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UNITED STATES Economics: United States Economics – Markets – Strategy US: Forecasts rising • The US will handily avoid recession this year • “Consensus” growth forecasts are rapidly heading northward • But the US came closer to recession than we imagined and remains weak. Domestic demand growth has been zero for two full quarters • US growth is being kept alive by foreign demand. It has accounted for 100% of US growth for the past two quarters and 46% over the past year. That is 2-3 times what foreign demand ever contributed to China’s growth • Domestic demand will be stronger in Q2 and especially in Q3 and Q4 • Oil prices are a burden but it is being paid in real time. Oil is not a hammer waiting to fall on growth • The Fed will hike rates by 50bps in 4Q08, by another 75bps in 1Q09 and another 75bps in 2Q09. That would put Fed funds at 4% by Jun09 Forecasts are going up Recession is not on the cards. But domestic demand is nowhere to be seen Notwithstanding all the hoopla back in January and February, the US will handily avoid recession this year. First quarter GDP grew by 0.9% (QoQ, saar) and consensus forecasts for second quarter growth are rapidly heading northward. Consensus now expects the same 1.5% growth in the second quarter that we do. With continued (and importantly, non-cyclical) core consumption growth, fiscal injections worth 1.4% of GDP coming on stream and the best global balance in 20 years, growth should rise further in Q3 and Q4. We expect GDP to expand by 2.5% and 2.75%, respectively, implying full year average growth of 2% in 2008. That’s a tad shy of last year’s growth (2.2%), a tad lower than last quarter’s ‘08 forecast (2.1%) and a country mile away from recession. US - GDP and domestic demand growth %YoY, 2qma 4.5 4.0 3.5 3.0 2.5 2.0 GDP (total demand) Dom Demand 2.5% GDP: 1.6 ppts DD: 2.7 ppts 1.5 1.0 1.5% 1.7% Sep- 03 Mar- 04 Sep- 04 Mar- 05 Sep- 05 Mar- 06 Sep- 06 Mar- 07 Sep- 07 Mar- 08 David Carbon • (65) 6878 9548 • davidcarbon@dbs.com 138

Economics – Markets – Strategy Economics: United States Is everything fine in America? Decidedly not. In fact, the US came a lot closer to recession than we expected and risks for such remain. GDP growth remains positive but American demand – the sum of consumption, investment and government spending – has not grown one iota for two quarters. How does GDP grow when domestic demand does not? Who is buying the incremental output? Foreigners. Net purchases by foreigners of US goods have delivered every penny of US growth since 3Q07. That contribution has risen but it’s not new. Over the past year, foreigners have US – foreign contribution to GDP growth Mar07-Mar08 USDbn/qtr, saar, 00P Contribution (1) (2) (2)-(1) to GDP chg Mar-07 Mar-08 Change (%) GDP 11,413 11,702 289 Net exports -612 -480 132 46 Exports 1,355 1,474 119 41 Imports 1,967 1,954 -13 -4 Dom Demand* 12,025 12,182 157 54 * GDP less net exports bought 46% of the increase in US GDP. That’s 2-3 times what foreign demand ever contributed to China’s growth and the US used to do a lot of complaining about China living off the rest of the world. Good thing the stone throwing has eased of late because the US house is looking pretty glassy at the moment. Growth in the second quarter will remain fragile but a bigger portion of it should come from domestic demand. Consumption should again grow by about 1% (QoQ, saar) and, because it accounts for about 70% of GDP, should (again) deliver about .7 points of headline growth. Investment should make a decent contribution in Q2 compared to the empty plate it was in Q1. Durable goods orders and shipments point to capex growth of 4%-5%. Housing construction continues to fall. It, and new home sales, have been dropping at a 25% annualized pace for 2.5 years now and neither show no any sign of abating yet. The good news is, the cost of the construction drop is known and relatively small. It has been knocking off about 1 percentage point from GDP growth every quarter for 2.5 years, turning 3% growth into 2%, or 2% into 1%, and so on. That’s a drag but it’s not deadly. We continue to expect it to fade considerably in 2H08 but such an outcome is not crucial to the forecast. Besides foreign demand, what has kept the US clock ticking (and will continue to) is consumption, core consumption mainly. This may sound funny because what has had the worriers worried for the past few years is not the housing sector per se, but that weakness there would spill over into consumption. Our view on consumption and on the risk it poses for recession is pretty much flipped around from this. In our view, consumption – especially core consumption, the US - real consumption of services US$bn, 2000p, seas adj. 4800 4700 Consumption prevents / attenuates a recession. It doesn’t cause one 4600 4500 4400 4300 4200 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 139

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