Around the World Economic and Market Highlights Q2 2009

1

Contents

Global 2

US 3

Euroland 6

UK 9

Japan 11

Asia ex. Japan 13

Contributions from:Joshua Feinman, Markus Kohlenbach, Oliver Eichmann, Johannes Mueller, Bettina Mueller, Philipp Brugger, Marc Kersten, Xueming Song, Axel Scheithauer, Xin Yu

2

GlobalThe global economy is still in the midst of a severe, synchronized economic downturn, the worst in a generation, though there are increasing signs that an inflection point may be at hand, with the rate of deterioration abating somewhat.

The bursting of a housing and credit bubble in countries with highly leveraged financial and household sectors (e.g., US, UK, Spain, Australia, Ireland), set in motion a vicious adverse feedback loop through the global economy. A sharp decline in aggregate demand in these “consumer” countries has spread around the world through financial and trade linkages, causing a steep deceleration in economic activity even in countries that didn’t have stretched housing and consumer sectors (e.g., Germany, Japan, much of emerging Asia), but that relied heavily on exports (and lending) to countries that did.

Stresses materialized more than a year ago, as declining home prices in many countries created mounting losses on securities collateralized by housing, eroding the capital of financial intermediaries and causing them to reduce leverage, spawning a credit crunch. Though this toxic stew was long simmering, it boiled over in the second half of 2008, driving parts of the financial system to the brink of collapse. At the same time, economic activity abruptly rolled over, as households and businesses cut back in the face of increasing uncertainty, tighter credit conditions, and declining wealth.

In response, governments have stepped in aggressively, taking some unprecedented actions. In addition to conventional easing of monetary policy, many central banks have vastly expanded the size and scope of their liquidity provision, and governments have expanded deposit insurance, temporarily guaranteed bank debt, planned to buy the illiquid securities encumbering the balance sheets of financial intermediaries, and infused capital into them so they can resume lending.

These measures have begun to bear fruit. They’ve helped prevent a total shut down of the financial system, and started to gain traction in thawing the credit freeze. But credit conditions remain impaired. It will take more time to restore confidence, re-capitalize the financial system and get people to start taking risk again. Credit is not apt to start flowing normally again until the root cause of the problem – the bubble in housing – is unwound.

Fortunately, there has been some progress on that front. In some countries, home prices may not need to fall much further to realign with fundamentals. And more policy action (including substantial fiscal stimulus) is in train. Finally, a number ofkey indicators suggest that the maximum rate of decline in economic activity may have passed. Even so, economic activity is unlikely to bottom before mid-2009 at the earliest, and is apt to remain sub-par even longer, probably into 2010, as households in consumer countries seek to rebuild savings rates, risk appetites come back only slowly and incompletely, and producer countries have trouble reorienting their economies toward domestic demand.

Inflation is heading lower because weak demand is increasing slack in global labor and product markets.

3

USEconomic activity continued to contract sharply through Q1, though tentative signs are emerging that the rate of decline maybe ebbing into Spring.

Still, the U.S. remains caught in a vicious adverse feedback loop from the housing slump to the stressed financial system to theirspillovers to the real economy that is resulting in the worst economic downturn in decades.

The labor market is in a severe downward spiral, with payrolls down 650k per month over the last four months, or nearly 6% annualized, comparable to the worst recessions of the post-WWII period, while the unemployment rate has shot up four percentage points from its cyclical low.

The twin collapses of housing prices and equity prices drove household net worth down 20% through Q4, and further substantial declines seem assured in Q1.

This huge loss of wealth, coupled with the sharp deterioration of the labor market and tighter credit conditions, has weighed heavily on household sentiment and spending. Real consumption fell 4% at an annual rate in H2’08, as households began to rebuild their savings in what may be the start of a trend that could depress consumption for some time.

Faced with deteriorating growth prospects, tighter credit conditions, and greater uncertainty, firms scaled back capital spending at more than a 20% annualized real rate in Q4, and preliminary data suggest more cuts in Q1.

USLabor Market Plunge

-7.0-6.0-5.0-4.0-3.0-2.0-1.00.01.02.03.04.0

1988

:119

89:1

1990

:119

91:1

1992

:119

93:1

1994

:119

95:1

1996

:119

97:1

1998

:119

99:1

2000

:120

01:1

2002

:120

03:1

2004

:120

05:1

2006

:120

07:1

2008

:120

09:1

6-m

onth

% c

h, a

nnua

l rat

e

3.54.04.55.05.56.06.57.07.58.08.5

3-m

o m

ov a

vg, %

Unemployment rate (right scale) Nonfarm payrolls (left scale)

Source: BLS

Real Business Investment Plunging

-20

-15

-10

-5

0

5

10

15

20

Q1

1988

Q1

1989

Q1

1990

Q1

1991

Q1

1992

Q1

1993

Q1

1994

Q1

1995

Q1

1996

Q1

1997

Q1

1998

Q1

1999

Q1

2000

Q1

2001

Q1

2002

Q1

2003

Q1

2004

Q1

2005

Q1

2006

Q1

2007

Q1

2008

2-qu

arte

r % c

hang

e, a

nn ra

te

Recession Source: BEA, NBER

4

USExports -- which had been a source of strength in the early stages of the housing bust -- have fallen off sharply of late too (more than 30% annualized in the last six months in real terms), on the back of collapsing global growth and the stronger dollar.

There are some positive signs, though. A few indicators suggestthe economy’s rate of decline may be abating. The ISM indexes have edged up (though they remain weak), and real consumption will be much less weak in Q1 than in the second half of 2008.

The policy response is gaining traction. Easier monetary policy, massive liquidity provision, capital infusions, and the Fed’s new TALF program are starting to thaw the credit freeze. Also, banks are tightening lending standards less aggressively, some have returned to profitability (benefiting from the steep yield curve), and the PPIP may remove the bad assets encumbering banks’ books, helping them recapitalize and resume normal credit transmission.There’s still a long way to go, but progress has been made.

The fiscal stimulus package is likely to provide a substantial boost to aggregate demand (perhaps 1 to 2 percentage points) starting this spring and continuing into 2010.

Much of the excess of the housing boom has been corrected. The price declines to date, coupled with lower mortgage rates, have brought prices back in line with fundamentals, and the collapse of new construction is starting to eat into the oversupply, suggesting a bottom may be near.

All told, we continue to expect the economy to improve later this year (as housing bottoms, credit heals, and the policy stimulus kicks in). But growth is likely to remain sub-par -- and dependent on accommodative policies -- into 2010.

USTrade Collapse

-18-15-12-9-6-30369

121518

1993

:1

1994

:119

95:1

1996

:119

97:1

1998

:119

99:1

2000

:120

01:1

2002

:120

03:1

2004

:120

05:1

2006

:120

07:1

2008

:120

09:1

12-m

onth

% c

hg

Real exports

Real imports

Source:Census, BLS

US Household savings rate rebounding as net worth tumbles

3.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0

Q1

1952

Q1

1956

Q1

1960

Q1

1964

Q1

1968

Q1

1972

Q1

1976

Q1

1980

Q1

1984

Q1

1988

Q1

1992

Q1

1996

Q1

2000

Q1

2004

Q1

2008

ratio

to d

ispo

sabl

e in

com

e-2

0

2

4

6

8

10

12

14

% o

f dis

posa

ble

inco

me

personal savings net worth

Source: Federal Reserve, BEA

5

USInflation is apt to fall further as the ongoing weakness in aggregate demand opens additional slack in labor and product markets. Inflation could move to uncomfortably low levels, though the stickiness of longer-term inflation expectations provides some guard against a true deflationary environment.

Given the huge shocks the economy is facing, the risks to this forecast are considerable, and skewed to the downside. The housing and credit slumps could linger, casting a darker pall over activity and opening additional disinflationary slack.

The Federal Reserve will likely keep the funds rate near zero well into 2010 -- until a self-sustaining economic recovery is assured. And policymakers are likely to commit to keeping rates low for along period to help hold down longer-term rates.

They’ll also reiterate their longer-term objective of price stability --with clear emphasis that means a low but positive rate of inflation --to ward off expectations of deflation.

The Fed is apt to keep the liquidity throttle wide open, expanding on steps aimed at easing credit conditions that have had the effect of vastly increasing the size and composition of their balance sheet.

Particular emphasis will continue to be placed on purchasing MBSand on expanding the TALF -- the facility to make Fed loans against a wide array of asset-back securities (consumer, small-business, CMBS, etc.), to revive the moribund securitization markets.

The Fed will also continue its more modest program of Treasury purchases, though this is a less direct way of achieving their goal of bringing down private-sector borrowing costs and getting credit flowing more normally again to households and businesses.

Consumer Spending: Finding a Faint Pulse in Q1

-6

-4

-2

0

2

4

6

8

Q1

1996

Q1

1997

Q1

1998

Q1

1999

Q1

2000

Q1

2001

Q1

2002

Q1

2003

Q1

2004

Q1

2005

Q1

2006

Q1

2007

Q1

2008

Q1

2009

1-qu

arte

r%ch

g,an

nra

te

real personal consumption

Source: BEAQ1 2009 estimated based on data through February

Housing Activity: A Bottom?

0.000.250.500.751.001.251.501.752.00

1995

:1

1996

:1

1997

:1

1998

:1

1999

:1

2000

:1

2001

:1

2002

:1

2003

:1

2004

:1

2005

:1

2006

:1

2007

:1

2008

:1

2009

:1

annu

al ra

te, m

illio

ns

Single-family

Source: Census

starts

permits

6

EurolandEconomic activity turned down sharply across the Euro-zone in the second half of 2008, with the rate of decline intensifying late in the year, mirroring the pattern seen throughout much of the globe. Declines continued in Euro-land through the early part of 2009, but recent signs suggest some moderation in the pace of runoff, again consonant with what is being seen in other areas and supportive of our view that the European economy is apt to bottom out by mid-year and then start growing again, albeit modestly.

At the risk of oversimplifying, countries in Europe can be divided into two broad categories: those who had big housing and credit booms, fueling rapid consumer spending that outstripped domestic production, evidenced by large current account deficits (e.g., especially Spain, but also Ireland and Greece within the Euro area, the US, UK, Australia outside), and those who did not have housing/credit/consumption booms but instead produced more than they consumed at home, evidenced by large current account surpluses (e.g., especially Germany, but also Belgium, Austria, and to a lesser extent France within the Euro-zone, Japan and many emerging Asian economies outside). In essence, this “producer” group of countries relied on exports to the “consumer” group of nations, and lent to them to finance their housing/consumption booms.

This symbiotic relationship has been shattered by the bursting of the housing and credit bubble in the consumer countries. Because of its size, the US has gotten the most attention in this category, but within the Euro-zone countries like Spain have seen comparable declines in home prices and consumer spending that have sent their economies reeling.

Especially in Germany

-6

-4

-2

0

2

4

6

Q1

1996

Q3

1997

Q1

1999

Q3

2000

Q1

2002

Q3

2003

Q1

2005

Q3

2006

Q1

2008

2-qu

arte

r % c

hang

e

Real GDP

domestic demand

Source: Eurostat

Collapse in activity: net exports largely to blame

-5-4-3-2-10123456

Q1

1996

Q3

1997

Q1

1999

Q3

2000

Q1

2002

Q3

2003

Q1

2005

Q3

2006

Q1

2008

2-qu

arte

r % c

hang

e

Real GDPdomestic demand

Source: Eurostat

7

Euroland

Until recently, labor markets had been damaged primarily in countries where home prices and consumer spending have collapsed. For example, Spain and Ireland have seen their unemployment rates jump more than seven and five percentage points, respectively. More recently, though, even countries like Germany and France -- which never had much of a housing/consumption boom in the first place – have started to see some deterioration in their labor markets, with unemployment beginning to edge up, and a steep rise in applications for short-shift work, reflecting the falloff in exports, capital investment, and industrial production.

Household expenditures have only moderated in Germany, supported by a labor market that has not been too badly hit, and by relatively resilient household sentiment. By contrast, consumption has fallen off sharply in countries where the housing boom has turned to bust and labor markets have weakened the most (again, Spain, Ireland).

All countries have also been adversely affected by the deterioration in the cost and availability of credit.

There are recent glimmers of hope, however. The PMIshave shown some signs of stabilization (albeit at low levels), industrial production in Germany is not dropping quite as rapidly as it was late last year, money growth has picked back up, the rate of decline in activity around the world seems to be moderating, and the monetary and fiscal policy stimulus already in train should help support aggregate demand.

Unemployment

3456789

1011121314

Jan-

02

Jul-0

2

Jan-

03

Jul-0

3

Jan-

04

Jul-0

4

Jan-

05

Jul-0

5

Jan-

06

Jul-0

6

Jan-

07

Jul-0

7

Jan-

08

Jul-0

8

% o

f lab

or fo

rce

Germany SpainFrance Ireland

Source: Eurostat

German exports and industry suffering

-50

-40

-30

-20

-10

0

10

20

30

Jan-

02

Jul-0

2

Jan-

03

Jul-0

3

Jan-

04

Jul-0

4

Jan-

05

Jul-0

5

Jan-

06

Jul-0

6

Jan-

07

Jul-0

7

Jan-

08

Jul-0

8

6-m

onth

% c

hg, a

nn ra

te

80

85

90

95

100

105

110

3-m

onth

mov

avg

ifo indexreal exports

source: ifo, BBK

a bottom?

8

Euroland

Indeed, that’s why we continue to see the Euro-area economy bottoming out later this year and then gradually returning to growth, though that growth is apt to remain sub-par, as households in the consumer countries seek to rebuild savings rates, and the producer countries struggle to find new sources of domestic-demand led growth.

Inflation – which had been running well above the ECB’s desired range as recently as this past summer, especially in countries that had experienced the housing/credit boom (e.g., Spain) -- has fallen markedly, especially on a headline basis, but also when excluding food and energy prices. The turnaround reflects the collapse of energy prices and the weakening of aggregate demand that has increased economic slack. As the slump in demand persists, further increasing idle capacity, inflation is likely to decline more.

European policymakers have responded to the crisis in a variety of ways, though perhaps not as aggressively as the US. A number of European governments have injected capital into the banking system, guaranteed bank debt, expanded deposit insurance, and unveiled plans for major fiscal stimulus (though less than in the US). The ECB has cut its policy rate from 4.25% to 1.5%, and we expect them to cut further, perhaps to 1%, but we don’t see them eager to follow the Fed down to zero. The ECB has also increased its liquidity provision, and is debating doing more, including embarking on a major program of quantitative easing, though here too they are likely to remain less aggressive than the Fed, and more concerned about the potential exit strategies from these unconventional measures.

Consumer prices

0

1

2

3

4

5

Jan-

02

Jul-0

2

Jan-

03

Jul-0

3

Jan-

04

Jul-0

4

Jan-

05

Jul-0

5

Jan-

06

Jul-0

6

Jan-

07

Jul-0

7

Jan-

08

Jul-0

8

12 m

onth

% c

han g

e

Source: EU

headline

core

Housing activity

0

100

200

300

Dec

-02

Apr

-03

Aug

-03

Dec

-03

Apr

-04

Aug

-04

Dec

-04

Apr

-05

Aug

-05

Dec

-05

Apr

-06

Aug

-06

Dec

-06

Apr

-07

Aug

-07

Dec

-07

Apr

-08

Aug

-08

Dec

-08

inde

x =

100

in D

ec 2

001

Germany Spain

New building permits

Source: Eurostat

9

UKThe UK economy continued to contract rapidly through Q1, as the worst economic downturn in decades persisted, though several signs of a moderation in the rate of decline have begun to emerge recently.

The recession has been driven primarily by the bursting of a housing/credit bubble that has caused leveraged households and financial intermediaries to pull back sharply from risk taking (spending, lending, borrowing, etc.).

After contracting at a 2-1/2% annual rate in Q3 2008, real GDP fell at a 6% annualized clip in Q4, the fastest rate of decline since 1980, and another substantial fall seems in train for Q1 2009. We expect the weakness to moderate gradually as the year progresses, as monetary and fiscal policy easing gain traction, as housing stabilizes, and as credit conditions improve.

But the economy is far from out of the woods. Buffeted by eroding wealth, a deterioration in the cost and availability of credit, worsening labor markets, and a general loss of confidence, households are retrenching. Real private household consumption began to decline in Q2 2008, the runoff intensified later in the year, and is persisting into early 2009. Although the fall in energy prices is providing some relief, it is not likely to be nearly enough to offset all the headwinds household face. Indeed, households will likely continue to rebuild savings rate, depressing consumption for some time.

Exports have been weakening as global activity slumps, and the environment is likely to remain challenging, though the decline in sterling’s trade-weighted value should turn the trade sector into less of a drag.

Collapse in activity

-10-8-6-4-202468

10

Q1

1996

Q3

1997

Q1

1999

Q3

2000

Q1

2002

Q3

2003

Q1

2005

Q3

2006

Q1

2008

1-qu

arte

r %

cha

nge,

ann

rate

Domestic demand Real

GDP

Source: ONS

Households change their behavior

-6

-4

-2

0

2

4

6

8

10

Q1

1996

Q3

1997

Q1

1999

Q3

2000

Q1

2002

Q3

2003

Q1

2005

Q3

2006

Q1

2008

1-qu

arte

r %

cha

nge,

ann

rat

e-2

0

2

4

6

8

10

12

% o

f dis

posa

ble

inco

me

Real consumer spending

savings

Source: ONS

10

UKWeak expectations of demand (both domestically and internationally), falling profits, and a tougher credit environment are likely to keep capital spending subdued.

There are some tentative signs, however, that the economy’s rate of decline may be abating. For example, although housing remains under pressure, the combination of lower prices, lower mortgage rates, and some improvement in credit availability is starting to show through in the first green shoots of stabilization in housing surveys.

Similarly, the Bank of England’s survey of credit conditions showed some improvement in credit availability to households and businesses, and the PMIs ticked up (albeit from very low levels).

Headline inflation is declining, and will likely fall into negative territory on a year-over-year basis by this summer as the effects of declining energy prices, a reduction in the VAT, and the general weakness in aggregate demand opens increasing slack in labor and product markets. The latter is apt to put downward pressure on core inflation too, likely causing it to grind down to 1% or less.

In terms of monetary policy, we see the BoE holding policy rates at 0.50% well into 2010, and continuing to focus on quantitative easing efforts aimed at further improving liquidity to the financial system and thawing the credit freeze.

Bank credit conditions: getting better?

-60-50-40-30-20-10

01020

Q2

2007 Q3

2007 Q4

2007 Q1

2008 Q2

2008 Q3

2008 Q4

2008 Q1

2009

net %

bal

ance

Secured household credit Unsecured household creditCorporate credit

How has the availability of credit changed over the last three months?

Source: BoE

Inflation coming down

0.01.02.03.04.05.06.0

Jan-

02

Jul-0

2

Jan-

03Ju

l-03

Jan-

04

Jul-0

4Ja

n-05

Jul-0

5Ja

n-06

Jul-0

6

Jan-

07Ju

l-07

Jan-

08

Jul-0

8

Jan-

09

12-m

onth

% c

han g

e

Headline

Core

Harmonized CPI

Source: ES/H

11

JapanEconomic activity plunged in the second half of 2008 and into early 2009 largely as a result of the collapse of global activity, which weighed heavily on Japan’s exports and related capital expenditures. Also, the turmoil in global financial markets hasdepressed sentiment among Japanese households and businesses. In short, the weakness of the Japanese economy has been more a result of the global downturn than a prime driver of that downturn.

Industrial production fell nearly 70% at annual rate in the six months ended in February, while real merchandises exports were down almost 40% annualized over the same period, the result of collapsing global activity and the strong yen.

More recently, Japan has been buffeted by two countervailing forces. On the plus side, the rate of deterioration of global activity is abating, relieving some of the more intense downwardpressure on Japan’s exports and capital spending. But on the downside, the previously-more-insulated consumer sector is starting to feel the downdraft.

The Japanese housing market and household sector were less stretched than their counterparts in many other advanced economies, so consumer spending was not initially hit as badly as in countries like the US, where the bursting of the housing and credit bubbles set in motion a major household de-leveraging.

But consumer spending is now starting to slow more forcefully inJapan as well, weighed down by deteriorating labor market conditions (the result of falling exports and capital spending), and a sharp drop in sentiment tied in part to uncertainty about the global economic and financial market turmoil. The decline of energy prices is providing only a partial offset.

Industrial production cratered

-70-60-50-40-30-20-10

01020

Jan-

03Ju

l-03

Jan-

04Ju

l-04

Jan-

05Ju

l-05

Jan-

06Ju

l-06

Jan-

07Ju

l-07

Jan-

08Ju

l-08

Jan-

09

6-m

onth

% c

hang

e, a

nn ra

teSource:METI

Collapse in exports

-40

-30

-20

-10

0

10

20

30

Jan-

01

Jul-0

1

Jan-

02

Jul-0

2

Jan-

03

Jul-0

3

Jan-

04

Jul-0

4

Jan-

05

Jul-0

5

Jan-

06

Jul-0

6

Jan-

07

Jul-0

7

Jan-

08

Jul-0

8

Jan-

09

6-m

onth

% c

hang

e, a

nn r

ate

Real merchandise exports

Source: MoF

12

Japan

All told, we see a shift in the composition of economic activity, with a moderation in the decline in exports and production, but a deterioration on the consumer side. Household savings rates have already come down sharply, are unlikely to fall much further, making consumption particularly vulnerable to weakening labor markets and compensation.

To counter these trends, the government has enacted a number of fiscal stimulus measures. The combined effects of these packages are expected to add about 3% to GDP over the next two years, helping bolster household sentiment and spending, and offsetting some of the economy’s other weaknesses.

Also, inflation is falling, both on a headline and core basis, reflecting falling commodity prices and increasing spare capacity, and this is boosting purchasing power. However, it also threatens to return Japan to the deflationary psychology that prevailed for many years.

To combat this, and revive economic activity the government has not only launched a major fiscal stimulus, but the BoJ is easing monetary policy more aggressively too. Their policy rate will likely remain near zero for the foreseeable future, and they have stepped up the size and composition of their quantitative easing in an effort to ease credit conditions. We expect them to do more along these lines, and possibly even take steps to try to weaken the yen.

Unemployment rate back on the rise

2

3

4

5

6

Jan-

96

Jan-

97

Jan-

98

Jan-

99

Jan-

00

Jan-

01

Jan-

02

Jan-

03

Jan-

04

Jan-

05

Jan-

06

Jan-

07

Jan-

08

Jan-

09

% o

f lab

or fo

rce

Source: MHLW

Inflation rolling over again

-2.0-1.5-1.0-0.50.00.51.01.52.02.5

Jan-

01

Jan-

02

Jan-

03

Jan-

04

Jan-

05

Jan-

06

Jan-

07

Jan-

08

Jan-

09

12-m

onth

% c

hang

e headline

core

CPI

Source:CAO

13

Asia ex. JapanEconomic activity decelerated rapidly across the Pacific basin in the second half of 2008, consonant with the global economic slowdown, and the weakness persisted into early 2009, though recent signs hint at an inflection point, or moderation in the rate of decline.

The main driver of the decline in activity in the region is the downturn in the rest of the world. In particular, Asia’s exports downshifted dramatically under the weight of weakening demand from the US, Europe, and Japan. Many developing Asian countries had relied heavily on exporting to countries that were enjoying a housing/credit/consumption boom (e.g., the US, UK, parts of the Euro-zone). In essence, these Pacific Rim nations were producing more than they consumed at home, sending the surplus to consuming countries and lending to them to sustain their consumption.

Now that the housing/credit/consumption boom is over, this economic model is under pressure, and the export-oriented nations in Asia are feeling the ill effects. Indeed, the falloffin their exports has depressed manufacturing activity across the region.

Almost all countries are suffering, but those more dependent on foreign trade (e.g., Singapore, Thailand, Taiwan, Korea), are most vulnerable. Those with larger internal markets (e.g., China, India) are less exposed.

Increasingly, however, there are signs that the rate of deterioration – especially in the export and manufacturing-oriented sectors -- may be receding. It’s not that they’re

Export collapse: hitting an inflection point?

-30

-20

-10

0

10

20

30

40

50

Jan-

2006

Mar

-200

6M

ay-2

006

Jul-2

006

Sep

-200

6N

ov-2

006

Jan-

2007

Mar

-200

7M

ay-2

007

Jul-2

007

Sep

-200

7N

ov-2

007

Jan-

2008

Mar

-200

8M

ay-2

008

Jul-2

008

Sep

-200

8N

ov-2

008

Jan-

2009

Mar

-200

9

12-m

onth

% c

hang

e

China

Korea

Real value indexes Source: CCS, KCS

Industrial production: finding a bottom?

-30

-20

-10

0

10

20

30

Jan-

2005

Apr-2

005

Jul-2

005

Oct

-200

5Ja

n-20

06Ap

r-200

6Ju

l-200

6O

ct-2

006

Jan-

2007

Apr-2

007

Jul-2

007

Oct

-200

7Ja

n-20

08Ap

r-200

8Ju

l-200

8O

ct-2

008

Jan-

2009

12-m

onth

% c

han g

e China

Korea

Source: CNBS, KNSO

14

Asia ex. Japangrowing again, but that the maximum rate of decline in real exports, industrial production, and manufacturing sentiment may have passed.

On the flip side, though, there’s evidence of some spillovers into domestic demand, as the turmoil in global financial markets and the falloff in emerging Asia’s exports cause domestic labor markets to weaken and erode consumer sentiment and spending. Also, with investor risk appetites waning, the flow of both foreign direct investment and portfolio capital to emerging Asian economies has slowed sharply.

But policy responses are likely to ease the blow. With inflation receding and the economic risks tilted to the downside, central banks across the region have already begun to ease monetary policy, and further substantial moves are likely. Many countries (most notably, China) are also adopting substantial fiscal stimulus.

All told, the region is facing its most challenging times since the economic/financial crisis of the late 1990s. Today’s challenges are largely caused by forces external to the region (in contrast to the late-1990s crisis, which was primarily home-grown, and required painful adjustments to correct). Even so, the region today is going to have to shift its economic model, reducing its reliance on exports and beefing up its domestic demand. Ultimately, this should leave it with a more balanced, sustainable growth profile, but the transition is likely to entail difficult adjustment.

Purchasing managers' indexes: turning a corner?

30

40

50

60

70

Jan-

1999

Apr

-199

9Ju

l-199

9O

ct-1

999

Jan-

2000

Apr

-200

0Ju

l-200

0O

ct-2

000

Jan-

2001

Apr

-200

1Ju

l-200

1O

ct-2

001

Jan-

2002

Apr

-200

2Ju

l-200

2O

ct-2

002

Jan-

2003

inde

x

405060708090100

inde

x

China

Korea

Source: CFLP, BoK

15

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