restrictive fiscal policy and
          between political                                                                         in August 2011            The US economy has shown a combination                                              potentially another credit downgrade. Sluggish
          parties, making       — Ben S. Bernanke, Federal Reserve chairman                         that led to the       of luck and resilience in avoiding a recession                                          employment growth, declining labor force
          longer-term tax                                                                           downgrade of          while growing well below its potential for the                                          participation, and shrinking real incomes are
          and investment                                                                            US debt by the        past 18 months. That resilience and luck are                                            a dangerous combination that could push the
          planning for businesses and individuals more             credit rating agencies. A second impasse over          going to be tested in 2013 as the economy sails                                         economy into recession in 2013.
          challenging. In most years, indexing of the              this issue could result in another downgrade.
          automatic minimum tax and various invest-                While the outcome of the fiscal cliff debate
          ment and R&D tax credits were among these                remains uncertain, at the very least, it seems
          items. Medicare’s “Doc fix” also seemed to               certain that the United States will face much
          require a yearly vote.                                   tighter fiscal policy in 2013 than it has in
              Three factors make this year’s fiscal cliff          recent years. With an economy growing near 2
          debate different: one is size, the second is tim-        percent, tighter fiscal policy will slow growth
          ing, and the final issue is the reaction of the          in the short term. A failure to resolve any of
          bond rating agencies.                                    the issues of the fiscal cliff could result in a

18                                                                                                                                                                                                                                                                                              19
                                                                                                                                                                                                              China     Geographies

  China: When Exports Decline
  by Dr. Ira Kalish

        C     hInA’S economy is slowing down, but a
              soft landing is still a possibility, thanks to
        various measures undertaken by the govern-
                                                               Industrial production was up a relatively mod-
                                                               est 8.9 percent in August. Automobile sales
                                                               were up 8.3 percent in August, far slower than
        ment that are helping to offset economic               the pace of the last few years. All of this news
        headwinds from Europe. Just the same, the              suggests that China’s economy is weaker than       to hold the currency steady. Evidently, China’s    actions. The central bank cut the benchmark
        country is experiencing an abundance of bad            expected, and the anticipated rebound is not       authorities are averse to allowing currency        interest rate and reduced banks’ required
        news. In September, for example, HSBC and              yet here. It also boosts expectations that the     depreciation as it would likely draw criti-        reserves, thereby boosting bank lending. In
        Markit published a purchasing manager’s index          Chinese authorities will engage in further mea-    cism from foreign governments. Given this          addition, the government has increased public
        that suggests that Chinese manufacturing was           sures to stimulate the economy.                    political climate, China’s central bank has been   investment in infrastructure.
        in negative territory for the 11th consecutive             Meanwhile, weakness in the industrial sec-     intervening to keep the currency steady by             The result of these measures has been
        month. The PMI was 47.9 in September com-              tor is having a negative impact on investment      trying to mitigate rising inflation and declin-    positive. China’s government announced that
        pared to 47.6 in August; a reading below 50.0          into China. In August, China experienced           ing currency that could kindle political unrest.   new local currency lending increased by $111
        indicates a decline in activity. The weakness          a net outflow of capital for the third time in     Yet at the same time, it is assuring that money    billion in August, the biggest August increase
        was largely related to poor export performance.        2012. This means that investors are moving         supply growth continues at a moderate and          on record. This is very likely due to the recent
        The sub-index for export orders reached its            money out of China, perhaps as a result of the     rising pace.                                       cuts in interest rates and the reduction in
        lowest level in 42 months, and the sub-index           declining profitability of Chinese companies           One effect of the weakening industrial         banks’ required reserves. Indeed, the broad
        for employment was also in negative territory.         and pessimism about the Chinese economy.           sector is a decline in Chinese company profit-     money supply increased 13.5 percent in August
            Exports are the primary culprit. China’s           To facilitate the outflow and prevent a drop in    ability. The profits of China’s industrial com-    from a year ago. Increased lending is welcome,
        government reported that total exports were            the value of the currency, the central bank sold   panies fell in August for the fifth consecutive    given that several indicators have lately been
        up a very modest 2.7 percent in August from            foreign currency. The central bank is boosting     month. Profits were down 6.2 percent from a        disappointing. The question now is whether
        a year earlier. Exports to the EU were down            domestic credit in order to offset the negative    year ago, the fastest rate of decline this year.   the government will choose to take further
        12.7 percent from a year earlier, and Chinese          impact on the money supply of sales of foreign     Corporate revenue continues to increase, but       actions aimed at stimulating the economy.
        imports fell 2.6 percent in August to their            currency. When a country experiences a net         export-oriented companies are struggling to        With a change of leadership about to take place
        weakest performance since 2009. This was               outflow of capital, it either leads to a decline   maintain sales by cutting prices, resulting in     in Beijing, major decisions may be put on
        partly due to declining commodity prices, but          in the value of the currency or a decline in the   weaker profitability.                              hold until the new leaders have time to assess
        it also reflected weakening demand in China.           money supply if the central bank intervenes            To deal with the slowdown in economic          the situation.
                                                                                                                  activity, the government has taken a variety of

  20                                                                                                                                                                                                                        21
                                                                                                          United Kingdom   Geographies

     Ian Stewart is Chief
     economist at Deloitte
     Research in the United

United Kingdom: Turning
the Corner, Slowly
by Ian Stewart

     T    he last five years have seen the worst
          growth performance by the UK economy
     since the 1920s. The UK economy saw a deep
                                                        was the hallmark of most postwar boom bust
                                                        cycles. The United Kingdom has also escaped
                                                        Great Depression levels of unemployment.
     recession in 2008–2009 and entered a milder        Indeed, employment has risen for the last
     second recession in the last quarter of 2011.      three years as job growth in the private sector
     The current cycle’s GDP levels are comparable      has outstripped public-sector job losses. Ben
     to those of the 1920s. However, this compari-      Broadbent, a member of the Bank of England’s
     son overstates the degree of stress facing busi-   Monetary Policy Committee, recently observed
     nesses and households today.                       that, had the normal, pre-recession relation-
         Low interest rates and forbearance on the      ships held, the number of jobs in the United
     part of lenders have helped soften the damage      Kingdom would have fallen by 8 percent over
     to the economy in recent years. UK interest        the last five years. Instead employment has
     rates and government bond yields today are         stayed roughly unchanged. The result is that
     at the lowest level since the foundation of the    the UK unemployment rate today is well below
     Bank of England in 1694. Debtors have not          the peaks seen in the previous, milder UK
     faced an acute interest-rate squeeze, which        recessions of the ’80s and ’90s.

22                                                                                                                             23
Global Economic Outlook: 4th Quarter 2012                                                                                                                                                         United Kingdom       Geographies

              Relatively low unemployment has helped        inflation has almost halved in the last year to     on a UK recovery, which is widely expected         shape today, and the larger corporates who
          support consumers during a period of acute        2.5 percent—should lend additional support to       to be powered by demand for British exports        responded to the CFO survey are not espe-
          difficulties. Other factors are also becoming     consumer spending power.                            from abroad.                                       cially constrained by cash or capital shortages.
          more positive for consumers. Most of the big          The outlook for a battered consumer sector          While the UK consumer outlook has              The big problems seem to be the weakness
          tax rises are past. Sharply lower inflation—CPI   is starting to look up. Real disposable incomes     brightened marginally and corporates are           of Europe’s economies and a climate of mac-
                                                            have risen 1.7 percent over the last year, having   continuing to                                                                       roeconomic
                                                            declined through 2011. And consumer spend-          hire, businesses                                                                    uncertainty.
                                                            ing is rising once again. Given that consumer
                                                            spending accounts for over 60 percent of the
                                                                                                                remain cautious.
                                                                                                                The third-quarter
                                                                                                                                       The universal assumption                                     After successive
                                                                                                                                                                                                    waves of bad
                                                            UK economy, an upturn in consumer activ-
                                                            ity should lend significant support to growth
                                                                                                                Deloitte Survey
                                                                                                                of UK Chief
                                                                                                                                       among economists—at least                                    macro news fol-
                                                                                                                                                                                                    lowed by policy
                                                            next year.
                                                                The universal assumption among econo-
                                                                                                                Financial Officers
                                                                                                                suggests that big
                                                                                                                                       for now—is that the worst has                                stimulus and
                                                                                                                                                                                                    equity rallies,
                                                            mists—at least for now—is that the worst has
                                                            passed for the UK economy. All 37 indepen-
                                                                                                                corporates increas-
                                                                                                                ingly subscribe
                                                                                                                                       passed for the UK economy.                                   UK corporate
                                                                                                                                                                                                    CFOs may need
                                                            dent forecasting groups that provide GDP            to the notion that                                                                  some convincing
                                                            forecasts to the Treasury expect UK growth          we are in a low-                                                                    to turn signifi-
                                                            to bounce back in 2013. Most believe that the       growth world. Perceptions of macro-uncer-          cantly more positive on expansion.
                                                            current slowdown in the United Kingdom is           tainty and of the risk of continued recession          The United Kingdom’s current downturn
                                                            drawing to an end, and that steady growth will      are widespread. Corporates are increasingly        seems to be drawing to an end. Growth should
                                                            resume in the first quarter of next year.           focusing on defensive balance-sheet strategies,    pick up next year. But, as the continued dif-
                                                                ut a better test is what kind of growth         including cash generation, cost control, and       ficulties in the euro area highlight, plenty of
                                                            is expected next year. The news here is not         leverage reduction.                                things could go wrong. For now, the United
                                                            encouraging. Consensus forecasts for UK GDP             In 2008, a combination of a shock to           Kingdom seems to be heading for a shaky and
                                                            growth for 2013 have dropped from 1.8 per-          demand and a credit crunch caused a deep           tepid recovery.
                                                            cent to 1.3 percent in the last four months—a       recession. The financial system is in far better
                                                            pretty weak rate of growth for an economy
                                                            used to growing at 2.5 percent a year. Our
                                                            guess is that most economists would say that
                                                            the risks to their UK growth forecasts lie on
                                                            the downside.
                                                                Many of the problems facing the United
                                                            Kingdom exist elsewhere in the world. After a
                                                            lull over the summer, worries about the euro
                                                            area are growing. Hopes that a bond-buying
                                                            program by the European Central Bank would
                                                            crack the euro’s problems have dissipated.
                                                            Meanwhile, the United States may be on course
                                                            for sharp tax hikes and cuts in public spending
                                                            in three months’ time. Unless politicians strike
                                                            a postelection deal, the so-called fiscal cliff
                                                            could derail America’s recovery. Such exter-
                                                            nal uncertainties constitute a significant drag

24                                                                                                                                                                                                                         25
                                                                                                                Japan   Geographies

        Japan: An Elusive Recovery
        by Dr. Ira Kalish

        J  APAn’S economy has been mostly sluggish
           for some time, despite the increased govern-
        ment spending on reconstruction following
                                                               The government also reported that the
                                                            compensation of workers continues to decline,
                                                            with total wages to workers in Japan in the
        last year’s earthquake and tsunami. Although        second quarter only marginally higher than in
        there have been periodic bursts of economic         1991—21 years ago. This means, of course, that
        activity, such as the 5.5 percent growth rate in    unit labor costs are declining, thereby improv-
        the first quarter of this year, growth has mostly   ing the competitiveness of Japanese products.
        been disappointing. For example, the Japanese       Yet that improvement is largely offset by the
        government reported that the economy grew           negative impact of a highly valued Japanese
        at an annual rate of only 0.7 percent in the        yen. On the other hand, declining wages
        second quarter. This was revised down from          contribute to declining purchasing power
        the original growth estimate of 1.4 percent         and stagnant consumer spending. This wage
        in the second quarter. The slow growth was          decline also contributes to deflation, which
        largely due to weak private investment as well      remains a serious problem in Japan.
        as weaker-than-expected public spending                This begs the question of whether the
        on reconstruction.                                  central bank will act according to its goals. The
                                                            Bank of Japan has set a formal inflation target

  26                                                                                                                        27
Global Economic Outlook: 4th Quarter 2012                                                                                                                                                                    Japan     Geographies

          of 1.0 percent, yet prices continue to decline     the Bank of Japan chose to leave its asset           This unexpected increase could bode well for       brand vehicles in China dropped sharply.
          despite a more aggressive monetary policy. For     purchasing program unchanged at 55 tril-             capital spending in the months ahead.              While the vehicles are mostly assembled in
          the past year, the Bank of Japan has engaged in    lion yen (US$700 billion). In addition, the              Just at a time when the Japanese economy       China, many of their parts are made in Japan.
          quantitative easing: the bank purchases assets     Bank of Japan downgraded its assessment of           hardly needs bad news, the political dispute       Consequently, if this dispute results in a sus-
          such as government bonds in order to inject        the outlook for growth and inflation, saying,        between Japan and China over a group of            tained decline in Chinese demand for Japanese
          liquidity into the economy. The idea is to boost   “Economic activity is leveling off.” Unusually,      islands is starting to have a real impact on the   products, it could have real consequences for
          the money supply, thereby creating some infla-     the economy minister attended the latest meet-       economy. Japan’s major automotive companies        Japan’s already troubled industrial sector.
          tion. Other goals include keeping market inter-    ing of the bank’s policymaking committee. He         report that, in September, sales of Japanese
          est rates low and putting downward pressure        said that he wanted to express his “sense of
          on the value of the yen. Yet the policy, which     crisis” to the bank. Clearly he failed to move
          involved purchases of 45 trillion yen worth of     the bank toward a more aggressive stance. Still,
          assets (roughly US$570                                                some observers now believe
          billion), has yet to                                                  that the bank will boost the
          result in any inflation.    Japan’s major                             quantitative-easing policy at
          Perhaps that is because                                               its next meeting, especially if
          it is not very aggres-      automotive                                it continues to downgrade its
          sive compared to what                                                 assessment of inflation.
          has been done by the        companies                                     Meanwhile, some indica-
          US Federal Reserve or                                                 tors suggest that the health
          the Bank of England.        report that, in                           of the Japanese economy is
          Consequently, on                                                      not improving. The well-
          September 18, 2012,         September, sales                          known Tankan survey,
          the Bank of Japan                                                     which measures confidence
          boosted its program of      of Japanese brand                         among manufacturers,
          quantitative easing by                                                declined in September. This
          10 trillion yen, demon-     vehicles in China                         was the fourth consecu-
          strating that the bank                                                tive decline in this quar-
          is concerned about          dropped sharply.                          terly measure. In addition,
          continued deflation                                                   exports fell in August for the
          and a high-valued yen.                                                third consecutive month,
          It also means that the bank recognizes that the    declining by 5.8 percent year over year, and
          Federal Reserve’s new third round of quanti-       imports fell 5.4 percent due to a recent slide
          tative easing is likely to put downward pres-      in oil prices, marking the sharpest decline in
          sure on the US dollar and, therefore, upward       nearly three years. Industrial production fell
          pressure on the yen. Yet again, the question of    in July, and purchasing managers’ indices for
          whether this will be sufficient must be asked.     both manufacturing and services were down
               By October, with Japanese government          in August. On the other hand, new orders for
          officials urging a more accommodative policy,      machinery rose 4.6 percent from June to July.

28                                                                                                                                                                                                                         29
                                                                                                              India   Geographies

        Pralhad Burli is Senior
        Analyst at Deloitte
        Research, India

        India: Cautious Optimism
        by Pralhad Burli

                                                           A step forward, but will
        A     LL of a sudden, the cogs of government
              policy have been set in motion. While
        the government’s reform agenda momen-
                                                           the government retract?

        tarily raised hopes, the implementation of             The government decided to allow foreign
        the reforms remains uncertain. The economy,        players to invest up to 51 percent in multi-
        however, is not out of the woods yet. Weak         brand retail. This announcement opens up
        industrial production, an erratic and delayed      India’s retail sector for multinational retail
        monsoon, muted global demand, and policy           giants, but there are some restrictions. Retail
        uncertainty cloud India’s economic outlook.        stores can be set up only in cities with a popu-
        Meanwhile, inflation remains elevated, and the     lation of more than 1 million. The minimum
        government’s woes arising from a high fiscal       investment must be $100 million, and at
        and current account deficits continue to con-      least 50 percent of the investment must be in
        strain the economy. Growth projections have        back-end infrastructure within three years.
        been lowered several times, and analysts pre-      Moreover, state governments will have the
        dict that India will grow at less than 6 percent   right to decide whether or not they will allow
        during the 2012–2013 fiscal year.

  30                                                                                                                      31
Global Economic Outlook: 4th Quarter 2012                                                                                                                                                                             India    Geographies

          foreign direct investment (FDI) in the retail         strike soon after the reforms were announced.          Limited options, limited action                          Through its current policy stance, the RBI
          sector in their respective states.                    Furthermore, the National Federation of LPG                In April 2012, the Reserve Bank of India         has reiterated that containment of inflation
              The decision to allow FDI in retail can           Distributors of India has threatened to go on          (RBI) aggressively cut its policy rate by 50 basis   remains its primary focus. Driven by a rise in
          potentially eliminate several inefficiencies that     a strike against the government’s multiple-rate        points. In its mid-quarter review in June, it did    food prices, consumer price inflation came in
          mar India’s retail sector. However, the politi-       policy on cooking gas cylinders. Some state            not opt for further policy easing. While the         at 10.3 percent in August 2012. Food prices
          cal consequences of the decision have already         governments have intervened by increas-                domestic economy remained fairly sluggish            for consumers accelerated to 12.0 percent in
          cropped up. The government faced significant          ing the limit on subsidized cylinders to nine,         between June and September, global macro-            August from 11.5 percent in July. Meanwhile,
          political backlash from the opposition parties        while others have waived state taxes on the            economic weaknesses did not subside either.          revised CPI data for July remained at 9.9
          as well as its allies. One of the government’s        sale of diesel. The backlash against the subsidy       Industry participants anticipated that the RBI       percent. Vegetable prices witnessed the high-
          allies has already withdrawn its support from         reform is just beginning, and political parties        would cut interest rates and prop up India’s         est increase at over 20 percent during August.
          the ruling coalition. While the government is         and trader unions are demanding a rollback of          negative investment climate. However, in its         Currently, inflation is well beyond the cen-
          unlikely to collapse on the back of this deci-        these reforms. The ensuing outcome is difficult        policy meeting in September, the RBI main-           tral bank’s comfort level. In addition, a weak
          sion, the implementation of the FDI policy            to predict.                                            tained its monetary stance and kept the policy       monsoon is expected to have a significant
          is unlikely to be smooth.                                                         The government’s
          The central government is
          unlikely to backtrack on its
                                             Given India’s huge                         subsidy bill rose substan-
                                                                                        tially, owing to a decline
          policy stance because state
          governments make the final
                                             consumer base and                          in the value of the rupee
                                                                                        and elevated prices of
          decisions about whether or
          not to allow retailers into
                                             a rising middle                            petroleum products.
                                                                                        While the subsidy draw-
          the country. But, as of this
          writing, only 10 states have
                                             class, global retail                       down is unlikely to solve
                                                                                        India’s fiscal woes, it is
          decided to allow FDI in
          multi-brand retail. The suc-
                                             companies are                              considered to be a step in
                                                                                        the right direction. India’s
          cess of multinational orga-
          nizations that enter India’s
                                             excited about their                        high-deficit problem
                                                                                        raises the interest rates
          retail space may depend on
          how they and the govern-
                                             growth prospects.                          for domestic borrowing,
                                                                                        which impacts private
          ment are able to assuage the                                                  investment; it also
          fears of those who are likely                                                 restricts the monetary
          to be affected by their presence. Given India’s       policy options of the central bank because defi-
          huge consumer base and a rising middle class,         cits are usually financed by borrowing funds
          global retail companies are excited about their       from the central bank.
          growth prospects. However, retail outlets have            Meanwhile, the finance ministry approved
          faced the ire of angry mobs in the past, and          49 percent FDI in the insurance and pen-
          multinational retailers will likely tread cau-        sion sector, up from the current ceiling of 26
          tiously amid uncertainty.                             percent. However, the bill is yet to be approved
              Another policy decision that met stiff politi-    by the parliament. In addition, the government         repo rate unchanged at 8 percent. However,           impact on grain production, and farm output
          cal opposition was the reduction of subsidies         has proposed allowing foreign minority stakes          the cash reserve ratio (CRR) was lowered by          may experience a contraction this year. As
          on diesel and cooking gas. The government             in the aviation, electricity trading, and broad-       25 basis points to 4.5 percent. The CRR cut is       such, food price inflation is likely to persist.
          decided to restrict supply of subsidized cook-        casting industries. Finally, the government            likely to inject primary liquidity in the banking    However, abundant rainfall in the latter half of
          ing gas to six cylinders per household in a year      will also divest its equity ownership in some          system to the tune of $3.1 billion and would         the monsoon season will likely ensure ade-
          and increase the price of diesel by 5 rupees per      state-owned corporations. It may be relatively         likely have a larger cumulative impact on the        quate irrigation for the winter crop.
          liter, which led to political resistance. All major   easier to implement these reforms as they are          economy through the money multiplier.
          political parties also participated in a day-long     unlikely to face significant political roadblocks.

32                                                                                                                                                                                                                                 33
Global Economic Outlook: 4th Quarter 2012                                                                                                                                           India   Geographies

              Finally, the government’s recent policy       market participants, thus crowding out               to currency risk. The Reserve Bank of India’s
          announcements regarding an upward revi-           private investment.                                  timely intervention stemmed the decline and
          sion in diesel prices and a partial curtailment       In the 2012–2013 fiscal year, the govern-        bolstered investor confidence. As a result, the
          in subsidy on cooking gas are likely to put       ment expects the fiscal deficit to be restricted     rupee has appreciated in recent months, after
          upward pressure on inflation in the short term.   to 5.1 percent of GDP. However, that target          witnessing a steep drop between February and
          However, over the medium term, these initia-      seems ambitions and is likely to be missed.          June this year. However, if India’s economic
          tives are expected to help the central bank to    Subsidies on oil and other petroleum prod-           prospects do not improve or investors flee to
          manage inflation and strengthen India’s macro-    ucts, fertilizers, and expenses on social welfare    safer assets as the European crisis deepens, the
          economic fundamentals. The central bank may       programs will make it extremely difficult to         rupee could experience some volatility.
          adopt an easier monetary policy if inflation      contain the fiscal deficit. Furthermore, any             India’s economy is operating below its
          declines to manageable levels.                    decision to deregulate diesel prices further or      potential, and a return to pre-crisis levels of
                                                            cut subsidies is likely to face political hurdles.   growth is unlikely in the near
          Twin deficit, twin challenge                      In the absence of additional fiscal reforms,         future. Given the global economic
                                                            the central government’s deficit will likely         uncertainty and India’s domestic        While the government’s reform
             Some of India’s macroeconomic chal-            range between 5.6 and 5.9 percent of GDP.            macroeconomic challenges, the
          lenges stem from its twin deficit problem.        Combined with the deficit of the state govern-       downside risks to the economy           plan is a welcome sign, it may
          Government expenditures exceed revenues,          ments, the overall deficit could be as high as 9     outweigh the upside. In an
          resulting in a fiscal deficit, and the country    percent of GDP.                                      already-inflationary environment,       be too early to celebrate.
          imports more than it exports, leading to a            Moreover, ambiguity pertaining to the            a weak monsoon is likely to push
          current-account deficit. Persistent current       government’s policy around taxation of foreign       food prices even higher, which
          account deficits put pressure on the exchange     capital flows led to a huge exodus of foreign        may dampen domestic consump-
          rate, and additional government borrow-           funds from India. This put additional pressure       tion. Furthermore, a weak performance in the
          ing increases the borrowing cost for other        on the exchange rate and exposed importers           agricultural sector does not bode well for the
                                                                                                                 economy. Finally, India will remain vulnerable
                                                                                                                 to the geopolitical tensions in the Middle East,
                                                                                                                 which may lead to a spike in global oil prices.
                                                                                                                 While the government’s reform plan is a wel-
                                                                                                                 come sign, it may be too early to celebrate.

34                                                                                                                                                                                              35
                                                                                                                                                                    Russia   Geographies

  Russia: Slowing Down
  by Dr. Ira Kalish

         I t is unfortunate that, at a time when the
           global economy is decelerating and major
         central banks are taking more aggressive action
                                                             investment. In addition, a rising currency
                                                             would hurt the competitiveness of noncom-
                                                             modity exports and, by boosting imports,
                                                                                                                Second, business investment accelerated due to
                                                                                                                strong cash flow, especially in the energy sector
                                                                                                                when energy prices were rising. Third, govern-
         to boost growth, Russia’s central bank finds        would damage the trade balance.                    ment spending rose early this year in anticipa-
         it necessary to tighten monetary policy. In             The question, of course, is whether the        tion of the election in March. The lingering
         mid-September, the Central Bank of Russia           central bank’s rate increase is a one-off action   effects of fiscal stimulus remain.
         boosted its benchmark interest rate by 25 basis     or the start of a new round of monetary policy         Many of the factors that contributed to
         points, citing the risk of rising inflation and,    tightening. Some analysts believe that the cen-    strong growth of domestic demand have
         importantly, rising expectations of inflation       tral bank has only just begun, and that more       already begun to reverse, even before the
         in the marketplace. The inflation problem           rate increases are in the cards. That is because   central bank raised interest rates in September.
         stems largely from rising food prices, as well      core inflation has lately accelerated from 3.6     First, the acceleration of inflation has eroded
         as from the freeing of administered prices, but     percent in April to 5.9 percent in August—         the gain in real income for consumers. In
         the central bank has noted that this can create     above the central bank’s target of 5–6 percent.    addition, banks have already begun to tighten
         expectations of inflation that lead to more         Moreover, although economic growth recently        lending standards for household borrowing.
         inflationary behavior among businesses and          has slowed largely because of export weakness,     Second, fiscal policy was tightened once the
         workers. The bank sees this as a greater prob-      domestic demand has remained strong. As a          election ended. Stimulus from the government
         lem than slowing output growth.                     result, there have been considerable wage pres-    has begun to diminish. Third, investment has
             There could be a silver lining to this other-   sures in a tight labor market. The unemploy-       begun to decelerate owing to weakening cor-
         wise cloudy situation: Increasing interest rates    ment rate has fallen from 6.1 percent a year ago   porate profits. The latter have been hurt by the
         will boost capital inflows into Russia, causing     to 5.2 percent in August. This was the lowest      rapid rise in wages as well as by the weakness
         a rise in asset prices and a boost to wealth.       rate of unemployment recorded since the end        of demand in Western Europe.
         Moreover, such capital flows would have the         of the Soviet Union. Wages, consequently, have         The end result is that the domestic side of
         effect of boosting the value of the Russian         risen about 15 percent in the past year.           the economy is showing signs of weakness,
         ruble, thus reducing import prices and reliev-          Why has domestic demand been so strong?        which will only be exacerbated by the tighten-
         ing some of the inflationary pressure.              First, consumer spending has grown rapidly,        ing of monetary policy. Thus, Russia appears
             On the other hand, rising interest rates        in part due to rising real wages and in part due   headed for a slowdown.
         could stifle already weak private sector            to a rapid increase in consumer leveraging.

  36                                                                                                                                                                             37
                                                                                                                Brazil   Geographies

  Brazil: Chasing Growth
  by Dr. Ira Kalish

         T    he Central Bank of Brazil has been easing
              monetary policy in order to boost growth,
         having decided that the slowdown in economic
                                                            lower than a year ago), there are signs of
                                                            economic renewal. Unemployment has fallen
                                                            to a record low of 5.5 percent. Moreover, while
         activity is more worrisome than the level of       second-quarter GDP was hardly up from a year
         inflation. Yet going forward, the central bank     ago, it did grow at an annual rate of 1.6 percent
         will have to find the right balance between the    from the first quarter, a significant improve-
         goals of higher growth and lower inflation,        ment from earlier quarters and the fastest rate
         lest one of the goals becomes unattainable.        of growth since early 2011. Thus, the easing of
         Moreover, with the US Federal Reserve hav-         monetary policy is evidently working despite
         ing initiated a third round of asset purchases     negative global headwinds. Indeed, second-
         (quantitative easing), Brazil is one of many       quarter growth improved despite severe
         emerging countries to be concerned that the        export weakness.
         US policy will cause a boost in the value of the       Not only has monetary policy been eased,
         local currency. Brazil’s policy will thus aim to   fiscal policy also has contributed to growth.
         also keep the currency competitive.                The government has cut the interest rate
             The central bank has cut the benchmark         charged by its development bank. It has also
         SELIC rate 11 times in the past year. The rate     boosted spending on public investment, pro-
         has declined by 525 basis points, reaching a       vided tax incentives for consumer spending on
         record low of 7.3 percent in September of this     durable goods, and sold concessions for private
         year. Although economic growth remained            sector development of public infrastructure.
         feeble during the first half of 2012 (real GDP         Meanwhile, inflation remains slightly
         was up only 0.5 percent in the second quarter,     higher than the central bank target of 4.5

  38                                                                                                                         39
Global Economic Outlook: 4th Quarter 2012                                                                                                                                                                          Brazil    Geographies

          percent. In September, consumer prices were          around, the government has chosen to impose
          up 5.3 percent from a year ago. Moreover,            a new round of capital controls on portfolio
          this was the third straight quarter in which         investment that aim to discourage hot money
          inflation accelerated. All these indicate a          from flowing into Brazil. One effect of these
          developing problem.                                  controls has been to shift inbound money from
              The other big issue is the currency. During      portfolio to direct foreign investment. Despite
          the past year, as interest rates were cut, the       weakness in the global economy, foreign direct
          Brazilian real declined by 22 percent against        investment has remained strong.
          the US dollar. While a cheaper currency tends           What can be expected going forward? It
          to be inflation-                                                                     seems likely that
          ary, it also
          leads to more        With stimulation from both                                      Brazilian growth
                                                                                               will recover in
          pricing of non-      the Central Bank of Brazil and                                  2013, barring
                                                                                               a deeper crisis
          exports. This        the government, domestic                                        in Europe or a
                                                                                               recession in the
          has been seen
          as a good            demand, including both                                          United States.
                                                                                               With stimula-
                                                                                               tion from both
          offset to the
          weakness in          consumer spending and public                                    the Central
                                                                                               Bank of Brazil
          global demand
          for Brazilian        investment, is picking up.                                      and the govern-         On the other hand, there are a few things       productivity growth, and often contribute to
          exports. Yet,                                                                        ment, domes-        that worry observers: rising inflation, increased   inflationary pressures. The fiscal deficit could
          the recent                                                                           tic demand,         protectionism on the part of the government,        become worrisome if it is financed through
          decision by the US Federal Reserve to engage         including both consumer spending and public         a rising fiscal deficit, and the continued weak     monetary creation (which causes inflation) or
          in a third round of quantitative easing will, it     investment, is picking up. With lower interest      state of the global economy. Protectionism has      if it leads to higher market interest rates (which
          is feared, cause the Brazilian real to increase in   rates and increasing foreign direct investment,     involved a variety of government regulations        would discourage private sector investment).
          value. This was the fear two years ago during        private sector investment should pick up in         aimed at boosting the domestic content of           If, however, growth accelerates sufficiently, that
          the last round of asset purchases by the US          2013. Moreover, Brazil is now seen as a favor-      manufactured goods. Historically, such rules        in itself could relieve the fiscal deficit by driv-
          Federal Reserve. At that time, Brazil imposed        able location for investment in energy, manu-       have tended to encourage inefficiency, reduce       ing an increase in tax revenue.
          a tax on inbound portfolio investment to             facturing, and offshored services.
          discourage a rise in the currency. This time

40                                                                                                                                                                                                                               41
                                                                                                                Korea   Geographies

        Dr. Satish Raghavendran neha Jain is an Analyst
        is Vice President, Com- at Deloitte Research,
        munications excellence, India
        Deloitte Consulting Ser-
        vices India Pvt. Limited

 Korea: S(e)oul Searching
 by Dr. Satish Raghavendran and Neha Jain

        T     he world today knows Korea not only for
              its smartphones but also for “Gangnam
        Style,” the recent pop single by rapper Psy that
                                                              rapid industrialization from the 1960s to 1980s
                                                              resulted in double-digit growth rates, which
                                                              set the trend for robust private consumption
        holds a Guinness World Record for being the           in future decades. Today, private consump-
        “most liked video in YouTube history.” The            tion accounts for almost half of Korea’s GDP.
        music video is shot in the affluent Gangnam           However, similar to many developed econo-
        district of Seoul, which benefited from Seoul’s       mies, rising levels of affluence have led to a
        rapid economic development and planned                consistent increase in conspicuous consump-
        expansion of in the 1970s. The video’s humor-         tion as Korean households strive to achieve
        ous compilation of unusual dance moves can            a higher social status. One of the immediate
        be perceived as a social satire of the materialis-    consequences has been the rise in household
        tic lifestyle of Gangnam’s elite residents. It also   indebtedness; Korean household debt stands
        depicts two fundamental characteristics of the        as high as 160 percent of disposable income,
        Korean economy: conspicuous consumption               which is even higher than the rate in the
        and rising income inequality.                         United States right before the subprime crisis.
            Consumption has long been the main
        driver of the Korean economy. Historically,

 42                                                                                                                         43
Global Economic Outlook: 4th Quarter 2012                                                                                                                                                                     Korea     Geographies

          Rising household debt                                   Record-high household debt levels have              Korea’s export reliance is a result of an      the service sector’s efficiency and productiv-
                                                              prompted policy action from the government.         outward-looking strategy adopted in the 1960s.     ity. The service sector has traditionally been
              Korean consumer debt is equivalent to over      So far, the government has adopted a loose          The strategy envisaged economic growth             protected by several regulations that should
          80 percent of Korea’s GDP and has expanded          monetary policy stance to relieve pressure on       through labor-intensive manufactured exports,      be loosened in order to attract more competi-
          by an average of almost 9 percent per year          borrowers; on the other hand, it has tightened      giving Korea a competitive advantage over          tion and encourage investment in vocational
          since 2005. Data from the Central Bank of           measures for lending institutions to keep a         countries with limited human resources. The        training for employees. This strategy would
          Korea shows that at the end of the first quarter    check on household debt. The government             government greatly encouraged foreign direct       also empower highly skilled professionals to
          of 2012, outstanding loans by the depository        faces an additional task of reviving private        investment (FDI) in the manufacturing sector,      drive innovation and reduce income disparities
          and other financial corporations stood as high      consumption, which has been declining as            which made up for the shortage of domes-           and migration of highly skilled professionals to
          as $757 billion—the highest level in the seven      overstretched households are tightening their       tic savings. This strategy served Korea well       foreign countries.
          years for which data is available. What is worri-   purse strings. Growth in private consump-           for the next few decades, leading to rampant           Moreover, a healthy and vibrant service
          some is the fact that household indebtedness        tion, which is the main driver of growth after      industrialization and a rapidly expanding          sector can exert positive externalities on the
          is rising in a sluggish economy with stagnant       exports, is slowing down as well. After register-   export sector.                                     manufacturing sector. In short, there is a room
          income growth and declining property prices.        ing a growth rate of 4.4 percent in 2010, private       However, in recent years, this outward-        for the services sector to increase its share to
              Rising real estate mortgages, especially at     consumption growth almost halved to 2.3             looking strategy and the openness of the           the GDP and provide immunity to external
          a time when external headwinds are having           percent in 2011 and is forecasted to slow down      economy have exposed it to external economic       shocks. Indeed Korea’s large conglomerates,
          an adverse impact on the domestic economy,          to 1.9 percent this year. Underlining weaker        conditions including trade demand, currency        chaebols, can also play an important role in the
          present a growing risk to the banking sector.       consumer sentiment, retail sales have also          fluctuation, and volatile capital inflows. While   development of the service sector; currently
          Recent statistics from the central bank show        experienced steady declines over the past few       macro prudential measures taken by authori-        only about 4 out of Korea’s large enterprises
          that around 70 percent of outstanding loans in      months. Policy makers are thus faced with the       ties and the resilience of the economy itself      are operating in the service sector as com-
          the banking sector are in the form of real estate   dilemma of reviving consumption while ensur-        has cushioned the landing so far, manufactur-      pared with 12 out of 30 large enterprises in the
          mortgages, exposing the sector to fluctuations      ing the stability of household debt.                ing—Korea’s export-oriented growth engine—         United States.
          in property prices. Real estate prices in Seoul                                                         has lost its magic in the wake of major global         There is also a need to alter the export-led
          have already begun to contract; after negligible    The eggs and the export basket                      economic and geopolitical events.                  strategy in order to move up the value chain.
          growth in 2011, property prices have already                                                                                                               There are opportunities in newer technol-
          dropped 1.2 percent since the beginning of this         Korea’s growth engine is losing steam pri-      Soul searching in Seoul                            ogy areas; nanotechnology, pharmaceuticals,
          year. Further softening of the housing market       marily due to decelerating domestic consump-                                                           and energy offer employment to its skilled
          could lower the value of household borrowers’       tion, declining investment, and weaker export           This is perhaps a wake-up call for the South   workforce and encouraging entrepreneur-
          collateral and further amplify indebtedness.        growth. The export sector contributes to about      Korean policy makers to identify a new growth      ship. Diversification to high-value exports will
              Another concern stems from the growing          half of Korea’s GDP, leaving the economy vul-       engine that will catapult the economy back to      provide some immunity to strong competi-
          involvement of the nonbanking sector (credit        nerable to external headwinds. Korea’s exports,     a growth trajectory. Korea’s historic success      tion from its neighbors that produce low-cost
          card companies and mutual savings banks) in         which mainly consist of electronics and semi-       as a manufacturing champion came at the            manufactured goods. Perhaps geographical
          household debt. With looser regulations than        conductors, suffered a quarter-over-quarter         expense of the country’s service sector, which     diversification to emerging trading hubs in
          those imposed on the regular banking sector,        contraction of 1.4 percent during the second        was starved of capital and innovation that was     the Middle East and Africa could also reduce
          these institutions typically enforce less strin-    quarter of 2012. In the month of August alone,      directed toward manufacturing.                     dependence on its current trade partners.
          gent qualifying conditions on loan applicants       exports declined by 6.2 percent year-over-year,         However, the recent export slowdown                The South Korean economy is at a tipping
          but charge a higher rate of interest. Moreover,     the sixth month this year in which exports          and its negative impact on the manufactur-         point to explore new growth engines instead
          around 90 percent of household loans are sub-       have fallen. Exports to its main markets—           ing industry have highlighted the need to          of trying to stoke engines that are beset with
          ject to floating interest rates, leaving borrow-    China, Japan, the United States and the EU—         diversify away from both exports and manu-         fatigue. South Korean policy makers need to
          ers vulnerable to a rise in interest rates. While   all contracted. The outcome of the Eurozone         facturing while striving for a more balanced       design forward-looking policies that include
          the central bank has kept interest rates low,       debt crisis is uncertain, but depressed demand      and sustainable growth model. Although the         expansion of the service sector, export diversi-
          expected economic recovery in the next few          conditions are likely to persist for a few years    government has taken some steps to expand          fication, and regional development while also
          years could tighten policy rates and push up        and are expected to weigh down Korean               its service sector, it has become imperative       being mindful of the trade-offs. It is indeed
          variable mortgage rates.                            manufactured exports.                               to design more focused policies to improve         time for soul searching in Seoul.

44                                                                                                                                                                                                                          45
Global Economic Outlook: 4th Quarter 2012                                                                                                                                                                                                                                                                                                                     Appendix

Appendix                                                                                                                                                                                   Yield curves (as of October 10, 2012)*
                                                                                                                                                                                                                        US Treasury
                                                                                                                                                                                                                       bonds & notes
                                                                                                                                                                                                                                                             Eurozone govt.
                                                                                                                                                                                                                                                                                                    Brazil govt.
                                                                                                                                                                                                                                                                                                                                        India govt.
                                                                                                                                                                                                                                                                                                                                          actives          Russia‡
                                                                                                                                                                                            3 months                          0.10              0.33               0.02               0.10              7.75              2.78              8.18             5.80
                                                                                                                                                                                            1 Year                            0.16              0.24               0.03               0.10              7.41              2.23              8.03             6.38
GDP growth rates (YoY %)*                                                                        GDP growth rates (YoY %)*                                                                  5 Years                          0.68               0.75               0.55               0.18              8.97               2.74             8.03             7.94
                                                                                                 (Note: India's fiscal year is April-March)
   8                                                                                               20
                                                                                                                                                                                            10 Years                          1.74              1.78               1.51               0.77              9.82              3.26              8.12             8.56

                                                                                                   15                                                                                      Composite median GDP forecasts (as of October 10, 2012)*
   2                                                                                               10                                                                                                                          US                 UK            Eurozone             Japan             Brazil             China            Russia

   0                                                                                                                                                                                        2012                                2.2            -0.4                 -0.5             2.3                1.6                7.7           3.75
  -2                                                                                                                                                                                        2013                              2.05             1.15                  0.4             1.2                4.1                    8           3.6
  -4                                                                                                0                                                                                       2014                                2.6            2.15                  1.3             1.2                4.1                7.5           3.85
  -6                                                                                               -5
  -8                                                                                                                                                                                       Composite median currency forecasts (as of October 10, 2012)*
 -10                                                                                                                                                                                                                         Q4 12              Q1 13             Q2 13              Q3 13             2012               2013             2014
 -12                                                                                              -15                                                                                       GBP-USD                           1.6               1.6                1.6              1.6               1.6                1.6             1.6
    Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2                                   Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
    07 07 07 07 08 08 08 08 09 09 09 09 10 10 10 10 11 11 11 11 12 12                                   07 07 07 07 08 08 08 08 09 09 09 09 10 10 10 10 11 11 11 11 12 12                   euro-USD                         1.28             1,27                1.26            1.25               1.28              1.25             1.28
                                                                                                                                                                                            USD-Yen                            78               80                  81              83                 78                83               85
          US           UK         Eurozone        Japan                                                      Brazil         China     India         Russia
                                                                                                                                                                                            USD-Brazilian Real                  2             1.98                1.96            1.95                  2              1.95             1.99

Inflation rates (YoY %)*                                                                          Inflation rates (YoY %)*                                                                    USD-Chinese Yuan                 6.31             6.29                6.27            6.23               6.31              6.21             6.18
                                                                                                 (Note: Inflation data for India is based on the WPI)                                        USD-Indian Rupee               54.33             53.59                  53              52             54.33              51.75               51
                                                                                                  16                                                                                        USD-Russian Ruble              31.05             30.94                31.2           31.29               31.5             31.46           32.51
   4                                                                                              12                                                                                       OECD composite leading indicators (amplitude adjusted)†
   3                                                                                              10                                                                                                                           US                 UK           Eurozone            Japan              Brazil           China             India             Russia
   2                                                                                               8                                                                                        oct 10                          100.07            101.57            101.30            100.21            101.22           101.27            101.41             101.99
                                                                                                   6                                                                                        nov 10                          100.26            101.58            101.44           100.36             101.30           101.49            101.31             102.41
   0                                                                                                                                                                                        Dec 10                          100.47            101.61            101.57           100.52             101.34           101.60             101.18            102.72
                                                                                                                                                                                            Jan 11                          100.66            101.62            101.66           100.64             101.27           101.58            100.97             102.88
                                                                                                                                                                                            Feb 11                          100.78            101.60            101.69           100.69             101.10            101.47           100.68             102.91
  -2                                                                                              -2
                                                                                                                                                                                            mar 11                          100.81            101.54            101.65           100.67            100.89            101.33            100.31             102.77
  -3                                                                                              -4
                                                                                                                                                                                            Apr 11                          100.73            101.40            101.54           100.60             100.61            101.18             99.91            102.55
    Jan    May       Sep    Jan   May   Sep     Jan    May    Sep    Jan     Mar May Jul               Jan   May      Sep      Jan   May      Sep     Jan    May   Sep   Jan   Mar   Jun
     09     09        09     10    10    10      11     11     11     12     12 12 12                   09    09       09       10    10       10      11     11    11    12   12     12    may 11                          100.58            101.19            101.37           100.50             100.24            101.03            99.53             102.31
          US           UK         Eurozone        Japan                                                      Brazil         China     India         Russia
                                                                                                                                                                                            Jun 11                          100.37            100.89            101.14           100.43              99.79           100.90             99.25             102.13

                                                                                                                                                                                            Jul 11                          100.14            100.51           100.86            100.38              99.31           100.77              99.07            101.98
Major currencies vs. the US dollar*                                                  USD-Yen
 1.8                                                                                       100                                                                                              Aug 11                            99.96           100.11           100.58            100.35              98.87           100.64             98.95             101.91
                                                                                                                                                                                            Sep 11                            99.91            99.75           100.31            100.34              98.51           100.53             98.89             101.91
                                                                                            95                                                                                              oct 11                            99.99            99.48            100.11            100.41             98.25           100.41             98.91             101.96
                                                                                                                                                                                            nov 11                          100.20             99.34             99.97            100.51             98.08           100.28             98.98             102.05
 1.5                                                                                        90                                                                                              Dec 11                          100.45             99.32             99.89           100.64              98.07            100.13            99.00             102.12
                                                                                                                                                                                            Jan 12                          100.68             99.40             99.85            100.76             98.18           100.00             98.94             102.13
                                                                                                                                                                                            Feb 12                          100.85             99.50             99.83           100.83              98.41             99.89            98.79             102.02
                                                                                                                                                                                            mar 12                          100.92             99.60             99.80           100.85              98.63             99.74            98.56             101.66
 1.2                                                                                                                                                                                        Apr 12                          100.90             99.69             99.75           100.80              98.80             99.56            98.31             101.06
 1.1                                                                                                                                                                                        may 12                          100.82             99.76             99.67           100.69              98.94             99.45            98.06             100.32
                                                                                                                                                                                            Jun 12                          100.71             99.86             99.58           100.55              99.09             99.39             97.83              99.63
   1                                                                                        75
                                                                                                                                                                                            Jul 12                          100.61             99.99             99.48           100.40              99.26             99.39             97.62              99.11
   Jan      May      Sep    Jan   May   Sep      Jan   May     Sep     Jan     May    Sep
    09       09       09     10    10    10       11    11      11      12      12     12                                                                                                   Aug 12                          100.55            100.12             99.38           100.26              99.45             99.40             97.47             98.82
          GBP-USD           Euro-USD          USD-Yen (RHS)
                                                                                                                                                                                           *Source: Bloomberg      ‡mICeX rates       †Source: oCeD
*Source: Bloomberg
                                                                                                                                                                                           note: A rising CLI reading points to an economic expansion if the index is above 100 and a recovery if it is below 100. A CLI which is declining points to an economic
                                                                                                                                                                                           downturn if it is above 100 and a slowdown if it is below 100.

46                                                                                                                                                                                                                                                                                                                                                                   47
Global Economic Outlook: 4th Quarter 2012                                                                                                                                                                                    Appendix

Additional resources                                                                                               Contact information
                                                                                                                   Global Economics Team              Global Industry Leaders            U.S. Industry Leaders
                               Asia Pacific                                                                        Ryan Alvanos                       Consumer Business                   Banking & Securities and
                               Economic                                                                            Deloitte Research
                                                                                                                   Deloitte Services LP
                                                                                                                                                      Lawrence Hutter
                                                                                                                                                      Deloitte LLP
                                                                                                                                                                                           Financial Services
                                                                                                                                                                                          Robert Contri
                               October 2012
                                                                                                                   USA                                UK                                  Deloitte LLP
                               Weathering Headwinds                                                                tel: +1.617.437.3009               tel: +44.20.7303.8648               tel: +1 212 436 2043
                               China: When exports decline
                               Indonesia: Maintaining expansion
                               Japan: Contraction in the cards
                                                                                                                   e-mail:      e-mail:      e-mail:
                               Philippines: Growth from within

                                                                                                                                                      Energy & Resources                  Consumer & Industrial Products
                                                                                                                   Pralhad Burli
                                                                                                                   Deloitte Research                  Peter Bommel                        Craig Giffi
                                                                                                                   Deloitte Services LP               Deloitte netherlands                Deloitte LLP
                                                                                                                   India                              netherlands                         tel: +1.216.830.6604
                                                                                                                   tel : +91.40.6670.1886             tel: +31.6.2127.2138                e-mail:
                                                                                                                   e-mail:        e-mail:
                                                                                                                                                                                          health Plans and health
                                                                                                                                                                                           Sciences & Government
                                                                                                                   Dr. Alexander Börsch               Financial Services
                                                                                                                                                                                          John Bigalke
                                                                                                                   Deloitte & Touche GmbH             Chris Harvey
                                                                                                                                                                                          Deloitte LLP
                                                                                                                   Germany                            Deloitte LLP
                                                                                                                                                                                          tel: +1.407.246.8235
                                                                                                                   Tel: +49 (0)89 29036 8689          UK
                                                                                                                        tel: +44.20.7007.1829
Deloitte Research Thought Leadership                                                                                                                  e-mail:
                                                                                                                                                                                          Power & Utilities and
                                                                                                                   Dr. Ira Kalish                                                          energy & Resources
                                                                                                                   Deloitte Research                  Life Sciences & Health Care         John mcCue
Deloitte Review Issue 11                                                                                           Deloitte Services LP               Robert Go                           Deloitte LLP
                                                                                                                   USA                                Deloitte Consulting LLP             tel: +216 830 6606
  From mad man to superwoman: The inevitable rise of the chief marketing officer in the age of the                 tel: +1.213.688.4765               USA                                 e-mail:
  empowered customer.                                                                                              e-mail:       tel: +1.313.324.1191
                                                                                                                                                      e-mail:            Public Sector (Federal)
  Cloud wars: How incumbents can respond to cloud disruption.                                                      Dr. Carl Steidtmann                                                    Robin Lineberger
                                                                                                                   Deloitte Research                  Manufacturing                       Deloitte Consulting LLP
  The engagement economy: How gamification is reshaping businesses.                                                Deloitte Services LP               Hans Roehm                          tel: +1.517.882.7100
                                                                                                                   USA                                Deloitte & touche Gmbh              e-mail:
  The Ito factor: In the digital startup world, Joi Ito is a bona fide rock star, but the outspoken entrepreneur   tel : +1.303.298.6725              Germany
                                                                                                                                                      tel: +49.711.16554.7130             Public Sector (State)
  faces his biggest challenge yet in revitalizing MIT’s venerable Media Lab.                                       e-mail:
                                                                                                                                                      e-mail:          Bob Campbell
                                                                                                                                                                                          Deloitte Consulting LLP
  Pulling ahead vs. catching up: Trade-offs and the quest for exceptional profitability.                           Ian Stewart
                                                                                                                                                      Public Sector                       tel: +1.512.226.4210
                                                                                                                   Deloitte Research
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