1. The World in 2050 Does the global financial crisis change the long-term outlook? John Hawksworth Head of Macroeconomics PricewaterhouseCoopers LLP Porto, 12 December 2008

2. PricewaterhouseCoopers LLP 12 December 2008 Slide 2 Agenda 1. Global financial crisis and short-term economic outlook 2. Key results from PwC long term economic growth model: - Relative growth rates and size of economies by 2050 - China vs India - other key emerging economies 3. Implications for European business: - potential winners and losers in next 10 years - longer term shift to a low carbon economy 4. Summary

3. PricewaterhouseCoopers LLP 12 December 2008 Slide 3 Long-run average = 3.2% World GDP growth has been above trend since 2004 …

4. PricewaterhouseCoopers LLP 12 December 2008 Slide 4 Long-run average = 3.2% … but is now expected to move sharply below trend due to the global financial crisis Forecast

5. PricewaterhouseCoopers LLP 12 December 2008 Slide 5 Anatomy of a Crisis: Stage 1 – global boom driven by easy credit and low prices of goods from China/E7 (2004 to mid-2007) E7* growth high G7 growth high Credit boom Housing bubbles Interest rates low Inflation down Goods prices down *E7 = largest seven emerging economies

6. PricewaterhouseCoopers LLP 12 December 2008 Slide 6 Anatomy of a Crisis: Stage 2 – double hit from credit crunch and rising commodity prices (mid-2007 to mid-2008) E7 growth still high G7 growth slowing Credit crunch Housing bust Interest rate dilemma Inflation up Commodity prices up ? - ? + -

7. PricewaterhouseCoopers LLP 12 December 2008 Slide 7 Anatomy of a Crisis: Stage 3 – banking crisis deepens while commodity prices fall back (September 2008 to date) E7 growth falls sharply G7 move into recession Banking crisis House prices fall further Interest rates down Inflation down Commodity prices down ? - - +/? -

8. PricewaterhouseCoopers LLP 12 December 2008 Slide 8 Broad-based decline in global growth now expected Risks clearly weighted to the downside in the short term

9. PricewaterhouseCoopers LLP 12 December 2008 Slide 9 How long will the effects of the global financial crisis last? Short term (1-2 years): major downward effect on world growth Medium term (3-5 years): gradually fading effects, though build-up of public debt could slow recovery (but less so in China than US/EU) Longer term: should not significantly change potential growth unless there is an unprecedented global depression and/or a return to protectionism

10. PricewaterhouseCoopers LLP 12 December 2008 Slide 10 Original 2006 study covered the 17 largest economies in the world based on GDP at PPPs (World Bank estimates) G7 plus Spain, Australia and South Korea E7 economies - BRICs (Brazil, Russia, India and China) - Indonesia, Mexico and Turkey Extended March 2008 study: also covers 13 other emerging market economies with potential to be in top 30 economies in the world by 2050

11. PricewaterhouseCoopers LLP 12 December 2008 Slide 11 Long-term GDP growth model structure Growth driven by: - Investment in physical capital - Working age population growth (UN projections) - Investment in human capital (rising average education levels) - Catch-up with US productivity levels (at varying rates) Real exchange rates vary with relative productivity growth Note: results are not forecasts, but rather indicate growth potential assuming broadly growth-friendly policies are followed and no major disasters (e.g. nuclear war, radical climate change)

12. PricewaterhouseCoopers LLP 12 December 2008 Slide 12 How big are the Chinese and Indian economies? Index (US = 100) Source: PwC estimates for 2007 using World Bank data for 2006

13. PricewaterhouseCoopers LLP 12 December 2008 Slide 13 Age vs Youth Fast ageing Russia Korea Japan China Italy Spain Germany Younger for longer India Indonesia Brazil Mexico Turkey US (relative to EU) Demographics will also affect consumption patterns, but only gradually

14. PricewaterhouseCoopers LLP 12 December 2008 Slide 14 India US UK China Brazil Russia Projected average growth of working age population: 2006-50 -1.5% -1.0% -0.5% 0.0% 0.5% 1.0% India Turkey Brazil Mexico US Indonesia Australia Canada UK France China Germany Spain Italy Japan Korea Russia Source: UN % change per annum Turkey Germany

15. PricewaterhouseCoopers LLP 12 December 2008 Slide 15 Key model results GDP growth Relative size of economies GDP per capita levels

16. PricewaterhouseCoopers LLP 12 December 2008 Slide 16 India China Brazil Russia US Japan

17. PricewaterhouseCoopers LLP 12 December 2008 Slide 17 Projected average real potential GDP growth: 2007-50 % real GDP growth p.a.

18. PricewaterhouseCoopers LLP 12 December 2008 Slide 18 Projected average real GDP growth: 2007-50 % real GDP growth p.a.

19. PricewaterhouseCoopers LLP 12 December 2008 Slide 19 Relative size of Big 4 economies: GDP at market exchange rates Constant 2006 US $bn

20. PricewaterhouseCoopers LLP 12 December 2008 Slide 20 China and India dominate E7 economies (relative GDP at MERs) Index: US = 100

21. PricewaterhouseCoopers LLP 12 December 2008 Slide 21 But other E7 economies could grow to significant size by 2050 Brazil could be bigger than Japan Russia and Mexico could be bigger than Germany or the UK Turkey could be of similar size to Italy Average GDP per capita in E7 could by 2050 reach current G7 levels (but still well below projected G7 levels in 2050)

22. PricewaterhouseCoopers LLP 12 December 2008 Slide 22 Potential GDP in 2050 in other fast-growing emerging economies (relative to UK = 100 with Turkey as an additional comparator) Index (UK GDP in 2050 = 100) Turkey

23. PricewaterhouseCoopers LLP 12 December 2008 Slide 23 China and India have different comparative advantages India has strengths in: - IT skills and technologies - low cost English speaking staff for offshoring services - younger population China has advantages in: - low cost manufacturing - higher average education levels - higher savings and investment rates Should create potential for mutually beneficial trade But: also competing for natural resources to support growth

24. PricewaterhouseCoopers LLP 12 December 2008 Slide 24 What might derail growth in China and India? Macroeconomic instability – knock-on effects of global crisis: - China more vulnerable on exports - India more vulnerable on capital flows Energy, water and transport infrastructure constraints Over-investment without proper capital allocation mechanisms (c.f. Japan in 1980s/1990s) Protectionism in key export markets (US/EU) Political instability (linked to rising economic inequality and social unrest) Environmental crises Other emerging economies likely to face similar challenges

25. PricewaterhouseCoopers LLP 12 December 2008 Slide 25 Implications for business Possible winners and losers over next 10 years Longer term shift to a low carbon economy

26. PricewaterhouseCoopers LLP 12 December 2008 Slide 26 Potential impact on European companies over next 10 years Winners Retailers Global brand owners Business and financial services Creative industries Healthcare and education providers Niche high value added manufacturers Losers Mass market manufacturers (both low tech and increasingly hi-tech) Financial services companies not able to penetrate E7 markets who become vulnerable at home to E7 entrants Companies that over-commit to E7 without right local partners and business strategies

27. PricewaterhouseCoopers LLP 12 December 2008 Slide 27 Economic growth projections imply more than doubling of primary energy consumption in ‘Business as Usual’ scenario Source: World Bank and BP data for 2006, PwC model estimates for later years Index (2006 = 100) Climate change challenge remains as severe as ever

28. PricewaterhouseCoopers LLP 12 December 2008 Slide 28 Achieving Greener Growth – global carbon emissions need to be cut to only around half current levels by 2050 Source: PwC model projections from July 2008 report GtC pa Business as usual Greener energy mix Faster energy efficiency improvements Carbon capture and storage Greener Growth (with CCS)

29. PricewaterhouseCoopers LLP 12 December 2008 Slide 29 Advanced economies (G7) need to lead the way in cutting carbon emissions if emerging economies (E7) are later to follow Source: PwC model projections for Greener Growth + CCS scenario Note: E7 = China, India, Brazil, Russia, Mexico, Indonesia and Turkey; G7 = US, Japan, Germany, UK, France, Italy and Canada GtC pa E7 G7

30. PricewaterhouseCoopers LLP 12 December 2008 Slide 30 All major sectors need to undergo radical shift to a low carbon economy by 2050 – big challenge, but also big opportunities Source: PwC model estimates for BAU and Greener Growth + CCS scenarios for 2050 Gigatonnes of carbon (GtC) c.75% reduction vs BAU requiring action in all sectors

31. PricewaterhouseCoopers LLP 12 December 2008 Slide 31 Summary The global financial crisis will, if anything, accelerate the shift in the global centre of gravity to the East: - US, China and India to be three major economies by 2050 - China could overtake US as early as 2025 - India could grow faster, but China will remain much bigger But: major public policy challenges for China and other emerging economies to sustain recent strong growth trend Potential ‘win-win’ for European economies if they can remain open, flexible and focused on human capital – but there will be losers as well Shift to a low carbon economy provides both huge challenges and huge opportunities for European businesses

32. PricewaterhouseCoopers LLP 12 December 2008 Slide 32 © 2008 PricewaterhouseCoopers LLP. All rights reserved. “PricewaterhouseCoopers” refers to PricewaterhouseCoopers LLP (a limited liability partnership incorporated in England). PricewaterhouseCoopers LLP is a member firm of PricewaterhouseCoopers International Limited. No part of this presentation may be copied, redistributed or placed on any website without permission. This presentation has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this report without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this report, and, to the extent permitted by law, PricewaterhouseCoopers LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this report or for any decision based on it.