1. Global Economic Outlook: Bottoming Out Now, Recovery by June 2009 Economics Research and Analytics January 2009

2. 2 Executive Summary 1. Indicators point to a bottom 3. Rebound to start in June due to massive global response 2. “Fear Index” is reaching a low-point 4. Sustainability of up-swing driven by performance of emerging nations

3. Origin of Crisis

4. 4 The Genesis: Sub Prime Story Home Buyer Mortgage Market Payments Loan Loan remains in the banks books Bank Mortgages are traded Payments Mortgages not in banks books Sub Prime Model Defaults Loss Due to Defaults Sub Prime Model: Actions Banks disperse risk of defaults Banks lend more New markets established for retail mortgages New market created for CDS (total CDS market estimated by BIS to be $57 trillion) Lax norms for housing credit as a result of low interest rates Sub Prime Model: Consequences Repercussions of defaults in mortgage market Falling house prices Prime borrowers start to default Write-downs by holders of mortgages and other instruments Resulting credit crunch in the economy * Note: CDS: Credit Default Swaps

5. 5 Genesis: From Financial Sector to Real Sector DefaultsLack of Trust in Financial Institutions Tightening Credit Markets Banks Slow Lending Down Slower Growth Financial Institutions Losses Lack of Lending for Small Business Lack of Retail Credit Consumers Reduce Spending Economy Slows Down/Contracts Sub-Prime Mortgages $ Lack of Capital for Companies Suspension of Interbank Lending $ $ $ $

6. 6 Internationalization of the Crisis Withdrawal of FII Inflows: Currency Depreciation Lower Exports From Asia Due to Lower American and European Demand Unwinding of Yen Carry Trade and FII Withdrawals European Banks Withdraw Investments in Eastern Europe European Banks Lose Money on Sub Prime Mortgages Oil Prices Drop on Slower growth in Europe and USA

7. 7 How Fear Drove the Recession – Fear is Now Bottoming Out “The only thing we have to fear is fear itself.” -- Franklin Roosevelt

8. Bottoming Out Now

9. 9 Employment Creation Hits Bottom; Due for an Upswing Beginning of great moderation; macroeconomic policies smooth business cycles Current employment levels the lowest of the Great Moderation Era, suggesting bottom-out Non-Farm Payroll growth indicates increase in non-agricultural employment During the Era of Great Moderation, the business cycle was longer and smoother, and recessions were typically shallower than pre-1984. Employment creation is currently at the lowest level of the Great Moderation Era (i.e., 1984 onwards); job creation will be positive for the foreseeable future, given the massive global fiscal stimulus.

10. 10 Has Industrial Production Bottomed-Out? Recovery in industrial production despite lower automotive growth rates Lowest since oil shock; that said, recent months’ output indicates recovery Increased output – despite the overhang of a recession – illustrates the robust underlying conditions in American manufacturing Industrial output showing a rebound from recent lows, suggesting the recovery of underlying fundamentals.

11. 11 Consumers Are Continuing to Buy The decline in retail sales is not as steep as in the 2006 or 2001 recessions. Recovering consumer confidence should lead to positive growth in the near future. Consumers activity, aided by the fiscal stimulus, will boost industrial production and ultimately aid recovery.

12. 12 The Good, The Bad, and the Ugly The Good “Fear Index” has peaked, indicating bottom-out Non-Farm Payroll growth has hit historic lows Industrial production has recovered and is much higher than during previous recessions Widely accepted that real estate is bottoming out now as well The Bad Credit markets still remain tight Interest rates are at historic lows, but lending has not restarted Crisis has “gone global” The Ugly Potential collapse of US automotive industry (though recent events indicate recovery to come soon) Clarity on the extent of sub prime losses and other securitized losses (no recent losses, suggesting the worst news is behind us) The crisis is reaching a bottom

13. Global Economy to Rebound by June 2009

14. 14 Mega Drivers for Rebound Positive economic news around the world; unprecedented focus worldwide on addressing the economic situation Fastest government response in history, primarily driven by massive government fiscal stimulus package New US Government/Obama’s economic growth plan focuses on creating employment through investments in infrastructure, renewable energy, broadband, and medical technology; infrastructure alone will create 2 million jobs Decline in commodity and oil prices leading to a tax break stimulus Easing of inflationary and liquidity pressures Strong demand from emerging nations will be a factor in reviving the global economy Smart money is coming back to the market, with stock exchanges at historic low P/E ratios “Fear fatigue” and rebound in confidence

15. 15 Global Response: Massive Government Stimulus China: Interest rate cuts and $586 billion stimulus (infrastructure, rural) India: Interest rate cuts $4 billion stimulus package (infrastructure, exports, textiles) Global Response Governments infusing capital into financial institutions Globally coordinated interest rate cuts IMF offers bridge loan to meet foreign exchange requirements Discussions, coordinated efforts (G20 summit) Brazil Support to real, infrastructure development under PDP (more than $64billion injected to financial system) USA: $700 Billion bailout rapid interest rate cuts $23 billion support for top 3 auto companies; plan to create 2.5 million jobs by 2011 UK: 250 billion pound bailout Germany: $700 billion relief package Belgium & Switzerland: Capital infusion ECB Interest rate cuts France$50 billion stimulus package Japan : Interest rate cuts, 447 billion yen stimulus package South Korea: Interest rate cuts and efforts to keep currency stable, $11 billion stimulus package Russia Support for ruble; $20 billion stimulus package

16. 16 Global Response – Stimulus Packages CountryStimulus Package and Policy Changes Job and growth fund- $25 billion 2.5 million jobs by 2011: 82.5% of losses (i.e., 1.6 million jobs) to be recovered within 6 months Every $1 billion spent on roads will create approximately 35,000 jobs Public buildings, schools, roads, energy efficiency, broadband and medical technology will be primary sources for employment growth in 2009 European Union USA UK: 250 billion pound bailout Germany: $700 billion relief package Belgium & Switzerland: Capital Infusion Spain$14 billion infusion, 300 000 jobs to be added by next year EUInterest rate cuts permanent; reduced VAT for labor-intensive units; $250 billion (i.e., stability and growth pact). Job creation sources include energy efficiency, transportation, infrastructure, broadband connectivity, construction, automobiles Japan : Interest rate cuts South Korea: Interest rate cuts; battling to stabilize currency Japan and South Korea Emerging Markets China: Interest rate cuts and $700 billion bailout; close to $88 billion for railway infrastructure with focus on 10 sectors including infrastructure, technological innovation, Healthcare, and low-income housing India: Interest rate and tax cuts totaling $4 billion in the next four months (March 2009); sector focus is on apparel, infrastructure, other export-oriented sectors

17. 17 Easing of Inflationary and Liquidity Pressures Increase in Real Income Inflationary Pressures: Easing Worldwide Policy Rate Reduction Leading to Addition in Liquidity Ensuring Liquidity % Y on Y

18. 18 Decline in Commodity and Oil Prices Commodity and energy prices have declined sharply in recent months. Oil prices have declined from $147 to $40 and will be a key stimulus for the 2009 rebound.

19. 19 Emerging Markets - China China is Structurally Vulnerable to External Environment Export-driven economy Dependent on foreign capital inflows High level of migration – imperative to maintain high growth momentum US is main destination for China’s exports Steps to Combat Crisis Announced a $586 billion bailout. Focus on developing infrastructure to create jobs and revive economy Government easing lending to stem fall in home prices Coordinated interest rate cuts to boost liquidity Current Scenario Small and medium manufacturers struggling to access credit Falling real estate prices could adversely affect the banking sector Facing struggling domestic demand, China’s recovery will depend upon access to an alternative market for its exports- namely India China’s present hard landing is expected to recover by the middle of 2009, when domestic consumption in China recovers as a result of effective use of stimulus package and growth in alternative market for its exports (i.e., India). Source: National Institute of Statistics Industrial Output China (2008)

20. 20 Emerging Markets - India Key Issues: Rupee; Real Estate Real estate boom for past few years, with prices now cooling off Rupee has depreciated considerably against the dollar, leading to loss of corporate profits Steps to Combat Crisis Comprehensive cut in excise duties to facilitate consumption across the board Easing of norms for foreign investments in local economy. Small manufactures received sops manage rising costs. Exports, automotive, textiles industries have received stimulus Current Scenario Fall in consumption: especially consumer durables Increase in outsourcing activity (due to off- shoring by US and European companies seeking to cut costs) India is set to record lower but nonetheless significant growth of 7% in 2008. Public spending, investments in infrastructure and third wave of IT boom in India will make the economy even more buoyant by June 2009. Source: CSO Industrial Output India (2008)

21. 21 World Economy - Composition and Growth Advanced Economies accounted for 67 percent of world GDP in 2007 and Developing Economies 33 percent in 2007. In terms of contribution to growth, the share of emerging countries has been increasing with major contributors being China, India, Russia, Brazil. These are also fastest expanding economies (Russia is now an exception) with large public sector contributions. Stimulus plans to result in more employment and growth. A quarter of growth was driven by these emerging markets; contributions from these economies will play a key role in global economic growth and recovery.

22. 22 Road to Recovery Increasing Government Consumption Resumption of Corporate Lending Increasing capacity utilization and expansion US/European Stimulus Package Output Stabilizes-Aided by Capital Goods and Infrastructure Credit Market Stabilize Increasing Consumption Stemming Job Losses Boom in Asia Chinese Stimulus Asian Stimulus Restarting of Retail Credit Consumer Spending Gets Back on Track Recovery/End of Trough Increasing Demand for Capital Goods $ $ $ $ $ $ $

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