58115371 how vulnerable is italy

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31 May 2011

EconomicsDaily

www.sgresearch.com

The Economic NewsHow vulnerable is Italy?

S&Ps negative outlook on Italys sovereign is debatable interms of its timing, as the economy has been stuck on alow-growth, high-debt trajectory for the best part of thelast decade, and growth-enhancing reforms have beenminimal. But while S&P's recent action appears a case ofdelayed realisation, Italy's economy is fragile, and shouldbe monitored closely. Here we discuss some of its keyvulnerabilities.Italys GDP per capita is lower today than it was in 1999; inthe IMFs words one of the worst performances amongadvanced economies. In fact, even excluding Italysespecially deep recession in 2008-2009, GDP growthbarely averaged 1.1% yoy since 2001 - the same rate asPortugals, and half that of the euro areas.Yet Italian bond yield spreads have held up well so far. Oneof Italys main advantages relative to the deeper peripheryis the relatively contained size of its external imbalances.For instance, its current account position, while in deficit,is nowhere near as negative as Portugals or Greeces.Nonetheless, the trend is one of clear deterioration (Fig. 2).The widely held view is that Italian banks are solid, but weare observing a sharp increase in non-performing loansamong Italian corporates (Figure 3). Household loanperformance is likely to follow suit, despite thecomparatively low leverage, as interest rates are set toincrease while real wages will at best stagnate on the backof weak productivity dynamics.S&P judges that the negative outlook issued on Italyreflects risks to its fiscal position that primarily stem fromweaker growth than our current assumption of averageGDP growth of 1.3% over the 2011-2014 period. Thatseems indeed a tall order: on our central forecasts, ItalianGDP growth will average 0.8%yoy over that period; andGDP won't be back to its 2008 level until at least 2015.Until now, Italys too big to fail status has provided aglass ceiling to its spreads even in the face of adversedomestic developments. But another prolonged bout ofstagnation may eventually erode that privilege.

Figure 1: Italys lost decade

Sources: ISTAT, SG Cross Asset Research, European Economics

Figure 2: Italy's trade deficit has continued to deteriorate, despitestrong global growth

Sources: ISTAT, SG Cross Asset Research, European Economics

Worthy of increased vigilanceUntil S&Ps recent outlook downgrade from stable to

negative of Italian sovereign debt and four domestic

banks, Italy had successfully averted the attention of

bond vigilantes. But after a lost decade (Figure 1),

economic stagnation continues to place relentless

pressure on fiscal sustainability, domestic demand and

the banking system.

[email protected] page 2

20,162 (1999) 20,127 (2010)

19500

20000

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21500

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Italy - Real GDP per capita

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993

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011

Visible trade balance as % of GDP

Current account balance (% of GDP)

Inside: GREEK SCENARIOS:

Good, Bad and Ugly,

THAILAND: Politics will

remain Thaid up in knots

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In the newsGREEK SCENARIOS

Good, Bad and Ugly

THAILANDPolitics Thaid up in knots

UNITED STATES

Personal income and spending disappoint in April

Pending home sales: now that's a black swan!

Preview: Chicago PMI

Preview: Dallas Fed manufacturing

Preview: Brazil industrial production

JAPANManufacturers plan a return to normalcy in June

April unemployment rises to 4.7%

A fresh new start for Japanese politics?

SOUTH KOREA

Industrial production was weak in April

NEW ZEALANDRecord trade surplus in April

Preview: Hong Kong April retail sales

Preview: India Q1 GDP

Preview: Australia Q1 GDP

Preview: China May PMI

Preview: South Korea CPI

ITALY

Berlusconi's coalition suffers a heavy defeat

EURO AREA

European Commission Survey: Cyclical peak is past

SWEDEN

Sweden GDP: Another strong reading in Q1

Preview: Germany Unemployment

Preview: France April consumer spending

Preview: Italy CPI

Preview: Euro area unemployment

Preview: Euro area CPI

Preview: Switzerland GDP

Continued from page 1

The banking sector is more vulnerable than it

seems...Italys banking system is widely perceived as safe and

free from opaque and risky products, while household

leverage is famously low (38% of GDP in 2010). This

broadly suggests lower contingent liabilities in the

economy, all else equal; a valued feature for many

investors.

But in truth, Italian banks are experiencing a steady

deterioration in their asset quality, and their loss

provisions have been rising. The steep increase in non-

performing loans among non-financial corporates -

despite the broadly unchanged nominal interest rates -is a concerning sign of fragility (Fig. 3). In addition, it is

worth noting that the traditional lending channel is

particularly important for Italian corporates, as most

companies are far too small to access capital markets.

Figure 3: Non-performing loans: Ongoing deterioration

Sources: Bank of Italy, SG Cross Asset Research, European Economics

Figure 4: Banks - Tier 1 capital ratios (%) could be higher

Sources: ECB, the data refer to 2009, SG Cross Asset Research, European Economics

0.0

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Banks, lenders & fin. institutions

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8.0

10.0

12.0

Germany Spain France Greece Ireland Italy Portugal

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...and rising interest rates will impact credit quality

As the ECB "normalises" its policy rates against this

vulnerable economic environment, asset quality looksset to deteriorate further, even in the absence of major

shocks. The simple mechanics of increasing interest

payments and static or declining real wages are likely

to solidify this trend. The most obvious risks for Italy,

unlike Ireland and, to a degree, Spain, do not stem

from abrupt adjustments in the housing market and the

construction sectors, or aggressive deleveraging from

households. Italys underlying vulnerability remains its

outright inability to grow real incomes, and the

consequences this entails, for consumers, credit

performance, and the broader health of the economy

and its public finances.

Where Italy's underlying fragility coming from?

The Italian economy was penalised by a comparatively

low productivity level even before the Great Recession.

To make things worse, 2008-2009 the economy

experienced a deep fall in productivity, from which the

economy is still struggling to rebound (Figure 5).

Similarly, our simple statistical analyses suggest that

the fall in Italys potential outputlevelin 2008-2009 has

been largely a permanent phenomenon (Fig. 6). Our

estimates also point towards a further deterioration of

Italys potential growth rate (the filtered slopes in

Figure 6).

Most structural economic indicators point in exactly

the same direction. Key determinants of productivity

such as spending on R&D and tertiary education

attainments all look extremely low, and fall visibly short

of average European standards. These characteristics

are reflected by Italys predominantly low-added-value

export composition, and the very modest share of

high-tech exports, which is close to Portugal's and the

rest of the periphery (Figure 7).

Figure 5: Italys productivity shock

Sources: ECB, SG Cross Asset Research, European Economics

Figure 6: Potential output Both a growth and level problem

Sources: ISTAT , SG Cross Asset Research, European Economics

Figure 7: Proportion of high technology exports as % of total

Source: Eurostat, European Commission, SG Cross Asset research

Avoiding another lost decade

The deep-seated structural flaws behind Italys poor

growth performance, suggest that its growth prospects

are subject to significant downside risks, especially in

the absence of vigorous and extensive structural growth-

enhancing reforms.

Yet there is no concrete strategy on this front. The years

ahead are likely to prove challenging for workers,

corporates, and the banking sector alike.

How increased surveillance could help

Pressures from financial markets and prospective

downgrades from credit rating agencies may induce

policy makers to proceed on structural growth-enhancing

reforms with a renewed sense of urgency. This would be

a major step in the right direction.

Ultimately, Italys biggest challenge will be to avoid

another lost decade. To this end, the key challenge will

be to engineer mutually reinforcing structural growth-

enhancing reforms while proceeding with a rationalisationof public spending.

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Potential GDP (HP Filter, Lambda=50K)

Statistical estimates of Italy's potential GDP

(logs)

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Should the policy response be limited to deep and

unimaginative austerity measures, similar to those

implemented in Greece and Ireland, there would be a

concrete risk to tip Italy's fragile economy into yet another

recession. We reckon Italy would struggle to cope with

more than 0.5-0.8% of GDP of net fiscal tightening per

annum on a sustained basis.

Fiscal implications

On our current assumptions Italys debt-to-GDP ratio

has been broadly stabilised at around 120% in thecoming years. However, the large erosion of Italys

productivity level and growth potential jointly suggest

that Italys debt sustainability remains vulnerable to

adverse setbacks.

GREEK SCENARIOSGood, Bad and UglyForget 2012, the deadline for Greece is June 29, when thenext tranche of 12bn from the EU/IMF is due. Without it,Greece is set to default, and in a very ugly way sendingshock waves through the global financial system. Morelikely, however, is that politicians with their backs to thewall will find a last minute solution. A good solution wouldclarify Greek funding out to at least 2013 and preferably2015. A bad one would carry Greece past the June 29, butleave big question marks open over what happens beyondthat date. True to European form, we expect a goodsolution to ultimately come through but in the usualpatchwork pattern, leaving markets open to significantvolatility near-term.Troikas verdict expected this week

The IMF, ECB and EU Commission are expected to

deliver the outcome of the Fourth Quarterly Review of the

Greek economic program this week (or possibly early

next week). The Third Review concluded; Greece has

made further progress towards its objectives, and the

underlying fiscal and broader reforms necessary to deliver

the programs medium-term objectives are gradually

being put in place. However, major reforms still need to be designed and implemented to build a critical mass

necessary to secure fiscal sustainability and economic

recovery. All performance criteria were met, but the

indicative target on domestic arrears accumulation was

again missed. The measures supported by structural

benchmarks have been either implemented or partially

implemented (with slight shortfalls in substance for

collective bargaining reforms and the study of public pay

and employment).We expect the Fourth Review to conclude favorably on

Greek debt sustainability allowing the next 12bn trancheof 110bn package to be paid out on June 29, but only if

Greece signs up to a new program of tougher

conditionality.

German Diet with Coach

Last week, PM Papandreou promised an additional 6bn

(or 2.8% of GDP) of austerity measures to reach the

deficit target of 7.5% of GDP in 2011. He also announced

the creation of a Sovereign Wealth Fund to accelerate the

50bn of privatisation set out in the Medium Term Fiscal

Strategy (MTFS, 2011-15). New promises to lose fiscal

weight, however, are unlikely to prove enough this time.

The EU and IMF both want assurance that the diet will

be implemented with (1) broad political support and (2)

discipline.PM Papandreou has already failed on step 1 as the

opposition New Democracy leader, Antonio Samaras, last

Friday rejected the governments austerity plans.

Papandreou has a sufficient majority in Parliament to

push ahead on reforms, but with the MTFS stretching into

2015 and the next election due in 2013, the EU and IMF

are keen to see broad political support.

On step 2, press reports suggest that part of a new

agreement for Greece could include technical

assistance (i.e. foreign involvement) in tax collection and

privatisation.

This would be unprecedented, but would no doubt help

deliver much needed confidence, both to EU taxpayers

and investors.

More help needed

Even the most optimistic of scenarios on new austerity

measures and accelerated privatisation will still leave

Greece in need of accessing bond markets in 2012; an

option that simply appears unrealistic today.

Consequently, a new package is urgently needed for

Greece. As we have detailed on previous occasions, wesee the most likely outcome to be an additional 50-60bn

of EU/IMF loans, likely with collateral and accompanied

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by a Vienna agreement approach, under which the main

private creditors (i.e. banks), agree to maintain current

exposure levels to Greece and thus secure refinancing for

a substantial share of maturing debt. If appropriately

structured, we do not expect the ECB to oppose this.

While the June 29 deadline is very tangible, it is still

unclear exactly what timeline reaching an agreement for

Greece will follow. Press reports suggest the Eurogroup

may hold an emergency meeting on Monday June 6,

although EU officials denied this Monday. The next official

meeting of the group is due on June 20, ahead of the

June 24 EU Summit. While a single comprehensive

package for Greece, clarifying both the short-term and

medium-term funding, is clearly the most desirable

outcome, the risk is to see a solution in patches. The first

patch would fix short-term funding, the second-patch

medium-term funding.

Thinking the unthinkable

With their backs to the wall, we expect policymakers will

always opt for the least risky and painful solution, i.e.

more support for Greece. Any political process, however,

is open to risk and there is a risk (albeit small in our

opinion) that Greece finds itself without funding on June

29. This scenario would most likely force Greece to

default on its debt, and by default here we mean haircuts.

Greek banks on the frontline: The most immediate

impact would fall on the Greek banking sector, which

holds 12.2% of its assets in Greek government bonds.

Greek banks would not only have an asset problem, but

also a liquidity one as Greek governments under a default

scenario would no longer be eligible at ECB refinancing

operations. A program for recapitalisation and emergency

lending assistance would be required immediately.

Greece is small : For the euro area banking sector as

a whole, Greece is relatively small. According to the latest

BIS data (end Q3-10), foreign claims and other exposures

of euro area banks amount to a modest 65bn on the

Greek public sector and just over 200bn including all

sectors in the Greek economy. At the euro area level,

these amounts are small.

the real issue is contagion

The real issue is contagion. Over the weekend, the Irish

Transport Minster noted that Ireland too could find it

difficult to return to market funding in 2012, hinting that

Ireland would also need a new package. Total foreign

claims and other exposures of euro area on Ireland

amount to almost 400bn, including all sectors. Portugal

amounts to just over 230bn and Spain almost 690bn.

These are clearly the sums the ECB is concerned about.

Liquidity crisis followed by funding crisis: In a Greek

default scenario with contagion; the most likely initial

outcome would be a drying up in inter-bank markets. The

ECB has the tools to tackle a liquidity crisis and would

take action accordingly. Government funding would be

the next issue. The ECB again has tools to act, stepping

up the SMP program (note that the ECB can only

intervene in secondary markets). An additional option

would be to use the EFSF to intervene in primary markets.

With the new EFSF powers still under construction, this

would require some accelerated footwork by the

Eurogroup. The Eurogroup would also have to act quickly

to reassure investors that the euro area is not on the

verge of serial defaults under such a scenario. This wouldleave policymakers scrambling for stability against a very

difficult backdrop. Moreover, such a risk scenario would

not just threaten the euro area, but global financial

stability.

To our minds, euro area policy makers are only too well

aware of the risks of not bringing an orderly resolution to

the current climate. An ugly scenario is thus to our minds

a low probability event, but as euro area leaders struggle

to put a good plan in place, things are likely to continue to

look bad over the coming days and weeks contributing to

more market volatility and euro weakness.

[email protected]

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THAILANDThailand elections: Politics Thaid up in knotsElections in Thailand rarely provide the resolution topolitical tensions that they should and the upcoming pollson 3 July are unlikely to change this pattern, in our view.Unless the Democrat Party wins an unlikely majority of thepopular vote, the best outcome that we may hope for is apostponement of political instability for a year or two. Yetmarkets have become accustomed to political instability inThailand; it is only when uncertainty reigns that sentimentbecomes markedly fragile and investors get nervous. Butthe upcoming polls contain ingredients that suggest thatthis may be thecase after July.Normally elections

will either deliver a

decisive victory for

one side or an

inconclusive result

for two or more

parties, requiring a

period of

negotiation before

the new coalition

government

emerges.

However, the odds

seem against a

neat and tidy

solution for

Thailand.

The current political

backdrop for these

elections is whatmatters and the

next elections are

unlikely to be the

platform to deliver

any decisive

resolution to the

wider political

game.

Yet the expectations will be that the market and economy

will largely ignore the political uncertainty. On the

economic front, this has seemed largely the case;Thailands GDP growth has averaged 4.5% per annum in

the past 20 years (when the country largely returned to

democratic rule), compared to the Asian average of 5.1%.

More recently, GDP growth is running at a respectable

3% yoy, though inflation is tracking higher and there is a

lack of policy leadership at present. And while political

volatility does lend itself to fragile market sentiment, the

importance of elections seems to have mixed long-term

significance.

Looking at the Bangkok SET equity index as a market

indicator, we note that sentiment is generally optimistic

ahead of elections with the SET rising by an average

2.2% in the month run-up to polling day.

However, whether

anything changes

at a political level,

the market

response is broadly

indifferent then

negative,

suggesting the

limited effect from

politics. SET is

virtually flat onemonth after an

election then falls

by an average 7%

in the three months

following. Elections

do not create any

sustained macro

impact typically,

instead the

direction of

markets usually

returns to the

prevailing

economic trends.

As long as the

politics doesnt

interfere too much

with the running of

the economy, then the political factor is usually short-

lived.

Hence any bullish hopes in the run-up to the elections

have to be taken with caution. Moreover; Thai politics are

rarely decided by elections, but instead by other political

events, such as a military coup (which is usually seen as

positive for stability), a key constitutional event (such as

Politics may cause short-term palpitations, but the longer-run implications of electionresults seem to have modest impact on markets and investor confidence

Notes on dates of significance: Blue lines: General elections; Black lines: Military coups; Pink line: Popular unrest.

Source: SG Cross Asset Research

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6m Bibor f ixings (%)

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the dissolution of the PPP in 2008), or perhaps, if the

revered king comes out to endorse a particular political

position.

Right now, public opinion polls and local expert analysis

suggest that the main opposition Puea Thai Party will

either win a dominant role in the new parliament, possibly

even an outright majority. We also note that Thailands

notoriously unreliable polling is usually biased to the

Democrats urban support base, and has historically

understated Puea Thais support levels.

Recent polls suggest Puea Thai is leadingOpinion Poll (%) Democrat Puea Thai

DusitPoll 37.0 41.0

Research Institute of Bangkok University 17.0 27.0Khon Kaen University 20.7 63.9

Abac 34.1 36.4


Puea Thai is latest incarnation of Thaksin Shinawatras

Thai Rak Thai Party, which was the ruling party between

2001-06 and technically won the 2007 elections (as the

Peoples Power Party).

The partys leader is Yingluck Shinawatra, a political

novice, but also the younger sister of Thaksin. Thaksin is

currently in exile to avoid a jail term for alleged corruption

during his term in office, but a win for Puea Thai is seen

as paving the way for his physical and political return to

Thailand. This seems to be sufficient to guarantee

Yingluck her brothers former popular support, making

her the front-runner for prime minister. It also helps that

Yingluck seems to be continuing her brothers penchant

for populist policies as well.

Against her, incumbent Prime Minister Abhisit Vejjajiva is

attempting to win his first mandate, after gaining power

due to the Constitutional Courts dissolution of the PPP in

2008. That dissolution, after the PPP had won the 2007

election, left Abhisits Democrat Party as the only major

party in parliament left to form a government. The media

has reported Julys election as a head-to-head race

between the Puea Thai and the Democrat Party, but

Abhisit has the weight of history and probably electoral

statistics against his hopes for a victory.

The Democrat Party has not won a general election since

1992. Its voting support also largely averages about 30%,

in comparison to Puea Thai (and its earlier incarnations)

and its average 50% support. Yet it is as Thailands main

conservative party, it naturally occupies the royalist nichethat the conservative tendency of the army leans towards.

And it is the presence of the army in the background,

which creates the enveloping political risk for the

elections. It is the uncertainty of future army intervention

in politics, which dilutes the significance of elections in

Thailand.

If the winning party (such as the Democrats) has the army

backing, then this intervention risk abates. However, a

Puea Thai win will always have the shadow of a potential

interference hanging over it, especially if it then works to

bring Thaksin back into power.

The army has engineered 18 coups or attempted coups

since 1933 (when the army staged its first successful

overthrow of the constitutional government), but there has

been only one in the past 20 years.

This was in 2006 when the army was seen as finally

intervening in the long-running stand-off between the

incumbent Thai Rak Thai government and the array of

anti-Thaksin forces. Officially this coup was executed as

the government was mired in gridlock and threatened

social and economic stability. However, Thaksin was also

seen as working to undermine the traditional and political

influence of the army. Note that the 2006 coup was

widely seen as being endorsed by the king, which

somewhat legitimised what was still an undemocratic

ouster of Thaksin.

It will be this historical shadow that hangs over any

victory by a party other than the Democrats. Hence, an

unsettled political situation remains likely long after July,

though the social and economic consequences may not

be immediately disruptive.

[email protected]

Current House of Representatives: ruling coalition parties on theright (major parties and seats held)


DemocratParty 173

Bhumjaithai32

Chartthaipattana 25Rum Chart

Pattana 9SocialAction 5Matubhum 3

Puea Thai189

PueaPandin 32

Pracharaj 8

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Preview: Dallas Fed manufacturingDallas Fed factory activity index expected to retreatto an eight-month lowSG: 2.5, Consensus: 8.3Echoing canvasses conducted by the Federal Reserve

Banks of New York, Philadelphia and Richmond, the

net percentage of manufacturers in the Dallas district

experiencing a pickup in general business activity

likely narrowed in May to 2.5% the lowest reading

since last September (see accompanying chart).

Heading into Fridays jobs report, the local

employment diffusion index may receive more than a

casual glance. Indeed, while the headline activity

gauges retreated in the aforementioned regional

reports, the employment soundings were stronger in

the Empire State and Philadelphia surveys.

Regional Fed manufacturing gauges weakened in May

Source: Global Insight, SG Cross Asset Research

Preview: Brazil industrial productionBrazil industrial production tests growth pacebeyond seasonality%YoY: SG: 1.3, Consensus: 0.9 After a full year of underperformance, industrialproduction picked up in February and March, taking

the baton from retail sales and pushing the 3- month

moving average (a better proxy for trend) to 0.9% from

0.5%. The development is encouraging but given the

drop in retail sales (particularly autos); markets will

wait for further pickup to confirm resumed momentum.

Indeed, despite the recent acceleration output remains

at relatively weak levels: production is only 0.5%

above March 2010 in seasonally adjusted terms.

Seasonality is again another factor bringing noise to

headline numbers as April recorded additional

holidays due to a late Easter in 2011.rebounding from

the -0.6% contraction the prior month, with a bounce in

manufacturing offering support.

Brazil Industrial production

Source: SG Cross Asset Research/Economics

JAPANManufacturers plan a return to normalcy in JuneApril industrial production came in a bit weaker thanexpected (actual +1.0% mom, expected +2.0% mom), butthe bigger news in the report should be manufacturersproduction plan for May and June.Manufacturers are planning to expand their production by

8.0% in May, followed by another surge of 7.7% in June.If these plans are realized, the level of production in June

will be only 0.8% below that of February before the

earthquake. After the devastating 15.5% production

decline in March, manufacturers are now planning a

return to normalcy by June.

Can they pull it off?

There are reasons to be cautious. In the March report,

manufacturers were planning 3.9% expansion in

production in April. In reality, they only managed to

increase the production by 1.0% in April, after the

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Philadelphia

Richmond

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devastating 15.5% decline in March. Perhaps we should

take manufacturers production plans with a grain of salt.

Having said that, while we think it is more likely that

manufacturers are likely to miss their production

expansion plans for May and June, it is likely that there

will be a large sized production expansion in May and

June, if not 8%, then along the level of 4-5%. With

perhaps one month delay, Japanese manufacturers seem

able to achieve their return to normalcy by summer.

Financial market implications: Positive

While the markets seem to remain somewhat sceptical,

we expect the V-shape recovery view to become

consensus as data confirms the slump in March

consumption and production being reversed. The impactof the supply chain shock was greater than our initial

assessments, but the once popular doomsday scenario

that Japanese consumption, as well as production,

remaining depressed until autumn no longer is credible.

While uncertainty still remains on how Japanese

manufacturers will handle power saving requirements

over the summer, we expect manufacturers to weather

their power issues without significant hindrance to output.

As incoming data confirms the V-shape recovery, we

expect the uncertainty discount priced into Japanese

assets to gradually diminish.

Industrial Production

Source: INDB, SG Cross Asset Research/Economics

[email protected]

JAPANApril unemployment rises to 4.7%A moderate deterioration in AprilThe labour market in Japan deteriorated in April with

unemployment rate rising to 4.7% from 4.6% and the job

offers to applicant ratio falling from 0.63 to 0.61. In our

view, job offers and applicants are more important in

determining the direction of the labour market.

Details suggest the beginning of recovery

Details show that job offers expanded by 5.8% month on

month in April. The deterioration in the offers to applicant

ratio stems from the increase in job applicants. Job

applicants expanded by April should make policy makers

remain cautious, yet the news that businesses expanded

their job offers in April gives hope that businesses are

regaining confidence.

[email protected]

JAPANA fresh new start for Japanese politics?Kan may resign in 1-2 weeks, opening the door to a grandcoalitionThere is an increasing possibility that Prime Minister Kan

may resign as soon as this weekend, opening the door to

a grand coalition between the three largest parties: DPJ

(the current ruling party), LDP (the former ruling party) and

Komei (a religion-based party). Yomiuri newspaper

reported that a motion of no confidence may be

submitted as early as Thursday this week.

Over the past week, LDP and Komei were mulling over

submitting a motion of no confidence on the PM in the

lower house. If the motion passes, PM Kan will need to

either resign or dissolve the lower house. However, the

motion was considered unlikely to pass, as it needs a

large-scale defection of DPJ members (80 out of 305 DPJ

members in the lower house).

However, last night, Ichiro Ozawa explicitly told his

supporters that Kan should resign and implied that he

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Industrial Production sa (2005=100)

Manufacturers' plan for May - June

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may vote for no confidence. With him leaning on PM Kan

to resign by threatening to join the motion of no

confidence, there is now a significant possibility that Kan

may decide to submit rather than face the embarrassment

of being voted out. The outcome is still not clear, but the

resignation of PM Kan and a formation of a grand

coalition in the next few weeks period is now a real

possibility.

Financial market implication: Positive for equity,

positive/neutral for JGBs

The formation of a grand coalition will be a big win for

Japanese politics after the poor performance of

government following the earthquake. A grand coalition

would be able to make otherwise difficult politicaldecisions, such as raising consumption tax rate. In our

view, such an event would be positive for equity, as it

would mean that Japanese government can form a large-

sized supplementary budget. The implication for JGBs is

not so straightforward. The news of a likely consumption

tax rate hike as soon as April 2012 should be positive for

JGBs, but the prospect of faster economic growth

boosted by a large sized supplementary budget may

dampen the attraction for the asset class.

How likely is a formation of a grand coalition?

The political picture is still too muddy. Ichiro Ozawa

cannot just break up the party. What remains of his

political career also seems limited too and his followers

wont be able to support his decision to leave DPJ . A

successor for PM Kan needs to be found within DPJ so

that DPJ wont lose the leadership in the grand coalition.

If no appropriate successor is found before LDP/Komei

submits the motion, the large majority of the DPJ may

decide to stick with PM Kan for now. In that case, PM

Kan may be able to hang on to this power for another fewmonths. Japanese politics will be something to pay

attention to in the next 1-2 weeks.

[email protected]

SOUTH KOREAIndustrial production was weak in AprilIndustrial production was weak in April, up only 6.9% yearon year, weaker than prior market consensus (9.2%). In ourview, this is a delayed supply shock reaction following theJapan's earthquake in March.While April production growth disappointed the market,

the size of decline was not particularly large. In month on

month terms, April production was down by a mere 1.5%,

meanwhile production in Japan turned into expansion

during April. We expect South Korean industrial

production to return to expansion in May.

BoK unlikely to take the news badly

BoK is likely to view the April decline in IP as a vindication

of its decision not to hike in May. However, supply chain

problems are being resolved in Japan and the actual size

of decline in South Korean IP was within reasonable

ranges. The robust production recovery outlook in Japan

for May and June should provide comfort to the BoK

policy makers that the decline in April is likely to prove

temporary. Mays CPI is due for release tomorrow (1

June) and will be more critical in any BoK decision-

[email protected]

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Preview: India Q1 GDPQ1-GDP to post a cycle highQtrly GDP (% YoY) SG: 10.0, Con: 8.1We are well ahead of the consensus with our 10% yoy

forecast for Indian growth in the first quarter of 2011.

The key difference between ourselves and the

consensus is that we do not expect the national

accounts estimate of industrial production to be as

weak as the monthly industrial production figures.

That is, as India accumulates its national accounts on

a production basis, the manufacturing sector is not

likely to be as weak as the market expects.

We have maintained for some time that as India has

rapidly moved into capital goods production, the

weights in the IP figures have not adequately captured

this, hence the increased volatility of the IP figures.

These distortions are not likely to be included in the

national accounts.

On the expenditure side, we look for a strong 11% yoy increase

in consumption as strong incomes growth continues to support

spending by the rapidly forming middle class.

In the fast lane, Indias growth overtakes Chinas


Preview: Australia Q1 GDPA rare moment of weaknessGDP (% QoQ) SG: -0.2, Con: -0.3GDP (% YoY) SG: 3.0, Con: 1.8The backward-looking national accounts will offer a

rare glimpse of weakness in the Australian economy.

That weakness is largely driven by one-off factors with

disruption to exports and consumer spending caused

by the severe flooding, cyclones and adverse weather

conditions in the north-eastern state of Queensland

(which accounts for around 20% of Australias GDP)

over the first quarter.

On the expenditure side of the accounts, private

consumption, housing investment, non-residentialinvestment and exports are all likely to have been

adversely affected or disrupted by the flooding.

Offsetting this, inventories are likely to have

accumulated over the quarter.

Still, on balance, we believe the Australian economy

will post a slight decline in the first quarter. The RBA

will look through this aberrant fall and concentrate on growth

relative to potential. The Australian economy still faces significant

inflationary pressures arising from a complete lack of spare

capacity.

An impressive decade of growth to continue


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IN GDP % YoY

CH GDP % YoY

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AU GDP % QoQ AU GDP % YoY

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Preview: China May PMIChina PMI to show further decelerationPMI SG: 51.6, Con: 51.6We expect the PMI to decline to 51.6 in May from 52.9

in March. Part of the decline would be due to seasonal

slowdown, as the pattern in previous years suggested.

However, the more important reason would be a real

deceleration in the manufacturing sector.

We think there are three factors behind the expected

slowdown: previous policy tightening, margin

squeezes and supply-chain disruptions caused by

Japans earthquake. The most affected companies areprobably the small-to-medium enterprises, low-value-

end exporters, automobile, and electronic

manufacturers.

The level of PMI would be consistent with GDP growth

of between 9.4~9.1% in Q2. However, we do not

expect the PBoC to change its tightening bias just now, as

inflation is not likely to stop rising until Q3.

China PMI and industrial production


Preview: South Korea CPIInflation pick up speed againSG Forecast (MoM): 0.2%, Consensus:0.2%SG Forecast (YoY): 4.2%, Consensus: 4.2%In April, the CPI inflation report surprised the market by

staying flat mom. The comforting news may have

contributed to the BoKs surprise decision to keep its

policy rate unchanged. In our view, the disinflation is

likely to be temporary. While the marginal strengthening

of the Korean won and a recent stability in commodity

price provides some anchor for South Korean inflation,

the general upward trend in the South Korean inflation is

unlikely to stop in the near future.

South Korea May CPI

Sources: SG Cross Asset Research

ITALYBerlusconi's coalition suffers a heavy defeatLocal elections held across Italian cities have resulted in a

heavy defeat for Berlusconi's center-right coalition

throughout Italy. The centre-left prevailed with strong

gains, which extended to historical strongholds of the

center-right such as Milan, Naples, and Trieste in the

North East. The extent of the defeat increases the chance

of some defections among center-right coalitionmembers, which could weaken Berlusconi's coalition.

Although it is early to say, Monday's electoral results

could eventually pave the way for either new General

Elections, or an outright change of government, in the

coming months. That said, before jumping to a new

national election, the current electoral law would most

probably need to be improved, to reduce the likelihood of

an inconclusive electoral outcome.

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60

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100

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20

2005 2006 2007 2008 2009 2010 2011

IP, 3mma PMI, %yoy

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11

CPI

Core CPI

(YOY%)

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EURO AREAEuropean Commission Survey: Cyclical peak is pastThe third successive decline in the Economic SentimentIndicator (ESI) for the euro area suggests that the cyclepeak has been reached in Q1, when year-on-year GDPgrowth hit 2.5%.This comes as little surprise, and is in line with our

forecasts a slowdown in year-on-year rate of growth in

Q2 was always on the cards, given that the exceptional

surge of 1.0% in Q2 2010 was most unlikely to be

matched or beaten. While some loss of momentum in

GDP over coming quarters is likely, we do not expect a

deep decline, suggesting a slowdown from the 0.8% qoqpace of Q1, but no slide into stagnation or recession. We

believe that weakness in economic sentiment in recent

months was caused by two factors that are likely to prove

transitory: one, the steep rise in energy prices, which has

been partly reversed already, and two the effect of

Japans earthquake and Tsunami which is also likely to

fade and give way to stronger activity growth. Indeed,

regarding the effect of energy prices, there appears to

have already been a positive effect on consumer

sentiment in May, with an improvement of 1.8pt to -9.8,

helped by a decline in inflation expectations.

[email protected]

SWEDENSweden GDP: Another strong reading in Q1The Swedish economy continued to grow robustly in Q1with real GDP up by 0.8% qoq and 6.4% yoy. This waslower than our projected 1.4% qoq and slightly below

consensus.

At the same time, growth in Q4 2010 was revised up to

1.6% (from 1.2%) which implies that the outlook for 2011

as a whole largely remains in place, with GDP heading for

an increase of around 4.5%. For 2010, growth was

revised up to 5.7% (from 5.5%).As expected, household

consumption was relatively weak in Q1 growing by 0.4%

qoq, while imports grew strongly by 3.1% qoq. Stocks

made another strong contribution to growth as activity in

the manufacturing sector remained very high. In fact,

confidence indicators suggest continued optimism in the

manufacturing sector, which could lead to higher than

expected GDP growth in Q2. The continued strength in

the economy reinforces the view that the Riksbank may

need to increase its rate path in their next forecast. We

expect rates to rise by 25 bp at each of the coming four

Executive Board meetings this year.

Main contributions to Swedish real GDP growth (p.pts)


[email protected]

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-4.0

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Domestic demand (w/o stocks)

Change in stocks

Net exports (p.pt. contr.)

GDP (% yoy )

Economic sentiment and GDP growth in the euro area


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1996 1998 2000 2002 2004 2006 2008 2010

Economic Sentiment indicator

long run average

Euro area GDP % y/y

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Preview: Germany UnemploymentGerman unemployment falling at a slower rateUnemployment Change, k SG: -28, Con: -30Unemployment Rate s.a SG: 7, Con: 7We doubt that the pace of decline in unemployment in

Germany over the past three months will have been

maintained in May. The average decline of 48k

reported for these months was about twice the size

recorded since the beginning of the downtrend in July

2009. This was probably related to the temporary

slowdown in the labour market during Q4, when

weather played a role. We expect a solid 28k decline

to have been recorded in May, reflecting a

continuation of the solid pace of growth in activity andin employment. Short-term impacts from the Japan

disasters are not expected to have affected labour

market trends, even if they are likely to have hit

manufacturing production. Employment is expected to

have continued to grow at a steady pace of about 1% at an

annualised rate, with a 35k increase in April.

Employment and unemployment in Germany (sa)


Preview: Italy CPITemporary lull in inflation volatility in ItalyCPI - EU Harmonized (% MoM) SG: 0, Con: 0.2CPI - EU Harmonized (% YoY) SG: 2.8, Con: 3.0The new method of measuring seasonal prices has

had a very large impact on Italian harmonised inflation

data, leading to a sharp drop in recorded inflation in

January and February and a surge in March and April.

Given that prices of clothing normally tend to move

very little in May, the effect should have been far more

muted this month, suggesting little change in headline

inflation rates. As elsewhere, Italian consumer prices

are expected to have benefited from the recent pull-

back in energy prices, allowing for slightly lower rates.

That said, energy price effects tend to have a far

smaller impact on Italian consumer prices than

elsewhere, implying some upward risks to our

forecast. Nevertheless, we note that there has in the

past few months been a sharp divergence of core and headline

inflation (in the harmonised measure), which supports our

forecast of a 0.1ppt decline in inflation

Measures of consumer prices in Italy (% yoy)


2,500

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Employment (in 1,000s)

Unemployed (in 1,000s) (rhs, inverted)

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HICP

NIC

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Preview: Switzerland GDPSwitzerland Q1 GDPGDP (% QoQ) SG: 0.8, Con: 0.7GDP (% YoY) SG: 3.2, Con: 3The boom in manufacturing continues unabated in

Switzerland. Judging by leading indicators, the PMI

and capacity utilisation, industrial production should

have remained buoyant in Q1 and with that

investments should also have performed well. While

consumers have yet to join in the party, and export

growth may have decelerated slightly, real GDP is

expected to have grown by 0.8% qoq, down

marginally from 0.9% in Q4 2010. On an annual

comparison, real GDP is expected to have grown by

3.2%. Even with a marked slowdown in growth for the

rest of the year, annual growth should be well above

potential at around 2.5%. Wage and inflationary

pressures remain low however and are only expected

to pick up gradually into next year. The Swiss National

Bank consequently faces a difficult choice of when to

start raising interest rates, and the hope of seeing a

weaker Swiss franc in the near term appears increasingly

unlikely. Given the current trends, we expect a first rate increase

after the summer at the earliest.

Main contributions to Swiss growth (pp)


Preview: France April consumer spendingFrench consumption of manufactured goods wasdepressed by the car sector in March.Consumer spending (% MoM) SG: -0.3, Con: -0.3We expect this trend to continue in April and

perhaps for a few months thereafter. Many car

purchases were in fact signed before end-2010 but

were delivered in January and February, thus

boosting total consumption in these two months.

April car sales should drop more significantly than

in March, given that new car registrations tumbled

by 34% mom in April. Moreover, consumerconfidence remains depressed and the weakness

in underlying consumption growth (ex-cars)

observed in Q1 11 is likely to persist into Q2,

particularly given the negative impact of fiscal

retrenchment. As a result, consumer spending

looks set to fall in April and we forecast almost flat

consumption in Q2 11 (-0.1% qoq). Looking ahead

into H2 11, the savings rate would have to fall significantly from its

current elevated 16.1% to bring consumption growth back to the

historical average rate (2% p.a. over the last 10 years).

Consumption of manufactured goods and car purchases

Source: DataStream, SG Cross Asset Research

-7.0

-5.0

-3.0

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1.0

3.0

5.0

7.0

08Q1 08Q2 08Q3 08Q4 09Q1 09Q2 09Q3 09Q4 10Q1 10Q2 10Q3 10Q4

Domestic demand Net exports Inv entories GDP (% y oy )

2.5

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19.5

20

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21

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23

23.5

Jan-05 Jan-07 Jan-09 Jan-11

Cons. Spending on manuf. Goods Car sales

EURbn 2000

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Calendar of economic releasesFriday 27-May-2011

GMT Period Previous SG Forecasts Consensus/

Actual

South Korea Current Account, USD mln 3:00(-1D) APR 1434.5 . 1876.8A

Goods Balance, USD mln 3:00(-1D) APR 2859 . 3927A

Japan Natl CPI (% YoY) 3:30(-1D) APR 0 0.5 0.3A

Natl CPI Ex-Fresh Food (% YoY) 3:30(-1D) APR -0.1 0.4 0.6A

Natl CPI Ex Food, Energy (% YoY) 3:30(-1D) APR -0.7 -0.2 -0.1A

Tokyo CPI (% YoY) 3:30(-1D) MAY -0.1 0 -0.1A

Tokyo CPI Ex-Fresh Food (% YoY) 3:30(-1D) MAY 0.2 0.3 0.1A

Tokyo CPI Ex Food, Energy (% YoY) 3:30(-1D) MAY 0 0.1 0.1A

Large Retailers' Sales (% YoY) 3:30(-1D) APR -7.5R -1 -1.9A

Retail Trade s.a. (% MoM) 3:30(-1D) APR -7.6R 5 4.1A

Retail Trade (% YoY) 3:30(-1D) APR -8.3R -2 -4.8A

China MNI Business Condition Survey 1:35 MAY 69.28 . 61.22A

Industrial Profits y.t.d. (% YoY) 2:00 APR 32 . 29.7A.

Spain Adjusted Real Retail Sales (% YoY) 7:00 APR -8.6 . -2A

Retail Sales (Real) (% YoY) 7:00 APR -8.0R . -2A.

Sweden GDP s.a. (% QoQ) 7:30 1Q 1.6R 1.4 0.8A

GDP w.d.a. (% YoY) 7:30 1Q 7.7R . 6.4A

Euro area M3 s.a. (% YoY) 8:00 APR 2.3 2.1 2.0A

M3 s.a. 3 mth ave. 8:00 APR 2 2.2 2.1A

Italy Hourly Wages (% MoM) 8:00 APR 0.2 0.2 0.1A

Hourly Wages (% YoY) 8:00 APR 2 2 1.8A

Norway Manufacturing Wage Index (% QoQ) 8:00 1Q 1.0R . 0.2A

Taiwan Coincident Index (% MoM) 8:00 APR 0.7R . 0.6A.

Leading Index (% MoM) 8:00 APR 0.3R . 0.3A.

Euro area Business Climate Indicator 9:00 MAY 1.28 1.2 0.99A

Consumer Confidence 9:00 MAY F -11.6 -12 -9.8A.

Economic Confidence 9:00 MAY 106.1R 105.5 105.5A

Indust. Confidence 9:00 MAY 5.6R 5 3.9AServices Confidence 9:00 MAY 10.4 10 9.2A

Portugal Consumer Confidence 9:00 MAY -49.5 . -50.3A.

Economic Climate Indicator 9:00 MAY -1.8 . -2.0A.

Switzerland KOF Swiss Leading Indicator 9:30 MAY .2.30R . 2.30A

Chile Central Bank Meeting Minutes 12:30 . .

US PCE Core (% MoM) 12:30 APR 0.1 0.2 0.2A

PCE Core (% YoY) 12:30 APR 0.9 1 1.0A

PCE Deflator (% YoY) 12:30 APR 1.8 2.2 2.2A

Personal Income (% MoM) 12:30 APR 0.4R 0.5 0.4A

Personal Spending (% MoM) 12:30 APR 0.5R 0.5 0.4A

U. of Michigan Confidence 13:55 MAY F 72.4 73 74.3A

Pending Home Sales (% MoM) 14:00 APR 5.1 2.1 -11.6A

Pending Home Sales (% YoY) 14:00 APR -11.5 -13.8 -26.8A

Mexico Overnight Rate 14:00 4.5 4.5 4.5A

Brazil Central Govt Budget, BRL bln APR 9.1B . 8

Germany Consumer Price Index (% MoM) MAY P 0.2 0 0.0A

Consumer Price Index (% YoY) MAY P 2.4 2.3 2.3A

CPI - EU Harmonised (% MoM) MAY P 0.3 0 -0.2A

CPI - EU Harmonised (% YoY) MAY P 2.7 2.6 2.4A

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WEEK 30-May to 3-June


Actual

China Leading Index APR 101.71 . .

Ireland Consumer Confidence MAY 57.9 . .

Live Register Level s.a., k MAY 439.2 . .

Live Register Monthly Change, k MAY -1.6 . .

Unemployment Rate MAY 14.6 . .

Japan BOJ to Hold International Conference on Monetary Policy . .

Official Reserve Assets, USD bln MAY 1135.5 . .

South Korea Foreign Exchange Reserve, USD bln MAY 307.2 . .

Spain Consumer Confidence MAY 73.2 . .

UK Halifax House Prices 3Mths/Year MAY -3.7 . .

Halifax House Prices s.a (% MoM) MAY -1.4 . .

Monday 30-May-2011


Actual

UK Bank HolidayUS Public Holiday

New ZealandExports, NZD bln 2:45(-1D) APR 4.61R 5 4.65A

Imports, NZD bln 2:45(-1D) APR 4.04R 4 3.54A

Trade Balance, NZD mln 2:45(-1D) APR 578R 1000 1113A

Trade Balance 12 Mth y.t.d. 2:45(-1D) APR 734R . 1187A

Japan Small Business Confidence 1:00 MAY 36.1 . 37.8A

Australia Company Operating Profit (% QoQ) 1:30 1Q -2.8 6 -2.0A

Inventories (% QoQ) 1:30 1Q 0.7 . 0.4A

New ZealandMoney Supply M3 (% YoY) 3:00 APR 5.6 . .

Spain Consumer Price Index (% YoY) 7:00 MAY P 3.8 3.7 3.5A

CPI (EU Harmonised) (% YoY) 7:00 MAY P 3.5 3.4 3.4A

Sweden Retail Sales n.s.a. (% YoY) 7:30 APR 0.4R . 5.2A

Retail Sales s.a. (% MoM) 7:30 APR -0.8 . 1.6A

Wages - Non-Manual Workers (% YoY) 7:30 MAR 1.9R . 1.7A

Taiwan Bounced Check Ratio 8:20 APR 0.16 . 0.18ABrazil FGV Inflation IGP-M (% MoM) 11:00 MAY 0.45 . 0.43A

FGV Inflation IGP-M (% YoY) 11:00 MAY 10.6 . 9.77A

Central Bank Weekly Economists Survey 11:30 . .

Chile Industrial Sales (% YoY) 12:00 APR 19.7 . 9.6A

Canada Current Account (BOP), USD bln 12:30 1Q -10.3R . -8.9A

Gross Domestic Product (% MoM) 12:30 MAR -0.1R 0.3 0.3A

Gross Domestic Product (% YoY) 12:30 MAR 3.0R . 2.8A

Quarterly GDP Annualized 12:30 1Q 3.1R 4.3 3.9A

Chile Copper Production Total 13:00 APR 450507 . 438340A

Industrial Production (% YoY) 13:00 APR 30.9 . 9.5A

Retail Sales (% YoY) 13:00 APR 16.4 . 8.7A

Brazil Outstanding Loans (% MoM) 13:30 APR 1.1R . 1.3A

Private Banks Lending, BRL bln 13:30 APR 1016R . 1029A

Total Outstanding Loans, BRL bln 13:30 APR 1754R . 1776A

Euro area ECB Announces Bond Purchases 13:30 . .

ECB Calls for Bids in 7-Day Main Refinancing Tender 13:30 . .

Mexico Budget Balance (y.t.d.), MXN bln 19:30 APR 1.26 . -6.637A

Colombia Overnight Lending Rate 3.75 4 4.0A

Portugal Retail Sales (% MoM) APR -5.5R . 3.0A

Retail Sales (% YoY) APR -7.7R . -4.3A

Tuesday 31-May-2011


Actual

South Korea Business Survey- Manufacturing 1:00(-1D) JUN 100 102 97A

Business Survey- Non-Manufacturing 1:00(-1D) JUN 89 90 86A

Industrial Production (% MoM) 3:00(-1D) APR 1.7R 0 -1.5A

Industrial Production (% YoY) 3:00(-1D) APR 9.0R 7 6.9A

Industrial Production Mfg (% YoY) 3:00(-1D) APR 9.2R . 7.1A

Leading Index (% YoY) 3:00(-1D) APR 1.6 . 1.1A

Service Industry Output (% YoY) 3:00(-1D) APR 3.0R . 3.1A

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The Economic News

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Japan Markit/JMMA Manufacturing PMI 3:15(-1D) MAY 45.7 . 51.3A

Jobless Rate 3:30(-1D) APR 4.6 4.6 4.7A

Job-To-Applicant Ratio 3:30(-1D) APR 0.63 0.61 0.61A

Overall Hhold Spending (% YoY) 3:30(-1D) APR -8.5 -3 -3.0A

Industrial Production (% MoM) 3:50(-1D) APR P -15.5 5 1.0A

Industrial Production (% YoY) 3:50(-1D) APR P -13.1 -8 -14.0A

Australia RP Data-Rismark House Px n.s.a. (% MoM) 0:30 APR -0.5R . -0.1A

RP Data-Rismark House Px s.a. (% MoM) 0:30 APR -0.6R . -0.3A

New Zealand NBNZ Activity Outlook 1:00 MAY 29.5 . 39.7A

NBNZ Business Confidence 1:00 MAY 14.2 . 38.3A

Australia Net Exports as % of GDP 1:30 1Q 0 -1 .

Building Approvals (% MoM) 1:30 APR 8.6R 4.2 -1.3A

Building Approvals (% YoY) 1:30 APR -19.3R . -11.5A

Current Account Balance, AUD mln 1:30 1Q -8091R -5600 -10447A

Private Sector Credit (% MoM) 1:30 APR 0.6 . 0.0A

Private Sector Credit (% YoY) 1:30 APR 3.5R . 3.3A

Japan Labor Cash Earnings YoY 1:30 APR -0.1R -0.4 -1.4A

Vehicle Production (% YoY) 4:00 APR -57.3 . .

Annualized Housing Starts, mln 5:00 APR 0.807 0.8 0.776Construction Orders (% YoY) 5:00 APR -11 . .

Housing Starts (% YoY) 5:00 APR -2.4 . -3.1

Switzerland GDP (% QoQ) 5:45 1Q 0.9 0.8 0.6

GDP (% YoY) 5:45 1Q 3.1 3.2 2.9

UBS Consumption Indicator 6:00 APR 1.66 . .

Germany Retail Sales (% MoM) 6:00 APR -2.7 3 1.8

Retail Sales (% YoY) 6:00 APR -3.5 2.9 1.5

France Consumer Spending (% MoM) 6:45 APR -0.7 -0.3 0

Consumer Spending (% YoY) 6:45 APR 2.6 3.6 4.4

Producer Prices (% MoM) 6:45 APR 0.9 . 0.8

Producer Prices (% YoY) 6:45 APR 6.6 . 6.4

Sweden Current Account, SEK bln 7:30 1Q 53.3 . .

Germany Unemployment Change, k 7:55 MAY -37 -28 -30

Unemployment Rate s.a 7:55 MAY 7.1 7 7

Italy Unemployment Rate s.a. 8:00 APR P 8.3 8.3 8.3Norway Credit Indicator Growth (% YoY) 8:00 APR 6.3 . 6.4

Retail sales - vol s.a. (% MoM) 8:00 APR -0.5 . 0.7

Retail Sales - vol. n.s.a. (% YoY) 8:00 APR -5.4 . 3.4

Poland GDP (% YoY) 8:00 1Q 4.4 4.5 4.4

GDP s.a. (% QoQ) 8:00 1Q 0.8 . .

Italy Governor Draghi Speaks at Annual Meeting of the Bank of Italy 8:30 . .

Hong Kong Retail Sales - Value (% YoY) 8:30 APR 26 26.7 25

Retail Sales - Volume (% YoY) 8:30 APR 20 21.4 19.8

Italy CPI - EU Harmonized (% MoM) 9:00 MAY P 1 0 0.2

CPI - EU Harmonized (% YoY) 9:00 MAY P 2.9 2.8 3

CPI (NIC incl. tobacco) (% MoM) 9:00 MAY P 0.5 0 0.2

CPI (NIC incl. tobacco) (% YoY) 9:00 MAY P 2.6 2.5 2.7

Euro area CPI Estimate (% YoY) 9:00 MAY 2.8 2.8 2.8

Unemployment Rate 9:00 APR 9.9 . 9.9

Hong Kong Govt Mthly Budget Surp/Def, HKD bln 9:00 APR -9.1 . .

Money Supply M1 - in HKD (% YoY) 9:00 APR 4.6 . .



Euro area ECB Announces Allotment in 7-Day Main Refinancing Tender 9:15 . .

Italy PPI (% MoM) 10:00 APR 0.7 . 0.9

PPI (% YoY) 10:00 APR 6.1 . 5.5

Euro area ECB Announces Allotment in 7-Day Term Deposits 11:00 . .

Brazil Industrial Production s.a. (% MoM) 12:00 APR 0.5 . 0.4

Industrial Production (% YoY) 12:00 APR -2.1 1.3 0.8

Chile Unemployment Rate 12:00 APR 7.3 7.5 7.4

Canada Industrial Product Price (% MoM) 12:30 APR 0.9 . 0.7

Raw Materials Price Index (% MoM) 12:30 APR 5.7 . 4.2

Bank of Canada Rate 13:00 1 1 1

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The Economic News

31 May 201122

US S&P/CaseShiller Home Price Ind 13:00 MAR 139.27 138.9 .

S&P/Case-Shiller US HPI 13:00 1Q 130.38 . .

S&P/Case-Shiller US HPI (% YoY) 13:00 1Q -4.13 . .

S&P/CS 20 City s.a. (% MoM) 13:00 MAR -0.18 -0.1 -0.2

S&P/CS Composite-20 (% YoY) 13:00 MAR -3.33 -3.1 -3.5

Brazil Net Debt % GDP 13:30 APR 39.9 . .

Nominal Budget Balance, BRL bln 13:30 APR -6.9 . .

Primary Budget Balance, BRL bln 13:30 APR 13.6 . .

US Chicago Purchasing Manager 13:45 MAY 67.6 63.6 63

Consumer Confidence 14:00 MAY 65.4 64 66.4

NAPM-Milwaukee 14:00 MAY 68 62 .

Dallas Fed Manf. Activity 14:30 MAY 10.5 2.5 8.5

Euro area ECB's Ewald Nowotny Speaks in Vienna 16:00 . .

Colombia Urban Unemployment Rate 16:00 APR 12.2 . 11.8

Greece Retail Sales (% YoY) MAR -7 . .

India Qtrly GDP (% YoY) 1Q 8.2 10 8.1

Peru GDP (% YoY) 1Q 9.2 8.8 8.8

Portugal Industrial Production (% MoM) APR 0.4 . .

Industrial Production (% YoY) APR -2.4 . .Spain Current Account, EUR bln MAR -5.4 . .

Total Housing Permits (% MoM) MAR 21.9 . .

Total Housing Permits (% YoY) MAR 3.6 . .

Wednesday 1-Jun-2011


Actual

New Zealand Terms of Trade Index (% QoQ) 2:45(-1D) 1Q 0.6 . .

South Korea Consumer Price Index (% MoM) 3:30(-1D) MAY 0 0.2 0.2

Consumer Price Index (% YoY) 3:30(-1D) MAY 4.2 4.2 4.3

Core Consumer Price Index (% YoY) 3:30(-1D) MAY 3.2 3.2 .

Australia AiG Performance of Mfg Index 3:30(-1D) MAY 48.4 . .

Japan Loans & Discounts Corp (% YoY) 3:50(-1D) APR -2.2 . .

South Korea Balance, USD mln 1:00 MAY 5823 . 4528

Export, USD mln 1:00 MAY 49773 . .Import, USD mln 1:00 MAY 43951 . .

Export (% YoY) 1:00 MAY 26.6 . 27.7

Imports (% YoY) 1:00 MAY 23.7 . 29

Australia HIA New Home Sales (% MoM) 1:00 APR 4.3 . .

China PMI Manufacturing 1:00 MAY 52.9 51.6 51.6

New Zealand ANZ Commodity Price 1:00 MAY 1.6 . .

Australia Gross Domestic Product (% QoQ) 1:30 1Q 0.7 -0.2 -0.3

Gross Domestic Product (% YoY) 1:30 1Q 2.7 3 1.8

Taiwan HSBC Manufacturing PMI 2:00 MAY 58.2 . .

China HSBC Manufacturing PMI 2:30 MAY 51.8 . .

India Markit Manufacturing PMI (Table) 5:00 MAY 58 . .

Japan Vehicle Sales (% YoY) 5:00 MAY -51 . .

India Exports (% YoY) 5:30 APR 43.9 45 .

Imports (% YoY) 5:30 APR 17.3 20 .

France ILO Mainland Unemployment Rate 5:30 1Q 9.2 9 .

ILO Unemployment Rate 5:30 1Q 9.6 . 9.4

Mainland Unemp. Change, k 5:30 1Q -49 -44 .

Ireland NCB Manufacturing PMI 6:00 . .

Australia RBA Commodity Index SDR (% YoY) 6:30 MAY 32.3 . .

RBA Commodity Price Index Au 6:30 MAY 106.1 . .

Sweden Swedbank PMI Survey 6:30 MAY 59.8 60.1 59.2

Poland Manufacturing PMI 7:00 MAY 54.4 54 .

Euro area ECB Calls for Bids in 7-Day Dollar Tender 7:15 . .

Spain Manufacturing PMI 7:15 MAY 50.6 49.5 .

Switzerland Retail Sales (Real) (% YoY) 7:15 APR -0.2 . .

SVME-Purchasing Managers Index 7:30 MAY 58.4 . 57.5

Italy Manufacturing PMI 7:45 MAY 55.5 54.5 53

France Manufacturing PMI 7:50 MAY F 55 55.3 55

Germany Manufacturing PMI 7:55 MAY F 62 58.2 58.2Euro area Manufacturing PMI 8:00 MAY F 54.8 54.8 54.8

Norway PMI s.a. 8:00 MAY 55.6 . 55.4

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The Economic News

31 May 2011 23

UK M4 Money Supply (% MoM) 8:30 APR 0.1 . .

M4 Money Supply (% YoY) 8:30 APR -1.1 . .

M4 Ex OFCs 3M Annualised 8:30 APR 1 . .

Mortgage Approvals, k 8:30 APR 47.6 47 47.9

Net Consumer Credit, GBP bln 8:30 APR 0.1 0.3 0.3

Net Lending Sec. on Dwellings, GBP bln 8:30 APR 0.4 . 0.6

Trends in Lending data

Manufacturing PMI 8:30 MAY 54.6 53.5 54

Euro area ECB Announces Allotment in 7-Day Dollar Tender 9:00 . .

Brazil FGV CPI IPC-S 11:00 27-May 0.47 . .

India 364 Day T-Bill Cutoff Yield 11:00 1-Jun 8.2947 . .

91 Day T-Bill Cutoff Yield 11:00 1-Jun 8.1439 . .

US MBA Mortgage Applications 11:00 27-May 1.1 . .

Challenger Job Cuts (% YoY) 11:30 MAY -4.8 . .

ADP Employment Change, k 12:15 MAY 179 125 178

Brazil Manufacturing PMI 13:00 MAY 50.7 . .

Euro area ECB's Trichet Speaks in Aachen, Germany 13:00 . .

Brazil Exports, USD mln 14:00 MAY 20173 . 21100

Imports, USD mln 14:00 MAY 18310 . 18600Trade Balance (FOB) - Monthly, USD mln 14:00 MAY 1863 3500 2500

US Construction Spending (% MoM) 14:00 APR 1.4 0.7 0.4

Manufacturing ISM 14:00 MAY 60.4 58.7 58

Prices Paid ISM 14:00 MAY 85.5 87 81.8

Mexico Central Bank Economists Survey 14:00 . .

Remittances, USD mln 14:00 APR 2049 . 1950

Italy New Car Registrations (% YoY) 16:00 MAY -2.2 . .

US Fed's Pianalto Speaks on Labor Markets in Columbus, OH 16:25 . .

Italy Budget Balance, EUR bln 17:00 MAY -8.8 . .

Budget Balance (y.t.d), EUR bln 17:00 MAY -40.1 . .

US Domestic Vehicle Sales, mln 21:00 MAY 10.2 . 9.8

Total Vehicle Sales, mln 21:00 MAY 13.14 12.2 12.8

Peru Consumer Price Index (% MoM) MAY 0.68 0.31 0.28

Consumer Price Index (% YoY) MAY 3.34 3.41 3.35

Wholesale Prices (% MoM) MAY 1.11 . .South Korea HSBC Manufacturing PMI MAY 51.7 . .

Thursday 2-Jun-2011


Actual

Japan Capital Spending 3:50(-1D) 1Q 3.8 4 3

Capital Spending excl Sftwre 3:50(-1D) 1Q 4.8 5 -1

Monetary Base (% YoY) 3:50(-1D) MAY 23.9 . .

Australia Retail Sales s.a. (% MoM) 1:30 APR -0.5 1 0.4

Trade Balance, AUD mln 1:30 APR 1740 1500 2100

Japan BOJ Board Member Nakamura to Speak in Nara City 1:30 . .

India Food Articles WPI (% YoY) 6:30 21-May . .

Fuel Power Light WPI (% YoY) 6:30 21-May . .

Primary Articles WPI (% YoY) 6:30 21-May . .

Spain Unemployment MoM Net, k 7:00 MAY -64.3 . .

Brazil FIPE CPI - Monthly 8:00 MAY 0.7 . 0.45

UK Construction PMI 8:30 MAY 53.3 52 53.5

Euro area ECB's Trichet Speaks in Aachen, Germany 9:15 . .

US RBC Consumer Outlook Index 12:00 JUN 42.9 . .

Continuing Claims 12:30 21-May 3690 3610 .

Initial Jobless Claims 12:30 28-May 424 417 .

Nonfarm Productivity 12:30 1Q F 1.6 1.8 1.8

Unit Labor Costs 12:30 1Q F 1 0.8 0.8

Factory Orders 14:00 APR 3 -0.6 -0.8

Canada Bank of Canada Senior Deputy Governor Macklem in Toronto 16:00 . .

US ICSC Chain Store Sales (% YoY) MAY 8.5 3.5 .

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The Economic News

31 May 201124

Friday 3-Jun-2011


Actual

New ZealandBuilding Permits (% MoM) 2:45(-1D) APR 2.2 . 0.5

Australia AiG Performance of Service Index 1:30(-1D) MAY 51.5 . .

China Non-manufacturing PMI 1:00 MAY 62.5 . .

HSBC Services PMI 2:30 MAY 51.6 . .

Hong Kong Purchasing Managers Index 2:30 MAY 52.9 . .

India Markit Services PMI (Table) 5:00 MAY 59.2 . .

Ireland NCB Services PMI 6:00 MAY 56 . .

Spain Services PMI 7:15 MAY 50.4 50 .

Italy Services PMI 7:45 MAY 52.2 51.6 51.6

France Services PMI 7:50 MAY F 62.8 62.5 62.8

Germany Services PMI 7:55 MAY F 56.8 55 54.9

Euro area Composite PMI 8:00 MAY F 55.4 55.4 55.4

Services PMI 8:00 MAY F 55.4 55.4 55.4

Taiwan Foreign Exchange Reserves, USD bln 8:20 MAY 399.54 . .

UK Official Reserves (Changes), USD mln 8:30 MAY 1663 . .

Services PMI 8:30 MAY 54.3 53.9 54.2Brazil GDP (IBGE) 4Qtrs Accumulated 12:00 1Q 7.5 . .

GDP (IBGE) (% QoQ) 12:00 1Q 0.7 1.1 1.2

GDP (IBGE) (% YoY) 12:00 1Q 5 4 4.2

US Avg Hourly Earning All Emp (% MoM) 12:30 MAY 0.1 0.1 0.2

Avg Hourly Earning All Emp (% YoY) 12:30 MAY 1.9 1.8 1.9

Avg Weekly Hours All Employees 12:30 MAY 34.3 34.3 34.3

Change in Manufact. Payrolls, k 12:30 MAY 29 . 15

Change in Nonfarm Payrolls, k 12:30 MAY 244 160 195

Change in Private Payrolls, k 12:30 MAY 268 180 220

Chg in Household Survey Emply 12:30 MAY -190 . .

Unemployment Rate 12:30 MAY 9 8.7 8.9

Mexico Consumer Confidence 13:00 MAY 89.7 . 90.1

US Non-Manf. Composite ISM 14:00 MAY 52.8 53.4 54.3

Euro area ECB's Gonzalez-Paramo Speaks in Barcelona 14:15 . .

Colombia Exports FOB, USD mln 21:00 APR 4899.4 . .

Producer Price Index (% MoM) 21:00 MAY 0.2 . .

Producer Price Index (% YoY) 21:00 MAY 4.66 . .

Portugal Industrial Sales (% MoM) APR 12.2 . .

Industrial sales (% YoY) APR 8.5 . .

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The Economic News

31 May 2011 25

European Themes Ireland: Deleveraging, the HousingMarket and the Risks of a Severe Credit Crunch

Inflation Themes: UK inflation target should be raised but not until the existing one has been met!

Ireland is an insightful, if extreme, casestudy on the euro areas twin banking and

sovereign crises and the prospects for

deleveraging. In the aftermath of the

elections, we explore the extraordinary

economic challenges that lie ahead.

The Bank of England has repeatedlymissed the 2% inflation target in recent

years and claims this is because of factors

beyond its control. We disagree. The

fundamental problem is that the core rate

of inflation looks likely to settle well above

the target.

Asia Themes - China landing watchEuropean Themes - Under Construction: Hard-hat

Mandatory!

We have adopted a bumpy landing asour core scenario for the Chinese

economy but we still believe a hard

landing is a risk scenario. We identify 9

possible events under three risk themes

as triggers for potential hard landingareas that we will be monitoring closely.

One year on from the Greek bail-out andthe dramatic May weekend that brought

the EFSF and SMP, Europes new house

is still a messy construction site, with

unruly plumbing and squabbling

architects. Construction will proceed andthe new house will be built, but it will be

arduous work and come in fits and starts,

leaving markets vulnerable.

For further details on the Global Economic Outlook see our latest Country Notes

Recent EditorialsGSEs receive the invite to the Fed repo party (27/05/2011)

Greece: Solvency unsolved (26/05/2011)

Japans decliningpension reserves (25/05/2011)

China: Declining or Derailing? (24/05/2011)

When will euro area inflation peak? (23/05/2011)

publicationsAsia Themes- Japan will rebound. How about Asia?

American Themes Fed Exit-Losing the weight before

raising the rate

On 11 March 2011, Japan was hit by atriple disaster; a combination of a M9.0earthquake, tsunami and a serious nuclear

incident. We have looked at Japans

economy and the doubts raised about its

immediate economic future, as well as the

potential repercussions for the rest of

Asia.

The easing cycle is set to end in June.The Fed is likely to take a brief pausebefore moving on to outright tightening.

We look for exit steps to be staggered,

starting around September. Rate hikes

themselves should come late in the exit

process. Relative to market expectations

for a Q12012 rate increase, we see the

risks skewed toward a later tightening.

F179665
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26/26

The Economic News

ECONOMICSGlobal Head of EconomicsMichala Marcussen(44) 20 7676 [email protected]

Euro areaKlaus Baader James Nixon Vladimir Pillonca Michel Martinez(44) 20 7676 7609 (44) 20 7676 7385 (44) 20 7676 7863 (33) 1 42 13 34 [email protected] [email protected] [email protected] [email protected]

United Kingdom Scandinavia / Switzerland PolandBrian Hilliard Anatoli Annenkov Jaroslaw Janecki(44) 20 7676 7165 (44) 20 7762 4676 (48) 22 528 41 [email protected] [email protected] [email protected]

AmericasAneta Markowska Alejandro Cuadrado Rudy Narvas Brian Jones(1) 212 278 66 53 (1) 212 278 73 13 (1) 212 278 76 62 (1) 212 278 69 [email protected] [email protected] [email protected] [email protected]

Asia PacificGlenn Maguire Takuji Okubo Wei Yao Joseph Lau(852) 2166 5438 (81) 355 49 5560 (852) 2166 5437 (852) 2166 [email protected] [email protected] [email protected] [email protected]

Research AssociatesLydia Boussour Martin Rose Mehreen Khan Ramzi BerrimaDavid Tam Samuel Slama Alexandre Donna

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