1. Global economic outlook Julian Callow, Head of Economic Research, Barclays Capital May 2008

2. 2 Global economic themes  Global monetary policy has been loose, not tight.  Central banks have a vested interest in keeping global growth going. The balance sheets of financial as well as non-financial companies seem to be robust enough to mean that central bank policy can still prove effective in the US and Europe.  The US economy is projected to recover during 2008 as the impact of substantial Fed easing coincides with an ebbing of the drag from housing contraction, accompanied by the fiscal stimulus package.  Gradual re-balancing of domestic demand is unfolding, with net exports an important support for US growth.  Emerging economies have effectively decoupled from the “advanced” economies in recent years. However, growth in China and India is set to moderate as higher inflation requires tighter monetary policy.  Inflation will remain a major concern for financial markets.

3. 3 Global monetary policy continues to be accommodative

4. 4....and low rates fuel global monetary expansion

5. 5 Potential for commodity exporters to help re-balance global demand

6. 6 G3 export volumes continue to grow at a reasonable pace

7. 7 Food prices are still low in “real” terms

8. 8 Oil prices set to remain elevated on demand/supply pressures

9. 9 “Resource utilisation” continues to be positive

10. 10 Rising core producer price inflation

11. 11 Global imbalances and the arrival of major “surplus” countries

12. 12 US outlook: the message from the surveys

13. 13 US firms benefit from a weaker dollar – profits key for investment

14. 14 US housing investment – close to a bottom

15. 15 US underlying consumer inflation moves up...

16. 16...weak dollar threatens a resurgence of core goods inflation

17. 17 Core goods and OER inflation set to rise

18. 18 European economic themes  Two factors that underpinned strong euro area GDP growth in this recovery are fading – export dynamism and housing.  Hence we look for euro area GDP growth to slow to around 0.3% per quarter during Q4 07~Q2 08. Growth should be supported still by growth in employment, but even this is likely to moderate.  Inflation profile ugly for the ECB during 2008 – hence GDP growth/business confidence will need to be really soft for the ECB to lower rates: we do not expect rate cuts this year and next, though the risks are on the downside

19. 19 Euro area GDP depends on rest of world

20. 20 Our euro area GDP equation signals sub-trend growth

21. 21 Euro area outlook: our GDP indicator signals a slowdown in Q208

22. 22 Euro area economy at a glance

23. 23 PMI survey indicators are signalling flat industrial output

24. 24 Service sector output weakening sharply in southern Europe

25. 25 Composite PMIs vs GDP growth

26. 26 Construction investment: Spain & Ireland are vulnerable

27. 27 Beware corporate imbalances

28. 28 Construction investment: recent housing activity

29. 29 Labour market outlook: hiring intentions rolling over

30. 30 Euro area retail PMIs

31. 31 Euro area consumption growth broadly in pace with income

32. 32 Mixed developments in bank lending across euro area

33. 33 Euro area outlook: resource utilisation set to decline...

34. 34 Assessing pipeline pressures in euro area PPI, HICP

35. 35 A stronger euro should help to keep a lid on industrial price rises

36. 36 Underlying goods and services inflation in the euro area

37. 37 Food prices continue to pose an upside risk to euro area inflation

38. 38 Euro area outlook: inflation – volatile items

39. 39 Euro area outlook: inflation – conclusions

40. 40 How ECB staff projections evolve over time

41. 41 ECB equation signals Q308 rate hike risk; easing potential in H109

42. 42 UK GDP to slow sharply, consistent with latest PMIs GDP, % y/y GDP growth and the composite PMI Source: Datastream, Barclays Capital, Bank of England

43. 43 UK services slowdown reflects orders, not sentiment Services PMI orders and sentimentRetail sales, % y/y Source: Datastream, Barclays Capital

44. 44 UK manufacturing output has softened alongside global sentiment Industrial confidenceManufacturing output growth, % 3m/y Source: Datastream, Barclays Capital N.B. (1) is using long-standing industrial confidence indices for major EU countries (i.e. IFO, BdF, CBI and ISAE), while (2) replaces these with country PMI data.

45. 45 UK construction has weakened, further decline likely Sectoral construction PMI activity balancesConstruction PMI v ONS construction output Source: Datastream, Barclays Capital

46. 46 Rise in mortgage spreads has more than offset cuts in Bank Rate Quoted mortgage rates, %Mortgage rate spreads, pp Source: Bank of England, Datastream, Barclays Capital.

47. 47 Recent housing data have been weak House prices, % 3m/3mHouse prices and mortgage approvals Source: Nationwide, Datastream, Barclays Capital

48. 48 Housing market is suffering a crisis of confidence Real house prices, £’000 at 2007 Q4 pricesHouse price – earnings ratio Source: Nationwide, Datastream, Barclays Capital

49. 49 UK housing and consumption House prices and consumption Housing wealth and the consumption-income ratio Source: Nationwide, Thomson Financial, Barclays Capital

50. 50 CPI to stay above target this year RPI and RPIX, % y/y CPI, % y/y Source: Datastream, Barclays Capital

51. 51 Import prices remain a concern Import prices and retail pricesSterling and import prices Source: Datastream, Barclays Capital

52. 52 A softening labour market should keep the lid on pay growth Employment and unemployment rates, % Pay growth Source: Datastream, Barclays Capital

53. 53 UK outlook: inflation – summary

54. 54 We expect Bank Rate to fall to 4%, spreads to settle higher Key interest rates, %Interest rate spreads, pp Source: Datastream, Barclays Capital.

55. 55 Appendix: Key global forecasts

56. 56 US outlook: key projections

57. 57 Euro area outlook: key forecasts

58. 58 UK outlook - summary

59. 59 UK inflation outlook

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