Global Economy Turns For the BetterMARK ZANDI, CHIEF ECONOMIST

2Moody’s Investor Day 2014

Slowdown

RecessionRecovery

Expansion

As the World Turns

Spain

UK

Germany

Japan

US

France

Italy

China

India

IsraelTurkey

Brazil

South Africa

Canada

Russia

3

Global Economy Gets an Energy Boost

Source: Moody’s Analytics

% change in 2015 real GDP due to decline in oil prices

-1.5 -1.0 -0.5 0.0 0.5 1.0

India

Turkey

Japan

China

Euro zone

Global

U.S.

U.K.

Canada

Norway

Russia

Based on Brent of $65

per barrel in 2015

4

Source: Moody’s Analytics

Easier

Tighter

Neutral

Global central banks monetary bias, May 2015

Most Central Banks Ease

5

0.8

1.0

1.2

1.4

1.6

1.8

2.0

2.2

Feb-13 Jun-13 Oct-13 Feb-14 Jun-14 Nov-14 Mar-15

ECB QE Stabilizes Inflation Expectations…

Sources: Bloomberg, Moody’s Analytics

French breakeven inflation rate, %

6

…Reduces Financial Fragmentation…

Sources: ECB, Moody’s Analytics

Nonfinancial corporate loans under €1 mil at variable rate, %

2

3

4

5

6

7

06 07 08 09 10 11 12 13 14 15

Germany Spain Italy

7

-35 -30 -25 -20 -15 -10 -5 0

Russian rubleBrazilian real

Swedish kronaEuro

Turkish liraAustralian dollar

Mexican pesoJapanese yen

South African randBritish pound

Canadian dollarSwiss franc

S. Korean wonIndian rupee

…and Prompts a Weaker Euro

Sources: Federal Reserve, Moody’s Analytics

Vis-à-vis U.S. dollar, % change yr ago

8

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

'00 '02 '04 '06 '08 '10 '12 '14

Openings Hiring

Quits Layoffs

U.S. Will Be a Key Global Economic Engine…

Rate, %

Sources: BLS, Moody’s Analytics

9

0

1

2

3

4

5

6

08 10 12 14 16F 18F 20F 22F 24F

U.S. Canada U.K. Euro zone Japan

…With the Federal Reserve Leading the Way

Main monetary policy rate, %

Source: Moody’s Analytics

10

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

14 15 16 17

Moody's Analytics

Fed's summary of economic projections

Fed funds futures contracts

Fed and Financial Markets Aren’t in Sync

Fed funds rate, %

Sources: Federal Reserve, CME Group, Moody’s Analytics

11

Rising Rates May Expose Financial Fault Lines

External Financing Vulnerability Other Sources of Vulnerability

Current Account Balance

External DebtExternal

Vulnerability Index1

Government Foreign

Currency Debt

Commodity Net Exports

GDP Growth Forecast

Inflation Forecast

Summary Vulnerability2

Foreign Exchange Pressure3

Percent of 2015F GDP

Percent of 2015F GDP

Percent of 2015F Govt

Debt

Percent of 2013 GDP

2015-2016Dec 2014 -Dec 2015

Average of Standard

Deviations

Turkey -5.0% 51.2% 176.1% 31.0% 0.0% 3.2% 7.0% 1.0

Chile -1.3% 51.9% 98.3% 14.4% 9.5% 3.5% 3.0% 0.5

Brazil -4.0% 29.2% 30.7% 6.1% 2.7% 0.5% 7.5% 0.4

South Africa -5.4% 31.6% 70.9% 9.1% 5.1% 2.7% 5.5% 0.4

Malaysia 3.7% 64.8% 121.2% 2.7% 8.2% 4.9% 3.2% 0.3

Peru -4.4% 34.2% 21.4% 47.8% 7.5% 4.7% 2.8% 0.3

Indonesia -2.7% 32.9% 61.3% 45.3% 4.4% 5.4% 5.3% 0.3

Colombia -4.7% 25.0% 44.5% 26.3% 8.6% 4.2% 3.3% 0.2

Mexico -2.3% 36.7% 64.5% 20.0% 4.2% 3.5% 3.3% 0.1

Thailand -0.8% 38.3% 44.6% 2.1% 6.2% 3.9% 2.6% -0.1

India -0.6% 22.0% 70.1% 6.4% 1.0% 7.5% 6.5% -0.4

Philippines 4.2% 26.5% 15.7% 36.3% 0.3% 6.4% 4.0% -0.6

Korea 6.0% 31.7% 45.3% 0.0% 0.1% 3.6% 1.5% -0.8

12

100

125

150

175

200

225

250

275

U.S. (2003-07) U.K. (2003-07) Japan (1986-90) S.Korea (1994-98) China (2009-13)

Chinese Economy Looks Vulnerable

Various government sources

Gross debt as a % of GDP, 5-years leading up to financial crisis

24 pp

33pp13pp

38pp

43pp

13

-4

-3

-2

-1

0

1

2

3

4

00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14

Excess Capacity Plagues the Global Economy

Global output gap, % of GDP

Source: Moody’s Analytics

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