1. 1 Economic overview – moving from less worse to better 9 June 2009

2. 2 Global downturn continued to ease in May The Global PMI – covering manufacturing and services – rose in May to its highest since last September, suggesting the annual rate of worldwide GDP contraction has eased from a post-war record of -3.5% in Q1 to perhaps just -1% in Q2. Job losses have also moderated, with employment falling in May at its slowest rate since last October. Global GDP Global Employment

3. 3 Improvement led by Asia, then Anglo-Saxons Developed Emerging PMIs indicate that the improvement has been led by Asia – notably China and India, where manufacturing output has now risen for two months – followed by the US and UK. The Eurozone and much of Central and Eastern Europe are lagging, but have nevertheless seen rates of decline moderate considerably in recent months.

4. 4 From Japanese exports to UK services, business trends have rebounded Japanese exportsUK services activity The recession has been characterised by a sharp retrenchment of global trade in response to the financial crises in the west. Its therefore interesting to see key two indicators, of Japanese exports and UK services activity (which includes banking), swing back far faster than anticipated to pre-Lehman levels.

5. 5 V or W? Does the recovery have legs? Orders-to-inventory ratios point to further production growth in coming months. There is a concern that the current improvement could be short-lived once stocks are rebuilt and high unemployment chokes growth momentum (meaning a W shaped GDP trend in 2009-10 rather than a V shape). But other PMI data suggest we are seeing something more sustainable: – Stocks are still falling at a near-record rate, so current improved trends are not just based on inventory building in manufacturing. – Underlying confidence in services (as well as manufacturing) rose again in May. Financial conditions also continued to improve as fears of corporate default eased ….

6. 6 Inter-bank markets are functioning more normally, and credit default fears have eased. The narrowing of the LIBOR-OIS spread indicates that banks have become more willing to lend to each other. At the same time, credit spreads have narrowed due to reduced fears of corporate default, helping boost economic activity. Though in both cases we are not yet back to pre-crisis levels.

7. 7 Equities have followed macroeconomic trends Stock markets have rebounded around the World, in line with signs of a bottoming out of the recession. Following the macroeconomic trends, as described by the PMIs, emerging markets have been favoured over the developed world. From their lows in March, the FTSE indices for the emerging and developed worlds have risen 71% and 43% respectively*. This probably reflects a cyclical return of risk appetite – but also follows the suggestion that China and India may have decoupled from the US, as PMIs show that domestic demand in these countries has helped drive their recoveries. * as of 3 June.

8. 8 US$ shunned as FX markets show a return of risk appetite, especially for commodity currencies % gain on US$ (2009 low to 4 June): Euro11.6 GB£15.0 Yen4.4 Aus$21.6 NZ$22.4 Ca$15.6 SA Rand24.7 Bra R20.9 The US dollar fell in May as the brighter outlook for the worlds economy caused a shift to increased risk appetite, especially against commodity-based currencies. Traders noted that demand for raw materials will rise as the manufacturing upturn gains traction. The euro and sterling also gained, reflecting the better-than-expected economic data.

9. 9 Focus shifts from recession to funding the recovery The month of May has seen shifts in many key indicators, which are now showing actual increases rather than just the rate of decline getting less worse. Forecasters & policymakers are therefore increasingly revising up their growth predictions, many for the first time in the downturn. But many also remain very nervous about longer-term prospects and the possibility of a bumpy or W shaped recovery path. Notably, consumer spending and public sector restraint will subdue growth next year. Anaemic growth means governments may struggle to fund rising deficits, most neatly illustrated by a widening of sovereign CDS spreads (see chart). Policymakers may at last be re-entering charted waters as far as growth and inflation are concerned, but their job is far from over.