CIO WM Research 12 March 2015

European economyEconomic outlook: Dawn inEurope

A number of macro factors have improved since our lastreport. Hence, we upgrade our optimistic outlook still furtherand expect the Eurozone economy to accelerate aboveconsensus, to around 2% GDP growth by the end of 2015,which is supportive of our overweight in Eurozone equities.

Consumption should remain strong, as foreign trade benefitsfrom a one off boost to growth from the lower euro, but theimprovement over the next two years should, on average,be driven more by investments. As such, we expect theEurozone purchasing manager indices to cross the 55 levelby 2H 2015.

Despite expected very strong fundamentals over the forecasthorizon, a number of risks have the potential to derail ouroutlook. Chief among them is the potential exit of Greecefrom the Eurozone, although we still assign a low probabilityfor an exit. Other risks include a sharp escalation of theUkraine crisis, a break in Chinese growth and an overlyrestrictive ruling in the OMT case.

On inflation, the sharp 2H 2014 fall in the oil price shoulddissipate from inflation rates in 2H 2015, bringing Eurozoneinflation back to almost 1% by the end of this year and 1.7%by the end of 2016. On this basis, the ECB is likely to keep theQE program running until September 2016, but reconsiderit early in 2016, should the overall outlook turn out evenstronger than anticipated.

On a country level, we expect Germany, the UK, Swedenand Spain to outperform the Eurozone, while France, Italy,Switzerland and Norway are expected to underperform.

Eurozone economy: Macro factors even more supportive nowIn our last European Economic Outlook on November 3, we wrotethat the consolidation of the European economy should bottomout around the turn of the year, which has meanwhile beenconfirmed by economic data. However, a number of macro drivershave improved since our last European Economic Outlook, requiringus to lift our optimistic outlook even further. While fiscal policyis expected to remain broadly unchanged with fiscal measuresamounting to roughly half a percentage point per year on average,the oil price fall following the November OPEC meeting has forcedthe ECB to engage in a full blown quantitative easing program(QE), pushing the euro even lower than anticipated. That said, themonetary impulse in the Eurozone has accelerated even furtherand reached very high levels, with further increases in monetaryaggregates very likely in the coming months.

Ricardo Garcia-Schildknecht, economist, UBS AG

Daniel Trum, analyst, UBS AG

Dean Turner, CFA, economist, UBS AG

Roberto Luis Scholtes Ruiz, economist, UBS Bank, S.A.

Bernd Aumann, economist, UBS AG

Source: Bigstockphoto

Table of ContentsEurozone: pages 1-4Country level outlook: pages 5-12Glossary: pages 13-15

Related research Greece: scraping together cash, 11 March

2015 Greece to generate headlines, not

headaches, 26 February 2015 Greece: negotiations formally launched,

15 February 2015 ECB QE: A Historic Day, 22 January 2015 Greek default risk overestimated, 12

January 2015 European Court of Justice and ECB

government bond purchases, 14 January2015

The Investment Plan for Europe, 1December 2014

European Economic Outlook, 3 November2014

This report has been prepared by UBS AG and UBS Bank, S.A.. Please see important disclaimers and disclosures atthe end of the document.

Monetary policy is finally feeding through to bank loan rates (including in the periphery), as loans to households and non-financial corporations

have turned positive, net of redemptions. Looking ahead, the ECB bank

lending survey suggests further improvements in loans (see Fig. 1). In our baseline scenario, we expect loans net of redemptions to accelerate in

2015 to levels last seen in 2010/2011, pushing the credit impulse back up

to the highest levels seen since the Global Financial Crisis. Combined with robust demand for consumer, mortgage and business loans, consumption

and investment should be well supported in the process.

Consumption: To remain strong after temporary energy windfall

Against the backdrop of the recovery, consumer confidence has reached

the highest level since the Global Financial Crisis. This has helped consumer spending in the second half of 2014 to print the best two

quarters in a row since 2007, running at an annualized 2%. Looking

forward, the sharp fall in energy prices is resulting in a one off boost to consumption growth in the first half of 2015. Although temporary,

consumption should remain strong as the end of consolidation in

economic momentum should herald a faster decline in the unemployment rate and with it improved consumer confidence. That

said, the unemployment rate (currently at 11.2%) is expected to fall to

10.5-10.8% by the end of 2015 and to around 10% in 2016. Although wage growth should not change much, the faster decline in the

unemployment rate over the forecast horizon should support strong

consumption via a lower household savings rate.

Investment: Corporates to take growth to the next level

Following two years of stagnation, construction investment is set to start contributing positively to economic growth. With real house prices now

moving up, a key ingredient for more construction activity has taken hold.

What's more, mortgage rates are falling like a stone (and meeting demand), with construction orders showing signs of life and construction

employment expectations clearly on the rise. Although we do not expect

a sharp turnaround in the construction sector, some modest growth here means that one of the key growth headwinds should fade over the

forecast horizon. On the corporate side, with business confidence

increasing as illustrated by higher business surveys and hiring intentions, the stage is set for a recovery of corporate capital expenditure. We expect

the purchasing manager indices (PMIs) to exceed 55 during the second

half of 2015 (see Fig. 2), which would be consistent with investment growth averaging an annualized quarter on quarter growth rate of 2% by

2016, twice as much as seen in 2014. In addition, higher corporate

spending should be supported by a turn in the inventory cycle following the consolidation seen in 2014. As a matter of fact, inventories are

getting stretched as new orders have already turned around sharply.

Foreign trade: Temporary boost from fall in euro

The sharp fall of the euro since spring 2014, is expected to support

exports in 2015. Indeed, the growth impulse stemming from the fall in the euro is one of the highest since inception of the monetary union (see

Fig. 3). However, lackluster global growth probably means that the

impact on Eurozone exports won't be as high as in other instances and could be driven more by a redistribution of market share globally. The

positive impulse from exports will over time likely be offset more and

Fig. 1: New loans increasing

Loans to households and non-financial corporates

Source: UBS, ECB, Haver. Note: Loans are net of redemptions.

Fig. 2: Manufacturing PMI

Economic momentum set to accelerate

0%

2%

4%

6%

8%

10%

12%

40

42

44

46

48

50

52

54

56

58

60

2001 2003 2005 2007 2009 2011 2013 2015

Money

supply

y/y

chan

ge

SA (%

)

Man

ufa

cturing P

MI I

ndex

Manufacturing PMI Money supply (7m lead, rhs)

Source: UBS, ECB, Markit, Haver. Note: Includes a simulation until year end (shaded area).

Fig. 3: Trade vs REER

Exports will be supported by a weaker EUR

Source: UBS, ECB, Haver. Note: REER refers to Real Effective Exchange Rate.

European economy

CIO WM Research 12 March 2015 2

more by imports. Indeed, stronger economic growth and job creation will likely lead to more demand for imports, even if imported goods and

services have become more expensive following the decay of the euro.

The sharp fall in oil prices in turn has already led to a windfall in the Eurozone trade balance in the second half of 2014 as energy constitutes

a quarter of goods imports in the Eurozone. In the meantime, Brent oil is

trading approximately at the same level as at the end of 2014, so that we see little further support from that side for the trade balance in 2015.

What's more, the increase in oil prices that the futures market is

reflecting for 2016 means a modest headwind for the trade balance next

year.

Eurozone inflation: Turnaround expected If there has been one surprise in recent times, it has been the fall in oil

prices and the resulting plummeting of inflation rates. Notably, the

decline in Eurozone energy prices has been comparable to that seen during the Global Financial Crisis. That said, the Brent oil price has more

recently stabilized at the level it traded at the end of 2014. This likely

means that January 2015 marks the low point in inflation over the forecast horizon. In terms of core inflation, resilient wage growth coupled

with the re-acceleration of economic growth should limit the spillover

from non-core to core inflation. This should be supported by the fall in the euro, which has made imported goods and services more expensive.

Further out, it will take 12 months for the oil price shock to filter out of

year-over-year comparisons. This means that the inflation rate is set to

move up very quickly once the negative base effects filter out. Therefore,

we believe that inflation should move above zero during the summer, to around 1% by end of 2015 and to 1.7% by end of 2016.

ECB: To stay easy, for now With large scale asset purchases, the ECB has embarked on the only key

alternative to interest rate reductions. However, this does not mean that

the ECB has no ammunition left. Indeed, the asset purchase programs can be redesigned at any time in terms of size, composition and pace for

instance. Nevertheless, it is imperative that the courts rule favorably this

year regarding asset purchases. With a low trend growth rate of around 1%, the ECB will have to rely on this tool probably again and again over

the long term.

In the short term, the ECB will be faced with an increasingly stronger

economy and be challenged by the hawks in the governing council to

prematurely scale down the QE program. By early 2016 inflation should have moved beyond 1% and the unemployment rate should be relatively

close to the structural unemployment rate of about 10%. However,

Mario Draghi recently pointed out that the new ECB economic staff projections assume a full implementation of the asset purchases at least

until September 2016. It will therefore probably require growth even

stronger than 2% to scale down QE, which is not likely but not impossible.

Conclusion: Eurozone economy to re-accelerate Given the very favorable fundamental backdrop over the forecast horizon,

we expect the Eurozone to grow well above trend growth (estimated at

approximately 1%). The growth enhancing effect from the monetary side should intensify sharply in the second half of 2015, given the lead of the

monetary impulse. This should propel the year-over-year GDP growth rate

from 0.9% currently to 1.9% by the fourth quarter of 2015.

Fig. 4: Oil price and euro

Bulk of the impact on activity in 2015

-60

-50

-40

-30

-20

-10

0

10

-60

-50

-40

-30

-20

-10

0

10

1Q

13

2Q

13

3Q

13

4Q

13

1Q

14

2Q

14

3Q

14

4Q

14

1Q

15

2Q

15

3Q

15

4Q

15

Perc

enta

ge (y/

y)

Perc

enta

ge( y/

y)

EURUSD (lhs) Brent crude oil (EUR, rhs)

Forecast

Source: UBS, Haver, Bloomberg. Note: Brent Oil Blended, 1st expiring contract (EUR/bbl).

Fig. 5: Eurozone inflation

Shocked by oil price falls, core inflation resilient

Source: UBS, ECB, Haver. Note: REER = Real Effective Exchange Rate.

Fig. 6: Central banks' balance sheet

ECB as rear light

Source: UBS, Haver. Note: January 2007=100.

European economy

CIO WM Research 12 March 2015 3

This outlook assumes that key risks do not materialize. Greece and a potential exit from the Eurozone is certainly a key risk. As the President of

the European Commission put it, an exit would be an "irreparable loss of

reputation". What's more, as we laid out in our note "Greece: negotiations formally launched" on 15 February 2015, an exit could

shave off 5 points from the manufacturing PMI within 3-6 months despite

the strong fundamental backdrop. Given that 70-80% of Greeks want to remain in the euro and given that 70% of Greeks want their government

to reach an "honorable compromise" with its partners, we continue to

believe that a deal for a new "program/contract" will be made by June

2015 even if negotiations should remain difficult and bumpy. That said,

we continue to see the exit risk at a low 10-20%.

Other than that, a sharp escalation of the Ukraine crisis and in particular a

break in Chinese growth would also act as a serious headwind.

Furthermore, the final ruling on the OMT case has not been issued yet, while a too restrictive ruling could seriously hamper the effectiveness of

ECB asset purchases. We expect the European Court of Justice's

preliminary ruling during the next 1-2 quarters, with the final ruling by the German constitutional by the second half of 2015. We continue to

assume a "yes, but" ruling.

Fig. 7: Turning points

Economic activity set to shoot up

Source: UBS, ECB, Markit, Haver.

Fig. 8: Recovery from Global Financial Crisis

Expected for end of 2016

100

105

110

115

120

125

130

135

140

95 97 99 01 03 05 07 09 11 13 15

Gross Domestic Product (SWDA, index, 1995=100)

Gross Domestic Product forecast (UBS) Source: UBS, Eurostat.

Table 1: Eurozone growth and inflation forecasts

Growth acceleration expected in 2015

2014 2015E 2016E 2014 2015E 2016E 2014 2015E 2016E 2014 2015E 2016E

Year over year 0.9% 1.6% 2.0% 0.9% 1.2% 1.6% 0.4% 0.1% 1.5% 0.4% -0.1% 1.2%

Inflation ConsensusAnnual real GDP growth Consensus

Source: UBS estimates, Bloomberg.

European economy

CIO WM Research 12 March 2015 4

Country level outlook Germany

The strong growth acceleration of the German economy in the fourth

quarter 2014 showed that fears of a potential recession in the second half 2014 were overdone. The German economy remains in a

fundamentally solid condition and we expect it to strengthen further this

year compared to last year. As a result, German economic growth should continue to outpace the Eurozone average. We expect consumer demand

to remain the key growth driver, supported by strong wage growth, high

immigration, and low interest rates. Furthermore, rising house prices will add to consumers' wealth and should support ongoing high consumer

confidence.

For the third year in a row, the general government budget balance was

in surplus for 2014. The German government also benefits from record

low interest rates on its debt, which, to some degree, hides a structural deterioration in the financing of rising social spending. Nevertheless,

compared to most other countries in the Eurozone, German public

finances are in good shape for the coming years. We expect the government's debt-to-GDP ratio to continue falling in 2015 and 2016.

The fiscal stance should continue to be close to neutral. Promoting fiscal

prudence will continue to be a key part of its European policy, thus we do not expect it to further stimulate domestic demand substantially.

German companies benefit from the weaker euro and a strong US economy. Investment picked up in the fourth quarter 2014 and we

expect this to continue in 2015, as low oil prices and a general upswing

in Eurozone economic activity lend further support to German industry. Eventually, rising business confidence should also lead to a turnaround in

inventories, with companies restocking them, thereby further supporting

GDP growth. German exports should also profit from the weaker euro and the stronger momentum in neighboring Eurozone countries, but

strong domestic demand should lead to rising imports, at least partly

offsetting stronger exports.

The main risks to our outlook on Germany include a lack of reforms in

other Eurozone countries and a stronger than expected euro. Both would

reduce demand for German export goods. Moreover, a further escalation

of the Russia-Ukraine crisis would weigh on German exports and business

confidence, while a potential exit of Greece from the Eurozone would hit Eurozone and German sentiment, in our view.

Fig. 9: Investments to continue to pick up Investments should benefit from low energy prices

and stronger overall activity in the Eurozone

Source: UBS, Haver.

Fig. 10: German real GDP

Germany still the growth engine of Eurozone

Source: UBS, IFO, Haver.

Table 2: German growth and inflation forecasts

Economic growth to pick up

2014 2015E 2016E 2014 2015E 2016E 2014 2015E 2016E 2014 2015E 2016E

Year over year 1.6% 2.1% 2.4% 1.6% 1.5% 1.7% 0.8% 0.1% 1.4% 0.8% 0.3% 1.6%

Annual real GDP growth Consensus Inflation Consensus

Source: UBS estimates, Bloomberg.

European economy

CIO WM Research 12 March 2015 5

France

Ongoing fiscal tightening and a lack of competitiveness will likely keep French growth rates below the Eurozone average in 2015. Contrary to

Spain, Portugal, Ireland and Greece, France has not been able to

materially reduce its labor costs relative to Germany since the Global Financial Crisis (see Fig. 11). However, a weaker euro, lower oil prices,

and a bottoming in the construction sector in 2015 should lead to a

significant acceleration of economic growth to 1.0%, compared to just 0.4% in 2014.

The downturn in the construction sector exacerbated the weakness in investments last year. This should change in 2015 in response to various

changes in housing legislation (Loi Pinel, prt taux zero), the sharp fall in

mortgage rates and the already depressed level of activity. House prices are already in a bottoming process after an almost three year long

downturn, while construction orders have yet to pick up. Low interest

rates should lend further support, so that private investments should grow this year. Private consumption was the main driver of growth in

2014. For 2015, we expect private consumption to continue to grow

positively, supported by low oil prices and positive wealth effects from the ECB's quantitative easing program. Meanwhile, net trade should benefit

from the weaker euro and solid demand from key trading partners.

Spending cuts by the French government should act as a slight brake on

economic growth, though. We expect the debt-to-GDP ratio to start

coming down from 2016, but the 3% deficit target is still out of reach for France, despite the government planning spending cuts. The European

Commission estimates the French deficit at 4.3% for 2014 (see Fig. 12)

and is giving France two additional years (until 2017) to leave the Excessive Deficit Procedure. In exchange, the French government has to

deliver additional fiscal tightening and to strengthen its reform efforts,

otherwise it could face sanctions. The new fiscal guidelines by the European Commission are allowing for more flexibility, taking into

account economic circumstances, which should partly placate French

demands for a more balanced mix of fiscal, monetary, and structural policies.

President Francois Hollande and Prime Minister Manuel Valls have

strengthened efforts to reform the French economy to make it more

competitive. The "Macron" law was pushed through in conjunction with

a vote of confidence according to Article 49.3. The law is aimed at reducing overregulation in order to stir growth and activity. Important

points include extending shop trading hours, facilitating the creation of

new businesses, easier layoffs, and the deregulation of some professions. Although by far not revolutionary, this is causing internal conflict in the

ruling Socialist Party. There is potential risk of the government facing a

loss of majority as a result. Upcoming departmental and regional elections this year are contributing to this risk. Nevertheless, we believe that the

government will follow up with a reform of labor laws to reduce

bureaucratic hurdles. The key risk for the outlook on France is thus a failure to push through necessary reforms.

With contributions from Thomas Veraguth

Fig. 11: Unit labor costs

No adjustment yet

Source: UBS, Eurostat, Haver. Note: Unit labor costs for the total economy vs. Germany.

Fig. 12: Government budget deficits

In % of GDP

Source: UBS, Eurostat, Haver.

Table 3: French growth and inflation forecasts

Better but still set to fall short of its own growth potential

2014 2015E 2016E 2014 2015E 2016E 2014 2015E 2016E 2014 2015E 2016E

Year over year 0.4% 1.0% 1.5% 0.4% 0.9% 1.4% 0.6% 0.3% 1.6% 0.6% 0.1% 1.1%

Annual real GDP growth Consensus Inflation Consensus

Source: UBS estimates, Bloomberg.

European economy

CIO WM Research 12 March 2015 6

UK: Keep calm and carry on The UK economy is set for another year of solid expansion in 2015, which

should continue into 2016 gradually closing what remains of the output

gap. The economy has thus far been supported by vigorous consumption, fuelled by a remarkably strong labour market, recovering consumer

confidence, and rising real incomes. Still, this isn't the whole story, as

business investment has also been a key factor in the UK recovery. For 2015, we expect that consumption growth will continue to support the

economy, aided by lower fuel prices boosting disposable income, and

labour market slack eroding further, forcing earnings higher. The

downside to lower oil prices will likely be seen in business investment

where growth is now expected to be weaker, as North Sea investment

plans are shelved outside of this sector expansion should remain brisk.

Fiscal policy will remain contractionary, with current projections of a

tightening of around 1% of GDP for the next few years. This should see the budget deficit shrink further, with the UK's debt-to-GDP ratio peaking

just above 80% in 2015/6. The monetary policy outlook is clouded by the

recent weaker-than-expected inflation outturns. However, once the temporary external effects of falling food and energy prices fade,

domestically generated inflation will, driven by higher wages, push

headline indices higher. We expect the Bank of England will hike rates in November, but the path beyond this is likely to be gradual, with only two

further hikes in 2016.

A blot on the UK's copybook is the marked deterioration in its external

position. The current account deficit has expanded sharply, with the -6%

print for the end of 3Q14, the joint worst position ever recorded (see Fig. 14). The deterioration can be explained by the income account; the trade

balance has been remarkably stable. The change in the income balance is

explained by the falling returns that the UK receives from overseas investments, especially when compared to what foreigners earn on their

UK assets. We expect that this position should naturally reverse over time

as the global economy recovers, but it may persist for some quarters yet.

Sterling has continued to find support on the forex markets, chiefly

against the euro where it has gained over 6% since the start of the year. Diverging paths for monetary policy explain this move. Nevertheless, in

the short-term sterling may face some headwinds, especially around the

general election (see below). Beyond this, the gradual path of interest rate rises should once again support the currency.

In our view, the risks around the UK outlook are primarily centered on the 7th May general election. Current polling points to neither of the major

UK parties gaining a majority, which suggests that another coalition

government or perhaps a less stable arrangement is the most likely outcome. For markets, the key areas of focus will be the fiscal policy, EU

membership, and the potential for further devolution. These matters have

the potential to weigh on consumer, and crucially, business confidence as the election approaches and after. Especially if there is a lack of certainty

about the direction and pace of travel on these major issues.

Dean Turner

Fig. 13: Robust economic growth to continue

UK GDP (%) and UBS Forecasts

-7

-6

-5

-4

-3

-2

-1

1

2

3

4

-3

-2

-2

-1

-1

0

1

1

2

07 08 09 10 11 12 13 14 15 16

GDP q-o-q (lhs) GDP y-o-y (rhs)

Source: Haver, UBS as of February 2015.

Fig. 14: The sharp deterioration of the UK's

current account can be explained by income flows, not a worsening trade position

UK current account deficit in % of GDP

-7

-6

-5

-4

-3

-2

-1

0

1

2

3

04 05 06 07 08 09 10 11 12 13 14

Trade balance Income balance Current account balance

Source: Haver, ONS, UBS as of February 2015.

Fig. 15: Current polling points to an unusually

uncertain outcome at the UK general

election

UK voting intentions, 10 poll average

0

5

10

15

20

25

30

35

40

45

50

Apr 12 Okt 12 Apr 13 Okt 13 Apr 14 Okt 14

CON (%) LAB (%) LD (%) UKIP (%) Grn (%)

Source: ukpollingreport.co.uk, UBS as of February 2015. CON: Conservative, LAB: Labour, LD: Liberal Democrats, UKIP: UK Independence party, Grn: Green Party. Note: Line colors in chart represent colors parties are typically associated with.

Table 4: UK growth and inflation forecasts

Losing pace, but still at the head of the pack

2014 2015E 2016E 2014 2015E 2016E 2014 2015E 2016E 2014 2015E 2016E

Year over year 2.6% 2.4% 2.9% 2.6% 2.6% 2.4% 1.5% 0.1% 1.7% 1.5% 0.5% 1.7%

Inflation ConsensusAnnual real GDP growth Consensus

Source: UBS estimates, Bloomberg.

European economy

CIO WM Research 12 March 2015 7

Italy

Italian GDP fell once again in 2014, contracting 0.4%. After more than three years, we expect Italy to leave recession behind, posting positive

growth rates from the first quarter 2015 onwards. Nevertheless,

compared to the Eurozone average, Italian growth is going to remain subdued, as we expect the economy to grow only by 0.7% this year. A

lack of competitiveness is still keeping potential growth rates low. The

government of Matteo Renzi finally addressed this in part with labor market reform, but more needs to be done. To that effect, the rise of the

Lega Nord in polls as well as the termination of the collaboration

(Nazareno pact) between Renzi's PD party and Forza Italia serve as a reminder for the challenges ahead. The Italian government plans only a

marginal fiscal tightening this year. Nevertheless, the debt-to-GDP ratio

should start to come down by 2016.

Private consumption is set to grow marginally in 2015 on the back of a

moderately falling unemployment rate and positive wealth effects from the ECB's quantitative easing program. Investments continue to be the

weak point, but we expect a gradual stabilization in 2015 on the back of

the government repaying arrears and easier financial conditions. As inflation has fallen into negative territory, relatively high real interest rates

are a drag on investments. The longer term outlook is better, though, as

the labor market reform should somewhat increase flexibility for companies and raise long-term economic growth potential. Additionally,

we expect Italy to be one of the main beneficiaries from the "Juncker

fund" for investments, especially in 2016, as the fund is only fully operational from summer 2015 onwards. House prices show tentative

signs of a bottoming and falling mortgage rates and better loan demand

should lead to a bottoming in construction activity, with a rebound conceivable in 2016. Finally, we expect net trade to contribute

moderately to economic growth in 2015, as a weaker euro and lower oil

prices should keep Italian imports in check and support competitiveness of exports.

The main risks for our Italian outlook are fewer than expected structural reforms, further weakness in the construction sector and a stronger than

expected euro. Moreover, even more negative inflation rates than

expected could push real interest rates higher, thereby making loans

effectively more expensive and acting as a drag on investments and

consumption.

Fig. 16: Italian investments

Main culprit behind economic stagnation

Source: UBS, Haver, Istat.

Fig. 17: Economic momentum improving

Consumer and business surveys

Source: UBS, Haver.

Table 5: Italian growth and inflation forecasts

Better growth but still underperforming

2014 2015E 2016E 2014 2015E 2016E 2014 2015E 2016E 2014 2015E 2016E

Year over year -0.4% 0.7% 1.3% -0.4% 0.4% 1.0% 0.2% 0.6% 1.6% 0.2% -0.1% 0.9%

Annual real GDP growth Consensus Inflation Consensus

Source: UBS estimates, Bloomberg.

European economy

CIO WM Research 12 March 2015 8

Spain

The recovery of the Spanish economy is gathering pace, helped by improving external conditions. Domestic demand is growing by more

than 2% y/y already as the initial pull from export-related activities was

followed by significant job creation and a swift recovery in household consumption. Meanwhile, fiscal restraint has been much lower than

budgeted as Spain enters in an intense election year. Furthermore, the

construction sector has been contributing positively to GDP in the last three quarters, at an increasing rate.

Besides, three key external elements are materially improving the economic outlook in the Eurozone, particularly in Spain. First, the

depreciation of the euro will support exports and restrain imports and,

even more important for Spain, will foster the recovery in France, Germany and Italy, its main trade partners. Secondly, the slump in oil

prices provides a big boost to the Spanish economy, whose energy trade

deficit amounted to 4% of GDP in 2014. As oil and gas imports cheapen, the goods trade balance will temporarily register a boost while real

disposable income jumps and consumption accelerates temporarily. The

overall positive effect could surpass 0.5% of GDP, supporting continued strong growth in 2015.

Thirdly, the expected improvement in credit conditions is feeding through to the real economy. The ECB's QE announcement has helped the

sovereign spread to fall and credit standards to ease. The net flow of

loans is improving and should start to trend in positive territory during 2015, providing a very favorable credit impulse that will contribute to the

cyclical bounce. What's more, we expect Spain to be one of the main

beneficiaries of the forthcoming European Fund for Strategic Investments (EFSI).

As a result, we now expect quarter-on-quarter growth to remain at around 0.6% in 2015, with a significant probability of even stronger

readings in the next 1-2 quarters as the positive effect of a more

competitive euro and low oil prices provide an additional boost to net exports and to consumption. This could translate into 2.4% GDP growth

in 2015 (1.4% last year) and 2.3% in 2016. Given this hefty economic

recovery, despite a clear relaxation in the fiscal tightening efforts, the

budget deficit should only miss its target of 4.2% in 2015 and 2.8% in

2016 by a few tenths of a percentage point. Nevertheless, Spain won't

register a primary fiscal surplus until 2016/2017. Therefore, debt-to-GDP will only stabilize in 2016 at close to 100% of GDP, meaning that long-

term fiscal sustainability has not yet been achieved.

Despite this very positive cyclical backdrop, Spain's healing remains fragile

and highly dependent on external economic and financial conditions,

especially as consumption growth is outpacing income growth by a wide margin, which is not sustainable. Besides, the recovery could be

threatened by rising political instability as local and regional (May) and

national (November) elections in 2015 will likely result in weaker governments, while Podemos is unlikely to win a majority.

Roberto Ruiz-Scholtes, Ricardo Garcia-Schildknecht

Fig. 18: Strong job creation augurs a

sustained GDP recovery Employment and real GDP annual growth and

Services PMI

30

35

40

45

50

55

60

65

-8

-6

-4

-2

0

2

4

6

01 02 03 04 05 06 07 08 09 10 11 12 13 14 15

Employment growth (% YoY) Real GDP growth (% YoY)

Services PMI (3m mov.av; rhs) Source: UBS, Markit, INE.

Fig. 19: Exports revive but imports rise with domestic demand

Real goods imports and exports and fixed

investment (real terms index)

30

40

50

60

70

80

90

100

110

120

130

140

30

40

50

60

70

80

90

100

110

120

130

140

95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16

Goods imports

Goods exports

Gross fixed investment

Forecast

Source: UBS, INE.

Table 6: Spanish growth and inflation forecasts

Past reforms should continue helping to outperform the Eurozone

2014 2015E 2016E 2014 2015E 2016E 2014 2015E 2016E 2014 2015E 2016E

Year over year 1.4% 2.4% 2.3% 1.4% 2.1% 2.2% -0.2% -0.3% 1.4% -0.2% -0.4% 1.1%

Annual real GDP growth Consensus Inflation Consensus

Source: UBS estimates, Bloomberg.

European economy

CIO WM Research 12 March 2015 9

Switzerland

At 0.6%, quarterly growth in Switzerland in 4Q surprised to the upside

(consensus estimate 0.3%). However, after the Swiss National Bank (SNB)

withdrew the exchange rate floor of EURCHF 1.20 on 15 January, this all seems like water under the bridge. Leading economic indicators from 1Q

2015 point to an economic slowdown after the Swiss franc's jump of

12% against the euro since mid-January. The strengthening of the Swiss franc represents a serious hit to the Swiss economy. Switzerland's exports

value 50% of its GDP; 60% of these exports go to the Eurozone.

We expect the government not to initiate any fiscal stimulus to support

the economy. Slower tax revenues will be offset by lower government

expenditure that should keep the budget well-funded and the debt-to-GDP ratio constant at 36%. Negative interest rates have become the

SNB's instrument of choice to weaken the Swiss franc, a measure that

seems to have worked well in the relative calm of the recent market environment. We assume no further tightening of the negative interest

rates in 2015. However, we expect further bumpy discussions between

the Eurozone and Greece regarding the debt program that could again trigger safe haven flows strengthening the Swiss franc. The SNB will keep

a close eye on the EURCHF exchange rate and we expect further

interventions from the SNB trying to weaken the Swiss franc if the pair trades substantially lower, especially if EURCHF moves well below parity.

Accelerating growth in the Eurozone and the US should attenuate the

negative effects of the strong Swiss franc and give some support to Swiss

exports. All in all, we expect negative export growth of -1.0% for 2015

and a negative growth impact of -0.5 percentage points from net

exports. The uncertainty surrounding the introduction of immigration quotas and the strength of the Swiss franc create an unfavorable

environment for business investment. We expect equipment investments

to be down by -0.3% in 2015. A higher expected unemployment rate of 3.6% on average in 2015 up from 3.2% in 2014 and slightly slower

expected population growth of 0.9% in 2015 down from 1.2% in 2014

will weigh on private consumption. Nevertheless, we expect private consumption and construction investment to increase by 1.4% and

1.6%, respectively and, therefore, to support growth in 2015. Overall, we

forecast 0.5% GDP growth in 2015 and 1.1% in 2016.

Political risk stems from the uncertainty about how the mass immigration

initiative will be implemented and whether a solution will trigger a cancelation of the bilateral treaties with the EU. We expect difficult

negotiations with the EU and no breakthrough in 2015. A further

referendum on the issue is likely to take place in 2016/2017. General elections will be held in October 2015, which is expected to have no

considerable market impact. A strong appreciation of the Swiss franc in

the case of more Eurozone troubles and the EURCHF hovering around 0.95 for a sustained period of time represents a risk to our GDP forecast.

This might lead to a deep recession, much lower immigration and a

decline in real estate prices of up to 20%. Bernd Aumann

Fig. 20: SNB so far but no further Central bank money, in % of GDP

Source: UBS, Reuters EcoWin

Fig. 21: Downtrend turns into landslide

EURCHF

Source: UBS, Reuters EcoWin

Table 7: Swiss growth and inflation forecasts

Solid growth, inflation sharply down

2014 2015E 2016E 2014 2015E 2016E 2014 2015E 2016E 2014 2015E 2016E

Year over year 1.9% 0.5% 1.1% 2.0% 0.8% 1.2% 0.0% -1.0% 0.2% 0.0% -0.9% 0.2%

ConsensusAnnual real GDP growth Inflation Consensus

Source: UBS estimates, Bloomberg.

European economy

CIO WM Research 12 March 2015 10

Sweden

We expect the Swedish economy to grow above its long-term trend in

2015 on the back of broad-based improvement in consumption,

investments, and net trade. Although some normalization of the extraordinary 4Q2014 growth rate of 1.1% q/q is likely in the first half of

2015, we believe that the average q/q growth rate of the Swedish

economy in 2015 will be able to stay close to the second half of 2014. Supportive factors are high business confidence indicated by the

purchasing managers' indices, low oil prices, an improving Eurozone

economy, and further monetary easing by the Swedish Riksbank.

However, with a size of only SEK 10bn and a duration of one month, the

recently launched sovereign bond purchase program (QE) is too small and too short to be able to turn around the downward trend in inflation

expectations (see Fig. 22) and the low inflation. Negative rates should be

an effective tool to depreciate the Swedish krona (SEK). However, the currency is already weak and the 1Q2015 Riksbank business survey has

shown that Swedish companies are hesitant to pass on higher import

prices due to strong competition. As such, we expect the Riksbank to ease further by cutting the repo rate further into negative territory and by

extending the QE program at least until the end of 2015. This should

keep the SEK weakening against major currencies, including the euro.

Unemployment is still relatively high at almost 8%, since growth in

2013/14 has not been strong enough to compensate strong immigration (see Fig. 23). We expect unemployment to fall more rapidly in 2015 given

strong growth rates. This should lend further support to consumer

confidence, along with lower oil prices and higher household wealth after recent strong house price increases. Therefore, consumption should

remain the main growth driver in 2015, although high household debt

levels will likely prevent even stronger growth. The Swedish government's fiscal policy is likely to be a slight drag, however. It ran a sizeable budget

deficit of 2.1% in 2014. Initial plans to reduce the deficit to 1.1% in

2015 could be loosened, as the government intends to drop the 1% budget surplus target. However, the proximity to the 3% limit set by the

European Union does not give much room on the easing side.

Despite immigration-led strong demand pushing house prices higher by

over 8% y/y recently, construction investment remains rather sluggish,

partly due to extensive rent control. Swedish total investments, however, have improved sharply in 2014 and we expect this to continue in 2015.

Drivers will be persistent high business confidence and the general

rebound in its biggest trading partner, the Eurozone, which is already feeding through to the export-heavy Swedish industry (see Fig. 24).

Exports will also benefit from the Eurozone acceleration and are

additionally supported by the weak SEK. As such, the net trade drag on growth that was observed in 2014 will likely be much lower in 2015.

Key risks to our outlook for Sweden are a serious escalation of the Russia-Ukraine crisis hurting Swedish exports and investments in Russia and a

resurgence of political and economic uncertainty in the Eurozone. Daniel Trum

Fig. 22: Inflation expectations

Downtrend accelerating lately

Source: UBS, TNS Prospera, Haver.

Fig. 23: Unemployment

Lagging the economic improvement

Source: UBS, Statistics Sweden, Haver.

Fig. 24: Swedish exports and imports

Exports finally picking up

Source: UBS, Statistics Sweden, Haver.

Table 8: Swedish growth and inflation forecasts

Ultra-strong growth, but inflation too low

2014 2015E 2016E 2014 2015E 2016E 2014 2015E 2016E 2014 2015E 2016E

Year over year 2.3% 3.0% 3.7% 2.3% 2.3% 2.7% -0.2% 0.2% 1.5% -0.2% 0.3% 1.5%

Annual real GDP growth Consensus Inflation Consensus

Source: UBS estimates, Bloomberg.

European economy

CIO WM Research 12 March 2015 11

Norway After three years of strong GDP growth above 2%, the Norwegian

Mainland economy is coming under pressure from low oil prices. We

expect Brent crude oil prices to fall again over the next three months and to rebound only to around 70 USD by the end of 2015. Against this

background, we believe that the Norges Bank will lower its key policy rate

further from 1.25% to 0.75%, most likely at its 19 March meeting. The inflation rate has remained close to target throughout 2014, but the

weak oil price is also putting this stability into doubt (see Fig. 25).

Contrary to other European countries, Norwegian consumers are set to

suffer from the low oil prices, as employment prospects in the oil and gas

sector are already deteriorating sharply (see Fig. 26). Given that this sector makes up more than 20% of the total economy, employment in the

Mainland economy is likely to be dragged down, too. Consumer

confidence has already weakened to the lowest level since the Global Financial Crisis in 2009 (see Fig. 27). At that time, the Norwegian

government supported the economy with higher spending. This is likely

to happen again in 2015, but to a much smaller extent. The center-right government has its focus on long-term initiatives to make Norway less

dependent on oil. Furthermore, they declared that it is the central bank's

job to react to short-term fluctuations such as the current drop in oil prices. If the economic downturn should last into 2016, though, more

fiscal stimulus is likely. They certainly have enough firepower with a

government debt-to-GDP ratio around 30% and some leeway left in

using returns from the over 800bn USD large government pension fund.

The downturn will be felt even more sharply in investments. A 2012 Norges Bank survey among Norwegian companies indicates that oil prices

below 70 USD are likely to have severe negative effects on economic

growth. The construction sector already weakened in 2014 despite further strong increases in house prices of over 8% y/y recently. With

lower growth in Mainland economic activity, we also expect house prices

to trend sideways and the construction sector to be a drag on growth.

We expect the huge net trade surplus (oil and gas make up around 50%

of exports) to deteriorate in 2015. However, the anticipated improvement in Eurozone economic momentum should help Norway Mainland's

exports, leading to a positive contribution to its GDP in 2015. We expect

the Norwegian krone (NOK) to stay weak against the euro, as the ECB's QE policy is matched by Norges Bank rate cuts, thereby more than

offsetting the effects on the currency pair . Moreover, an oil price below

70 USD increases the need for a weaker NOK to offset falling oil revenues from abroad. Beginning in the second half of 2015 we expect the Brent

oil price to rebound to around 70 USD in 12 months. This should re-

accelerate Norway Mainland growth again from 1.1% in 2015 to 2.2% in 2016.

Key risks to our outlook on the Norwegian economy pertain to a longer than expected period of oil price weakness, a stronger housing market

downturn as a result of the general economic weakness, and a weaker

than expected Eurozone economy. Daniel Trum

Fig. 25: Inflation

Producer prices pointing to lower inflation

Source: UBS, Statistics Norway, Haver.

Fig. 26: Employment

Oil sector already feeling the pinch

Source: UBS, Statistics Norway, Haver.

Fig. 27: Consumer confidence

Lower oil prices affecting the whole economy

Source: UBS, TNS Gallup, Haver.

Table 9: Norway Mainland1 growth and inflation forecasts

Low oil prices hurting growth in 2015

2014 2015E 2016E 2014 2015E 2016E 2014 2015E 2016E 2014 2015E 2016E

Year over year 2.3% 1.1% 2.2% 2.3% 1.8% 2.2% 2.0% 1.3% 1.3% 2.0% 2.2% 2.2%

Annual real GDP growth Consensus Inflation Consensus

Source: UBS estimates, Bloomberg. 1 Norway Mainland refers to the domestic economy excluding oil and gas sectors.

European economy

CIO WM Research 12 March 2015 12

Bank Recovery and Resolution Directive (BRRD) The Bank Recovery and Resolution Directive (BRRD) harmonises the tools used in the recovery and resolution of credit institutions in the EU. The BRRD stipulates that, should a bank fail, its shareholders and creditors should normally be first in line to absorb any risks and losses. Only then should a resolution fund financed by the entire banking industry (Single Bank Resolution Fund, or SBRF) step in. In extreme cases, government institutions can still be financially involved in the recovery or resolution of an institution ("bail-out"). Current account The current account measures the cross border flow of goods, services, net investment income and cash transfers in a given period. Usually, the trade balance is the largest component of the current account. A current account surplus (normally associated with a trade surplus) means that the respective country has increased its net foreign assets, or in case of net liabilities reduced it in a specific period. Deposit Guarantee Schemes Directive (DGSD) The new European Directive on Deposit Guarantee Schemes entered into force on 2 July 2014. It replaces the previous Deposit Guarantee Scheme Directive from 1994. Its main elements include: simplification and harmonization, in particular relating to coverage and payout arrangements; further reduction, to one week, of the time limit for paying out depositors, and better access for DGSs to information about their members (i.e. banks); harmonization of minimum ex ante financing requirements for DGSs; mutual borrowing between DGSs, i.e. a borrowing facility in certain circumstances. ECB Deposit Facility A standing facility of the Eurosystem which counterparties may use to make overnight deposits at a national central bank. Such deposits are remunerated at a pre-specified interest rate ("deposit rate"). ECB Executive Board One of the decision-making bodies of the ECB. It comprises the President and the Vice-President of the ECB and four other members, all of whom are appointed by common accord by the Heads of State or Government of the EU Member States whose currency is the euro. ECB Governing Council The supreme decision-making body of the ECB. It comprises the President and the Vice-President of the ECB plus the other members of the Executive Board and the governors of the national central banks of those EU Member States whose currency is the euro. ECB longer-term refinancing operation (LTRO) A regular open market operation executed by the Eurosystem in the form of a reverse transaction. Longer-term refinancing operations are carried out through monthly standard tenders and normally have a maturity of three months. European Fund for Strategic Investments (EFSI) An investment plan from the European Commission aimed at relaunching public and private investment in the real economy over the next three years (2015 2017). The fund will be operated by the European Investment Bank. European Semester A six-month period each year when member states' budgetary, macro-economic and structural policies are coordinated so as to allow member states to take EU considerations into account at an early stage of their national budgetary processes and in other aspects of their economic policymaking. European Stability Mechanism (ESM) The European Stability Mechanism is an intergovernmental institution based in Luxembourg, set up to provide financial assistance to eurozone member states experiencing, or being threatened by, severe financing problems, if this is indispensable for safeguarding financial stability in the eurozone as a whole. The maximum lending capacity of the ESM is set at 500 billion. This is achieved with a subscribed capital of 700 billion ( 80 billion paid-in capital, the rest callable). The ESM entered into force on 27 September 2012. It takes over the tasks fulfilled by the European Financial Stability Facility (EFSF). European System of Financial Supervision (ESFS) The group of institutions in charge of ensuring the supervision of the EUs financial system. It comprises the European Systemic Risk Board, the three European Supervisory Authorities (the European Banking Authority, the European Securities and Markets Authority and the European Insurance and Occupational Pensions Authority), the Joint Committee of the European Supervisory Authorities, and the national supervisory authorities of the EU Member States.

European economy

CIO WM Research 12 March 2015 13

European Systemic Risk Board (ESRB) An independent EU body responsible for the macro-prudential oversight of the financial system within the EU. It contributes to the prevention or mitigation of systemic risks to financial stability that arise from developments within the financial system, taking into account macroeconomic developments, so as to avoid periods of widespread financial distress. Eurosystem The central banking system of the euro area. It comprises the ECB and the national central banks of those EU Member States whose currency is the euro. Excessive Deficit Procedure (EDP) The corrective arm of the Stability and Growth Pact (SGP) ensures that Member States adopt appropriate policy responses to correct excessive deficits by implementing the Excessive Deficit Procedure (EDP). The EDP operationalizes the limits on the budget deficit and public debt given by the thresholds of 3% of deficit to GDP and 60% of debt to GDP not diminishing at a satisfactory pace. Full allotment policy This policy provides banks with access to unlimited ECB liquidity, as long as eligible collateral is delivered to the ECB. The MRO interest rate applies to the liquidity lent out under fixed allotment policy. HICP Inflation Consumer price inflation in the euro area is measured by the Harmonized Index of Consumer Prices (HICP). The HICP is compiled by Eurostat and the national statistical institutes in accordance with harmonized statistical methods. The headline inflation refers to the inflation rate including core and non-core inflation. Main refinancing operation (MRO) A regular open market operation executed by the Eurosystem (in the form of a reverse transaction) for the purpose of providing the banking system with the amount of liquidity that the former deems to be appropriate. The interest rate on MROs represents the key policy rate for the ECB to implement its monetary policy stance. Marginal lending rate The interest rate on the Eurosystem's marginal lending facility which banks may use for overnight credit from a national central bank that is part of the Eurosystem. Monetary aggregate Currency in circulation plus outstanding amounts of certain liabilities of monetary financial institutions (MFIs) that have a relatively high degree of liquidity and are held by non-MFI euro area residents outside the central government sector. The Governing Council has announced a reference value for the growth of M3. Outright monetary transactions (OMT) A program under which the ECB makes purchases ("outright transactions") in secondary, sovereign bond markets, under certain conditions, of bonds issued by eurozone member states. Conditions for eligibility are that the government has asked for financial assistance through the ESM or EFSF and that it agrees to implement certain domestic economic measures. Purchasing Manager Index (PMI) The Markit PMI series are monthly economic surveys of carefully selected companies compiled by Markit. They provide advance insight into the private sector economy by tracking variables such as output, new orders, employment and prices across key sectors. Securities Markets Programme (SMP) Interventions by the Eurosystem in public and private debt securities markets in the eurozone to ensure depth and liquidity in those market segments that are dysfunctional. The objective is to restore an appropriate monetary policy transmission mechanism, and thus the effective conduct of monetary policy oriented toward price stability in the medium term. Single Resolution Mechanism (SRM) The Single Resolution Mechanism complements the Single Supervisory Mechanism. It is set to centralize key competences and resources for managing the failure of any bank in the eurozone and in other Member States participating in the Banking Union. Single Supervisory Mechanism (SSM) The Single Supervisory Mechanism (SSM) is a new system of banking supervision for Europe. It comprises the ECB and the national supervisory authorities of the participating countries. Its main aims are to ensure the safety and soundness of the European banking system, increase financial integration and stability, and ensure consistent supervision. The SSM is one of the two pillars of the EU banking union, along with the Single Resolution Mechanism.

European economy

CIO WM Research 12 March 2015 14

Six-pack A set of six legal acts adopted in 2011, strengthening procedures for the surveillance of the member states' fiscal policies (the "Stability and Growth Pact") and introducing new ones for their macroeconomic policies. The aim is to better control public deficits and national debt and to better address macroeconomic imbalances. Stability and Growth Pact The Stability and Growth Pact (SGP) is a rule-based framework for the coordination of national fiscal policies in the European Union. It was established to safeguard sound public finances, based on the principle that economic policies are a matter of shared concern for all Member States. TARGET2 The second-generation TARGET system. It settles payments in euro in central bank money and functions on the basis of a single IT platform, to which all payment orders are submitted for processing. This means that all payments are received in the same technical form. Targeted Long-Term Refinancing Operations (TLTRO) A new LTRO (see above) announced on June 2014 targeted at business loans, consisting of eight LTROs. The aim of this refinancing operations is to improve bank lending to the Eurozone non-financial private sector in order to ensure that the supply of credit will not endanger the recovery of the real economy. TLTROs should also improve the distortions in the monetary transmission channel. TLTROs will be accessible on a quarterly basis from September 2014. Treaty on stability, coordination and governance (fiscal compact) The fiscal compact is an intergovernmental treaty signed by euro area members and other EU member states at the European Council meeting on 2 March 2012. The treaty requires structural government deficits not to exceed 0.5% of GDP and the budget to be in balance or surplus. In addition, debt to GDP ratios above 60% of GDP must be reduced over a 20- year period (subject to a three-year grace period following compliance with the deficit objective). Two-pack The second package of proposals on economic governance was presented by the Commission in November 2011 and builds on the so-called "six-pack" of economic governance proposals. Once adopted, the two draft regulations will introduce provisions for enhanced monitoring of eurozone countries' budgetary policies. Unit labor costs Unit labor costs (ULC) measure the average cost of labor per unit of output and are calculated as the ratio of total labor costs to real output. A rise in an economys unit labor costs represents an increased reward for labors contribution to output. Source: BaFin, Bundesbank, ECB, European Union, Markit, OECD.

European economy

CIO WM Research 12 March 2015 15

AppendixChief Investment Office (CIO) Wealth Management (WM) Research is published by UBS Wealth Management and UBS Wealth ManagementAmericas, Business Divisions of UBS AG (UBS) or an affiliate thereof. CIO WM Research reports published outside the US are brandedas Chief Investment Office WM. In certain countries UBS AG is referred to as UBS SA. This publication is for your information only andis not intended as an offer, or a solicitation of an offer, to buy or sell any investment or other specific product. The analysis containedherein does not constitute a personal recommendation or take into account the particular investment objectives, investment strategies,financial situation and needs of any specific recipient. It is based on numerous assumptions. Different assumptions could result in materiallydifferent results. We recommend that you obtain financial and/or tax advice as to the implications (including tax) of investing in the mannerdescribed or in any of the products mentioned herein. Certain services and products are subject to legal restrictions and cannot be offeredworldwide on an unrestricted basis and/ or may not be eligible for sale to all investors. All information and opinions expressed in thisdocument were obtained from sources believed to be reliable and in good faith, but no representation or warranty, express or implied, ismade as to its accuracy or completeness (other than disclosures relating to UBS and its affiliates). All information and opinions as well asany prices indicated are currently only as of the date of this report, and are subject to change without notice. Opinions expressed hereinmay differ or be contrary to those expressed by other business are as or divisions of UBS as a result of using different assumptions and/orcriteria. At any time, investment decisions (including whether to buy, sell or hold securities) made by UBS AG, its affiliates, subsidiaries andemployees may differ from or be contrary to the opinions expressed in UBS research publications. Some investments may not be readilyrealizable since the market in the securities is illiquid and therefore valuing the investment and identifying the risk to which you are exposedmay be difficult to quantify. UBS relies on information barriers to control the flow of information contained in one or more are as withinUBS, into other areas, units, divisions or affiliates of UBS. Futures and options trading is considered risky. Past performance of an investmentis no guarantee for its future performance. Some investments may be subject to sudden and large falls in value and on realization youmay receive back less than you invested or may be required to pay more. Changes in FX rates may have an adverse effect on the price,value or income of an investment. This report is for distribution only under such circumstances as may be permitted by applicable law.Distributed to US persons by UBS Financial Services Inc., a subsidiary of UBS AG. UBS Securities LLC is a subsidiary of UBS AG and anaffiliate of UBS Financial Services Inc. UBS Financial Services Inc. accepts responsibility for the content of a report prepared by a non-USaffiliate when it distributes reports to US persons. All transactions by a US person in the securities mentioned in this report should beeffected through aUS-registered broker dealer affiliated with UBS, and not through a non-US affiliate. The contents of this report havenot been and will not be approved by any securities or investment authority in the United States or elsewhere.UBS specifically prohibits the redistribution or reproduction of this material in whole or in part without the prior written permission of UBSand UBS accepts no liability whatsoever forthe actions of third parties in this respect.Version as per May 2014. UBS 2015. The key symbol and UBS are among the registered and unregistered trademarks of UBS. All rights reserved.

European economy

CIO WM Research 12 March 2015 16