Interest rate forecasts - economic research of Credit Agricole

Quarterly - no. 137 – 3 rd quarter 2012
Political will and the ability to lead
• In the West, politicians are finding it difficult to stabilise the economic and financial situation. Currently, the
situation in Greece and Spain is attracting the attention of markets. It could be the turn of the US in the next few
months with the „fiscal cliff‟ at the end of the year (programmes slated to expire at year-end would trim the federal
deficit by about 5% of GDP) moving back into focus as the November elections draw closer.
• Markets are challenging both the current economic model followed in most advanced countries and the
institutional architecture of Europe. The model of a permanent recycling of excess savings around the globe,
which has been very popular in previous decades, is severely questioned. Replacing saving efforts with a
persistent accumulation of debt, with the hope that this will allow higher productivity gains and thus a fairly strong
recovery in asset prices, has led nowhere. At a certain stage, investors from countries with an external surplus
question the scheme; simply because the large productivity gains and rise in asset prices are not as solidly in place
as the current account and government deficits. Isn‟t this the recent experience of a couple of European countries?
• In the EU, a consensus is emerging on the need to move towards more integration, whether on fiscal policy,
banking supervision or indeed politics itself. The main difficulty is knowing what the best sequencing should be.
France supports the principle of a thematic approach, prior to a great political quantum leap; Germany takes a more
contrasting line.
• While EM countries have been forced to adjust their policies to a less supportive economic and financial environment
in the West, investors are likely still to prefer short-term tactical plays for the foreseeable future, simply
because the distribution of risks remains very large. However, beyond the immediate uncertainties that will dissipate
only gradually, our more medium-term call is for an exit from the current crisis that is able to bring a more solid
European framework. This will require political will and the ability to lead.
Contents:
Europe will not disintegrate via its single currency .................. 1
Risk: High and unstable risk now the new standard ................ 6
Monetary Policy: Potential and limits of the ECB‟s arsenal ...... 7
Banking Regulation: Undergoing in-depth transformation ...... 10
US Interest Rates: Benefits of a „risk-free‟ asset ................... 13
Eurozone Interest Rates: When (how) will the crisis end? ..... 14
Exchange Rates: USD reigns supreme ................................ 15
Gold: downside risks ........................................................... 16
Energy: Oil prices back to more sustainable levels................ 17
US: Muddling through .......................................................... 18
Japan: Mind the external risks .............................................. 20
Eurozone: Waiting for Godot? .............................................. 21
France: Growth reprieved… ................................................. 22
Germany: brain teaser ......................................................... 23
Italy: Keeping it under control ............................................... 24
Greece: Alarming situation ................................................... 25
Spain: Fears accumulating................................................... 26
Portugal: On hold ................................................................ 27
UK: Not in Olympic shape .................................................... 28
Australia: Hit by external woes ............................................. 29
New Zealand: Rebuilding coming soon ................................ 29
Canada: External risks temper the outlook ........................... 30
Emerging Markets: Time to use the existing leeway ............. 31
Brazil: A clogged engine (for now) ....................................... 32
Russia: Long-term challenges front-loaded .......................... 33
India: Going through a rough patch… .................................. 34
China: Growth target at risk ................................................. 35
Central Europe: Hopes dashed ........................................... 36
Turkey: Delicate landing ...................................................... 36
South Africa: Weak ZAR and lacklustre growth .................... 37
Mexico: Growth is helping, but what will politics do? ............. 37
Egypt: A welcome stabilisation in currency reserves ............. 38
Morocco and Tunisia: Serious budget difficulties in 2012 ...... 38
Exchange rate forecasts...................................................... 39
Interest rate forecasts – developed countries ....................... 40
Interest rate forecasts – emerging countries......................... 41
Economic forecasts............................................................. 42
Economic forecasts – quarterly breakdown .......................... 43
Economic forecasts............................................................. 44
Commodities forecasts ........................................................ 44
More information: Video – Time is our only ally

Europe will not disintegrate via its single currency 1
Europe remains the central concern, despite the US outlook being dimmed by the upcoming presidential election and by
the choices to be made about cutting the Federal budget deficit next year, and China seeing the first changes to its
leadership in a decade this autumn. In fact, the Eurozone could be defined by a double paradox: it lurches from crisis to
crisis, despite the fact that its economic fundamentals are not really any worse than those of its peers; and it is looking for
ways to emerge from the crisis by reverting, at least in part, to proposals often mooted in the past.
10Y Greek government bond rates: a
profile shaped by crisis
40
35
30
25
20
15
10
5
0
Source: Bloomberg, Crédit Agricole CIB
Current account imbalances:
Germany versus the average of
Greece, Ireland and Portugal
10
5
0
-5
-10
-15
06 07 08 09 10 11 12
Greece 10Y Rate
99 00 01 02 03 04 05 06 07 08 09 10 11 12
Germany Current Account
Average Periphery Current Account
Source: Bloomberg, Crédit Agricole CIB
Hervé Goulletquer
herve.goulletquer@ca-cib.com
+33 1 41 89 88 34
A look back at the timeline of the Greek crisis makes the head spin rather,
so strongly does it seem to show just how difficult Europe is finding it to resolve,
once and for all, the economic and financial situation of a country whose GDP
amounts to just 3% of the Eurozone total.
• In May 2010, a three-year EUR110bn rescue package was approved.
• In July 2011 a new Greek bailout package was granted (in the meantime,
Ireland and Portugal – in November 2010 and May 2011 respectively – were
also placed on EU „life support‟ with IMF participation). This featured a set of
financial conditions that were more favourable to the country and a private
sector contribution to public-debt-reduction efforts.
• In October 2011, the Greek rescue package was strengthened, with a
considerable increase (from 21% to 50%) in the private sector‟s voluntary
debt forgiveness contribution („haircut‟). In the meantime, Europe‟s leading
banks saw their access to USD financing dry up spectacularly, and investor
distrust of Italian and Spanish sovereign debt emerged.
• In November 2011, the Greek crisis took on a political slant, with the prime
minister‟s proposal to put the EU and IMF rescue plans to a referendum of
Greek voters. The project was withdrawn, and a transitional coalition
government was appointed.
• In May 2012, after a start to the year marked by the deployment of the
expected measures in Greece and by the lenders releasing funds (and more
generally by an improvement in the situation in Europe), a snap general
election saw the coalition formed in Athens lose its parliamentary majority,
but with no other coalition emerging.
• Greek voters were called back to the polls on 17 June. A majority was
apparently won by a coalition in favour of the bailout plan, with a series of
adjustments to make it not less restrictive, but more bearable to the Greek
people. This suggests that the repayment schedule would be more spread
out over time. In all cases, observers wonder (is it still the case?) about
Greece‟s ability to remain within the EU. This begs the question: if the
integration machine that is Europe were to go down, could it restart?
The special character of the Greek case cannot disguise Europe‘s difficulty
in creating a framework that will enable it to manage effectively the
economic and financial imbalances revealed by the crisis within and
between Eurozone countries.
• How do you reduce balance of payment imbalances, which largely reflect
widening competitiveness gaps, between Germany & several other Northern
European countries and most of those of the „South‟?
• How do you resolve the moral hazard issue raised by the payment of
financial aid that could encourage others to slacken off on the necessary
efforts?
• How do you increase Europe‟s capacity for intervention without disrupting the
public finances of the main contributors?
• How can you ask private investors to pay for past mistakes (lack of ability to
discriminate between the different sovereign risks in Europe), at the same
time as continuing to ardently desire them to continue massively underwriting
1
Alluding to a dictum by Jacques Rueff in 1950: “Europe will integrate on the back of a single
currency or not at all”.
Macro Prospects – no. 137 – 3 rd quarter 2012 2

GDP per capita growth: marginal
advantage for the US
3%
0%
-3%
-6%
Source: OECD, Crédit Agricole CIB
Government income excessively
high in Europe
50%
40%
30%
20%
10%
0%
Source: OECD, Crédit Agricole CIB
A tiny EU budget
1.5%
1.0%
0.5%
0.0%
02 03 04 05 06 07 08 09 10
US GDP per capita growth rate
Eurozone GDP per capita growth rate
99 00 01 02 03 04 05 06 07 08 09 10
US Gov Income/GDP
EZ Gov Income/GDP
01 02 03 04 05 06 07 08 09 10 11 12 13
EU Budget/GDP (%)
Source: EC, Crédit Agricole CIB
upcoming government bond issues?
• Finally, how do you encourage the ECB, as part of its mandate, to do more to
achieve monetary stability (in both the banking and capital market spheres)?
There appears to be something slightly awry in the Eurozone. Yet the
statistics, while not exactly flattering, compare favourably with those of peers.
Jean-Claude Trichet famously likes to point out that since 1999 the Eurozone has
created 14.5 million jobs compared with 8.5 million in the US, and that per-capita
GDP growth has been 0.8% for the former and 0.6% for the latter over the same
period. Similarly, balances – whether we are talking about the public accounts or
foreign trade in goods and services – are somewhat better on the European side
of the fence: this year the Eurozone budget deficit is forecast to come in at 3ppt
of GDP, compared with 8.3ppt in the US, and the current account balance is a
positive 1ppt of GDP in the former and a negative 3.7ppt in the latter. Of course, if
we looked at some other indicators, we would be tempted to put the US ahead.
This holds true, for example, in the higher level of labour productivity and lower
level of government income. The fact remains that there is nothing in this
comparison of figures to justify putting the Eurozone on the „naughty step‟. In fact,
while the markets do not give a hoot, most of the time, about the economic and
financial situation of this or that American state, but worry about this or that
Eurozone country, this is because the Eurozone‟s institutional and governance
architecture is incomplete. And, of course, it is in times of crisis that this is easiest
to observe.
The debate on monetary union in Europe is nothing new. Think of the Barre
memorandum in the late 1960s, the Werner report in the 1970s and, following the
collapse of the Bretton Woods agreement, the currency snake and the EMS
(European Monetary System). The aim pursued right up to the present has not
changed: to contribute to the consolidation and development of trade within
Europe, which became a “burning obligation” with the creation of the single
market in 1986, and to assert the role of Europe as a vital player in the “concert of
nations”. Clearly, ideas about integration and a strengthening of Europe
both economically and politically have been present in debates going back
decades. Similarly, the question of an „optimum currency area‟ has been argued
over during all this time, concluding invariably that Europe is a highly imperfect
optimum currency area, whether we are talking about the mobility of production
factors (above all, labour) or the asymmetry in response to external shocks. What
is more, the capacity for budgetary or fiscal intervention to make up for those
shortcomings is rare.
However, the dawning awareness of the need to make progress as regards a
transfer mechanism is very real, even if the political will to do so sometimes lags
behind. Thus, the preparatory discussions on the launch of the EMS focused not
only on the best design for the exchange rate mechanism, but also on the
possibility of implementing resource transfer mechanisms called cooperation
funds from strong countries (above all Germany and the Netherlands) to weaker
ones (Ireland, Italy and the United Kingdom, which was to join the mechanism
only later). With regard to the second aspect, it would seem they failed largely
because of Germany. The idea put forward in the 1977 MacDougall Report to
increase the EEC (European Economic Community) budget from some 0.7% of
GDP to 2.0-2.5% during a pre-federal stage of European integration (then to 5-
7% during a „small public sector‟ federal stage) was quickly shelved.
Clearly, these topics are not dissimilar to those being debated today. On the
other hand, the exit from the Eurozone of a member state has been less
talked about in the past two decades than the failure of the single currency.
It is well-known that a non-negligible proportion (quite a large one, in fact) of US
economists was fairly sceptical about the European project‟s survivability.
Perhaps we should consider the analysis by Barry Eichengreen as a good
reference point 2 . According to Eichengreen, the cost to a member state of leaving
the Eurozone would exceed the benefit – and by a wide margin. The costs are
economic (capital flight, financial crisis, dearer credit and inflation), political
2
„The breakup of the Euro Area‟, Cambridge, MA, USA, Sept. 2007. For the most recent period,
one should no doubt note that the rarity of comments about the immediate break-up of the
Eurozone is a sign that Eurosceptic viewpoints are weaker today than was the case a decade or
two back.
Macro Prospects – no. 137 – 3 rd quarter 2012 3

Points of weakness in Europe,
according to the market
600
400
200
0
Source: Bloomberg, Crédit Agricole CIB
An active ECB
35%
30%
25%
20%
15%
10%
5%
0%
5Y CDS
08 09 10 11
Source: Bloomberg, Crédit Agricole CIB
Fiscal asymmetry
4
0
-4
-8
-12
-16
Germany
Italy
Greece (rhs)
France
Spain
99 01 03 05 07 09 11
ECB Balance sheet (% of GDP)
Structural Primary Balance (%GDP)
Source: OECD, Crédit Agricole CIB
6000
4000
2000
99 01 03 05 07 09 11 13
Germany
Average Greece, Ireland and Portugal
0
(becoming the „bad apple‟ of the European Union) and practical (reintroducing a
national currency and rewording all contracts). As for the risk of contagion
following the departure of a member state, the analyst‟s response seems to have
to be: „it all depends‟. The same causes produce the same effects; if a country
suffers from the same ills and is characterised by similar economic, financial,
social and political structures to the country that has just exited, there is a definite
risk that it will suffer the same fate. Different characteristics, however, should lead
to different fates, even if the difficulties are similar in style. Two comments could
be added to this. In the first place, regardless of the lack of similarities in the
objective situations, a certain behavioural mimicry on the part of the markets is
genuinely something that should be addressed. Secondly, the shock of a member
state leaving the Eurozone could (or, in fact, should) encourage the partners to
strengthen the monetary union, if only to fend off possible attacks from the
market.
Faced with a sovereign debt crisis in Europe that has gone on for too long,
and with a Greek drama that cannot go on, the EU‘s institutions and its
member states must realise that the time for half measures and small steps
forward (hailed as major advances) is over. The issues were all raised a long
time back and the unprecedented difficulties faced today demand to be resolved.
Unless we accept the prospect of regression, the need to move forward is
inescapable. This is what must be done, given that budgetary responsibility and
maintaining the economy‟s competitiveness will remain unavoidable necessities
at the level of each member state.
• Institutionally speaking, a new awareness and a ‗leap forward‘ are
necessary. In the first place, we have to admit that, within a monetary union,
and even more so in the case of an economic and monetary union,
sovereignty is part of the shared domain. We only need to ask Italy or Spain
about the impact there currently from the Greek crisis. Secondly, should we
admit, with Jean-Claude Trichet 3 , that a member state that is having difficulty
in honouring its commitments as regards reforms and structural adjustments
can be helped out by the Eurozone‟s institutions? Similarly, moves towards
greater budgetary federalism are essential. Already, oversight of budgetary
and competitiveness policies is the responsibility of the Commission.
Tomorrow, the right to veto certain budgetary decisions could be approved
for the Union‟s institutions, or else the Union‟s budget could be increased to
the detriment of those of its member states, which would make it easier to
create Eurobonds.
• The much-talked-about growth initiative should be launched without
delay. This should have two components: supply-side measures designed to
strengthen competitiveness and ensure more efficient operation of the
various markets; and other, demand-side, measures in the shape of better
and more comprehensive use of the EU‟s structural funds, an increase in the
European Investment Bank‟s lending capacity, and even issuance of project
bonds.
• Budgetary policy initiatives, and more generally growth policy
initiatives, should be rolled out with greater flexibility and be more
symmetrical. Thus, with respect to the countries facing the greatest
imbalances in their public accounts, the setting agreed beforehand must be
tailored both to circumstance (where are they in the economic cycle?) and to
building up new-found credibility. From a complementary standpoint, those
countries with more room for manoeuvre in terms of boosting their own
domestic demand should feel themselves duty-bound to do so.
• The ECB can remain on the alert only on three fronts: that of bolstering
growth, so long as inflation does not seem to be a risk in the medium term;
that of commercial banks‟ access to refinancing; and that of the transmission
of its monetary policy to the capital markets via the government bond
channel.
• It is vital to restore full confidence in the state of the banking system.
This involves reducing the relationship between the state and the banks of a
single country that are too close: the state may often seem to have an
3
Building Europe, building institutions, Aachen, Germany, June 2011.
Macro Prospects – no. 137 – 3 rd quarter 2012 4

World of giants
Others,
32%
Share in World GDP (in ppt)
Russia,
3%
Brazil,
Japan,
3% 6%
India,
UK,
China,
6%
3%
14%
Source: IMF, Crédit Agricole CIB
US, 19%
Eurozone,
14%
insufficient financial surface relative to the size of the banks‟ balance sheets,
while the banks may be over-exposed to the credit risk represented by the
state. Implementing centralised oversight and regulation at the EU level
would be perfectly useful, as it would contribute to minimising the second
of these relationships by encouraging credit institutions to diversify their
government securities portfolios more. Moreover, if emergency
recapitalisations prove necessary for some institutions and call for the use of
public funds, the EU should be at the helm via, for example, the European
Stability Mechanism and not the governments of the member states. This
would have the advantage of not strengthening a relationship they are trying
to loosen.
The list of things to do may seem long. What is more, implementation should
not be delayed. Is it possible? Asking that question runs the risk of getting
the same answer as that heard every time post-war Europe has been faced
with a major challenge: everything hangs on political will. In a rapidly
transforming global economy, and faced with the rise of economic giants, that
political will should exist. But we should never forget that nothing is possible
without a guarantee that each member state will honour its commitments.
Macro Prospects – no. 137 – 3 rd quarter 2012 5

Risk: High and unstable risk now the new standard
Regardless of the slight improvement expected on the macroeconomic/policy front, the distribution of risks remains very
large, with many possible outcomes and fat tail-risks, while the global deleveraging continues and room for manoeuvre is
minimal in most developed countries. Short-term tactical plays will continue to prevail for the foreseeable future.
Sovereign CDS: very different paths
in the US and the Eurozone
400
350
300
250
200
150
100
50
0
Big 4 is the equally weighted average of 5Y
CDS in Germany, France, Spain and Italy
Source: Bloomberg, Crédit Agricole CIB
The cycle of risk, at an accelerated
pace
60
55
50
45
40
35
30
25
20
15
10
08 09 10 11 12
Eurozone Big 4 5Y CDS (*)
United States 5Y CDS
Germany 5Y CDS
1 2 3 4 5
1 – Lehman‟s
2 – Eurozone debt crisis I (Greece)
3 – US debt ceiling + Eurozone debt crisis II
(Greece + Italy + Spain)
4 – Eurozone debt crisis III (Greece + Spain)
5 - US presidential election
Source: Bloomberg, Crédit Agricole CIB
Hervé Goulletquer
herve.goulletquer@ca-cib.com
+ 33 1 41 89 88 34
Jean-Francois Perrin
jean-francois.perrin@ca-cib.com
+ 33 1 41 89 94 22
?
08 09 10 11 12 13
Euro Stoxx implied volatility
Average
Average - 0.8 stdev
Average + 1.2 stdev
Almost five years after the subprime crisis began – if setting point zero during the
summer of 2007 – things have definitely not returned to normal. Phases of high
risk aversion continue to recur, still following the same pattern: (1) a „fire‟ breaks
out somewhere (eg, deficit figures revisited in Greece, deficit targets abandoned
in Spain or federal debt ceiling reached in the US), then (2) the problem is not
addressed properly and the crisis worsens, then (3) the pain threshold is met and
emergency action is taken, (4) some short-term relief takes place, hoping the
worst is over. And then (1) can start again.
The different risk gauges (sovereign CDS, equities P/E) clearly show this pattern,
even if it has to be qualified according to the country and market. In that respect,
the continuously growing CDS levels of the aggregated Eurozone is alarming
(see chart left). From a medical point of view, the conclusion would be that
extreme pain is necessary before any hard therapy is decided and implemented.
In other words, you have to be in the very tough situation of Ireland,
Portugal – or even Spain – before serious action is taken. If you are AA
France or AA US, you just procrastinate.
This means that, beyond our global macro and financial scenario of a slight
improvement, risk (erratic volatility, low global equities P/E, high sovereign
CDS in Europe) will remain both high and unstable over the coming year
and probably years. For how long? Historians say that getting out of a
deleveraging crisis takes about seven to eight years. If correct, this would mean
that Western countries are just in the middle of the adjustment phase. It is simply
too soon to believe that „trend deals‟ will reappear soon. We can only hope that
the process of the gradual consolidation of balance sheets will contribute to the
slow return to confidence and lower risk-aversion levels.
This global crisis is unique because the three major regions of the OECD (let us
say the US, Europe and Japan) are now stuck in the deleveraging process at the
same time. If you launch austerity measures (the Eurozone periphery diet)
without growth stimulus, the result is recession, deflation, unemployment, social
and ultimately political unrest. If you offset the private deleveraging with public
deficit (the US diet), then the deleveraging issue just swallows more. In that
respect, the risk ‗baton‘ may be passed from Europe to the US some time in
H212. The Greek election will be in the past (with a favourable end as our central
view) meaning more action possibilities for EU institutions, while the presidential
election in the US will bring back another batch of issues (the „fiscal cliff‟ if
stimulus measures are interrupted and a risk of more paralysing antagonism
within Washington). Another risk sequence can be expected on this horizon,
which in turn will spread to global markets as the tripod (US, European and
Chinese economies) will be endangered again.
The bottom line is that the degree of confidence in any medium-term scenario is
lower than usual because the distribution of possible outcomes is very large,
while room for manoeuvre is minimal. Since economic growth in the US is
weak, and even weaker in the Eurozone, we will not be far from the red line of
recession for several years, meaning a continuous focus from investors on
short-term issues, no strong views, and tactical plays rather than long-term
strategic ones. No surprise, then, that safe havens will continue to be chased
whatever the logical and rational medium-term scenarios. When a country like
France – which is definitely solvent, merely thanks to the huge savings from
households – has an implied probability of default of 17% priced in debt markets
(with a 5Y CDS of 218bp on 1 June), you have evidence of the gap between
macro and markets. In any case, if the „cycle of risk‟ – like in the second chart –
continues, one should go long into risky assets when volatility breaks the pink line
and short when the black one is breached. Bets for the brave though!
Macro Prospects – no. 137 – 3 rd quarter 2012 6

Monetary Policy: Potential and limits of the ECB‘s arsenal
Although the ECB did not cut rates in June, the decision was a close call for the Governing Council, which clearly remains
much more flexible than many had believed. The Bank stands “ready to act” on the back of “increased downside risks to
activity”, and indeed we expect further monetary easing in coming months. The policy arsenal is not infinite, but many
options remain that the ECB is more or less likely to use depending on the macro-financial-political environment as well as
the nature of the threat.
Option 1 – cut rates to below 1%
The ECB could cut rates to 0.50% in either two steps or one single move if faced with major risks to financial
stability.
Pros
• Rate cuts are fundamentally justified, and costless;
• Strong policy signal that the ECB is ready to do more;
the closer the policy rates get to the zero bound, the
more the market expects the ECB to respond with QElike
policies;
• Lower bank funding costs as all the ECB‟s Open-
Market Operation (OMO) rates are indexed to the Refi
rate.
Cons
• No more conventional ‗dry powder‘ available;
reduced capacity to keep the pressure on governments
to deliver;
• Little macro impact expected with interbank rates
already very low and monetary policy transmission
channels impaired;
• No impact from the deposit rate if unchanged; potential
negative impact for money markets if it is cut to zero.
Likelihood: highly likely as economic contagion reaches the core.
Option 2 – another (round of) LTRO
The ECB announces one or several LTROs with a maturity of at least 1Y, most likely 3Y, but possibly even longer.
Pros
• The most „natural‟ non-standard response to risk
aversion;
• With most banks pre-funded beyond this year,
additional LTRO money could be used for further
commercial margin restoration and carry trade
operations easing periphery funding costs;
• An extended safety net for banks and sovereigns in a
transition towards greater European integration;
possibly a complement to a common deposit guarantee
scheme;
• Positive effects through the usual transmission
channels, including on confidence and risk assets.
Cons
• Most banks are awash with liquidity; although credit
risk indicators are rising again, interbank spreads, such
as OIS/BOR spreads, have remained capped, so far;
• LTRO success uncertain without looser collateral
rules (see Option 3) as the banks that need the cash
the most are likely to be the same ones that lack the
amount of eligible securities;
• Risk of strengthening the feedback loop between
sovereigns and banks; additional stigma attached to
„LTRO banks‟;
• ‗ECB impotence‘ if it appears forced to make such a
decision.
Likelihood: possible but no panacea, and of limited help unless combined with other measures, including Option 3.
Frederik Ducrozet
frederik.ducrozet@ca-cib.com
+ 33 1 41 89 98 95
Macro Prospects – no. 137 – 3 rd quarter 2012 7

Option 3 – even looser and/or harmonised collateral rules
The ECB loosens collateral eligibility rules further, either alongside new LTROs (Option 2) or as a standalone
decision applying to regular refinancing operations. In practice, this could include applying general 3Y LTRO rules
to other OMOs, an acceptance of even riskier asset classes and/or looser margin calls. Alternatively, valuation
haircuts could be reviewed towards a less constraining and more harmonised framework – this would be one of the
most efficient measures in our view.
Pros
• Increase in the collateral pool; could be used for
other purposes to support liquidity in the wholesale
market;
• Overall reduction in funding costs.
Cons
• Rising credit risk being transferred from banks‟
balance sheets to the ECB‟s balance sheet;
• Lower incentives for banks to clean up balance sheets
and diversify their sources of funding;
• Opposition from some „core‟ national central banks; risk
of further re-nationalisation of monetary, liquidity and
credit policy.
Likelihood: not very likely but potentially very useful to ease bank funding stress temporarily.
Option 4 – generalise ELA
The Governing Council explicitly allows all 17 NCBs to use ELA up to a specific ceiling amount while
communicating on the lending conditions (which it has always opposed, so far 4 ): interest rate, maturity, collateral
and haircuts.
Pros
• Greater flexibility in dealing with the refinancing of
stressed banks (broader pool of eligible collateral);
• Stricter lending rules, greater transparency and „bad
bank stigma‟ to act as a disincentive for solvent banks
to go to ELA;
• Distinction between solvent and insolvent banks
before the latter are restructured via a European
resolution scheme.
Cons
• ELA supposed to a temporary and exceptional
monetary policy tool, not a permanent one;
• Growing confusion between monetary and quasifiscal
policy.
Likelihood: unlikely and potentially undesirable, although more transparency would be welcomed.
Option 5 – restart SMP
The ECB announces that ―it will actively implement its Securities Markets Programme‖ again, like it did in August
2011, ―to help restoring a better transmission of monetary policy decisions and therefore to ensure price stability in
the euro area‖.
Pros
• A quick fix and potential circuit-breaker given illiquid
markets;
• Interventions potentially unlimited, backed by the
ECB‟s balance sheet;
• Potentially more efficient if the ECB clearly commits to
a pre-defined programme, let alone a first step before
outright QE.
Cons
• Unless SMP becomes more flexible, its efficiency will
be lower post Greek PSI as the ECB confirmed its
senior creditor status by refusing to participate in the
exchange, and SMP adds to the subordination of
private bondholders;
• ECB buying seen as another opportunity for foreign
investors to get rid of their holdings of peripheral
debt;
• Sign of desperation; growing opposition in core
countries; no legitimate way for the ECB to impose
conditionality;
• Market reaction to depend on the buying intensity in the
early weeks, leading to more uncertainty.
Likelihood: possible in reaction to secondary market dislocations, but unlikely to be flexible and efficient enough
4
As it stands, information about ELA lending remains scarce and difficult to interpret with precision. On 24 May 2012, the ECB reported a
EUR121bn increase in the category „other claims on euro area credit institutions‟ (asset item 6) due to an accounting reclassification to harmonise
the disclosure of the ELA.
Macro Prospects – no. 137 – 3 rd quarter 2012 8

Option 6 – give the ESM a banking licence (indirect QE)
The ECB grants the ESM a banking licence to access central bank funding. The ESM would be able to buy more
sovereign debt and to repo the securities with the ECB to boost its lending capacity to very large, if not potentially
infinite, levels.
Pros
• Not inconsistent with the Treaty 5 , at least no more
than previous policies;
• A game-changer given the unlimited capacity of the
funds;
• Conditionality set by the EFSF/ESM; purchased
assets to remain on the EFSF/ESM balance sheet, not
the ECB‟s;
• Funds used for other purposes including bank
recapitalisations, flexible credit lines, purchases of
sovereign debt.
Cons
• Strong opposition from Germany and other core
countries; quasi-equivalent to unlimited SMP
interventions, hence German resistance;
• Equivalent to fiscal transfers and debt mutualisation,
with the associated risks and drawbacks: moral hazard,
liquidity fix rather than structural solution, risk of large
mutual losses in the event of widespread defaults.
Likelihood: unlikely, barring a major financial catastrophe and bold policy measures by national governments.
Option 7 – full-blown QE, or ‘super SMP’
The ECB moves ‗all in‘ by announcing a large-scale asset purchase programme centred on European Government
Bonds, implying an open-ended commitment to defend a certain yield/spread level for solvent but illiquid
sovereigns.
Pros
• The monetary ‗bazooka‘ expected by some market
participants and likely to be efficient in bringing down
sovereign yields, as no one would dare to fight the
central bank and short positions would basically be
killed;
• Quasi-debt monetisation is happening already through
various banking channels; pure QE would merely make
the situation clearer, to some extent.
Cons
• Explicit deficit financing is clearly forbidden by the
Treaty; the ECB could ultimately be sued for having
breached the rules, putting its credibility at risk; extreme
opposition from the Bundesbank; moral hazard at its
utmost;
• Practical limitations due to bond buying ventilation
across countries (in theory) according to the respective
share of bond markets in order to avoid any preferential
treatment.
Likelihood: highly unlikely unless the very existence of the euro is at stake.
Conclusion
In the current environment, the ECB will have the difficult task of dealing simultaneously with the most pressing matters and
adjusting monetary policy to structural changes in the European economy. Any decision in Frankfurt will depend on the
nature of the shock as well as on potential initiatives at the EU and government levels. A minimal pre-requisite for ECB
action would appear to be a commitment to a roadmap towards greater economic, fiscal and banking integration.
Should the bond market show obvious signs of dislocation, it could be the case for instance that the ECB first has to restart
SMP selectively as an emergency measure, even though we consider it least efficient in the long run. Alternatively, the
ECB‟s assessment and stance could turn around rapidly if the situation in Greece and in the Eurozone were to stabilise.
Near term, we believe that the most efficient ECB response to intensifying financial stress would consist in a combination of
existing and new tools aimed at lowering borrowing costs further. Therefore, our central case remains for the ECB to cut
rates to 0.50% in Q312 and to stand ready to provide additional liquidity to banks in the form of new ultra-long
refinancing operations, possibly with looser collateral requirements.
5
See „Liquidity in times of crisis: Even the ESM needs it‟, 28 March 2012, Daniel Gros and Thomas Mayer.
Macro Prospects – no. 137 – 3 rd quarter 2012 9

Banking Regulation: Undergoing in-depth transformation
The pace of change in banking regulation is picking up both at the international level (with the extension of the Basel III
reforms) and in individual countries: think Dodd-Frank Act in the US, the Liikanen Group in Europe, and the Vickers
recommendations in the UK. The outcomes will be important for financing economies.
Reduction in bank balance sheets in
different projections
4
3
2
1
0
USD2.2trn
(6% of
bank assets)
1.7
0.4
0.1
USD2.6trn
(7% of
bank assets)
0.4
0.2
Source: IMF, Crédit Agricole SA
2.5
0.9
0.4
Diego Ferri
diego.ferri@credit-agricole-sa.fr
+33 1 43 23 65 39
Serge Oppenchaim
serge.oppenchaim@credit-agricole-sa.fr
+33 1 43 23 22 99
2
USD3.8trn
(10% of
bank assets)
Best scenario Baseline
scenario
Worst
scenario
Asset sales & reduction in interbank lending
Reduction in RoW credit
Reduction in Eurozone credit
Shared objectives but non-stabilised arrangements …
The four reforms underway around the world share a number of indisputable
objectives, such as making the financial system more stable, protecting
depositors, ensuring service continuity, decreasing the probability of default at
systemic institutions, and making their eventual rescue easier and less costly for
governments. All these reforms take separate paths yet their timetables and
spheres of application are interwoven. Consider:
• From a cross-functional standpoint, the standards drawn up by the
Basel III Committee are designed to be implemented by most national
banking regulatory frameworks. Europe has just transposed them into the
draft CRD4 Directive; China is working up a draft bill, while the US is still at
the preliminary project level. These standards seek, first and foremost, to
strengthen the level and quality of bank capital. They also introduce liquidity
ratios which measure each institution‟s ability to cope with sudden and
massive withdrawals by depositors and correlate the maturity of the loans it
grants with that of its funds. They also seek to curb pro-cyclicality and
financial leverage, via, for example, the creation of additional capital
cushions. They also step up requirements for systemic banks. Theoretically,
implementation of these standards could be spread between 2013 and 2018,
but the current economic and financial environment has demanded fast-track
implementation.
• In parallel, in July 2010, the US passed a framework law – the Dodd-
Frank Act – to be complied with by US banks and, to a certain degree,
through an extra-territoriality effect, by foreign banks that have
business dealings with the US. The Act sets out 250 rules to be drafted by
US supervisory bodies, ranging from shareholder votes on senior executive
compensation and golden parachutes, to the development of „living wills‟ for
banks and restrictions on the size of banking groups. One-third of these
prescriptions have so far been finalised. Among these is a key reform
enacted on 20 January 2011, known as the Volker Rule. This aims to
separate a bank‟s riskiest activities from those covered by state guarantee.
To achieve this, it bans banks, with a few exceptions, from carrying out
proprietary trading and from investing more than 3% of their core equity in
hedge funds and private equity funds. Banks have until 21 July 2014 to
comply.
• In the UK, the recommendations published by an independent
Commission chaired by Sir John Vickers must be transposed into law
by 2019. The main idea is to ring-fence retail banking operations
economically and operationally, and give them governance structures
independent from those of the other financial businesses carried out by the
groups to which they belong. Each retail bank concerned must erect
sufficient barriers to continue operating with corporate and individual
customers in the event of unfavourable circumstances, without any external
help or public support. In exchange, the ring-fenced banks will have a
monopoly on basic banking services.
• More recently, the European Commission asked a group of experts
chaired by Erkki Liikanen, the Governor of Finland‘s central bank, to
determine what structural banking reforms may need to be
implemented in addition to those already scheduled. He is expected to
submit his report this autumn. In the meantime, the European Commission
aims to present proposals for a banking crisis resolution plan in June.
Macro Prospects – no. 137 – 3 rd quarter 2012 10

Impact on distribution of bank
lending in Europe
%
0
-1
-2
-3
-4
-5
-0.6
Best
scenario
Source: IMF, Crédit Agricole SA
Estimated overall capital shortfalls –
big banks
225
119
67
39
-1.7
Baseline
scenario
* Minimum : CET1 = 4.5%, Tier 1 = 6%, Total
=8%
** Minimum plus buffer : CET1 = 7%, Tier 1 =
8.5%, Total = 10.5%
Source: BIS, Crédit Agricole SA
-4.4
Worst
scenario
930
223
221
486
Minimum * Minimum plus
buffer **
CET1 Tier 1 Total
…and poorly-understood potential outcomes
A certain number of standards have already been integrated by the various
banks. Even so, several points have emerged from this flurry of complex
regulatory initiatives:
• Method: many aspects have been addressed without consultations, such as
the additional common equity requirements imposed on institutions
presenting a systemic risk profile, while the calibration of parameters
governing the different ratios to be complied with by banks is so far
incomplete. This has led not only to operational difficulties in implementing
them but most importantly to the impossibility of identifying the possible
interactions between the various reforms. Similarly, some projects collide
with existing and, in some cases, recently updated regulations.
• Nature of the measures enacted: these are a mix of administrative
prescriptions – such as the ring-fencing of business operations or the ban on
working in selected business areas – and financial prescriptions, such as
ratios for capital adequacy, liquidity and stable resources. They cover
concepts that differ widely from country to country, as shown by the Volker or
Vickers rules on the interconnections between different types of banking
activity.
• Structural impacts: a radical transformation of the role of banks in financing
the economy could result from the new regulations (see below).
• Connection between monetary policy and the operation of interbank
markets. The impact of the introduction of liquidity and stable resource ratios
on the transmission of monetary policy is unclear. This is a key issue to be
addressed when it comes to setting levels for these ratios.
Estimates of the impact of the Basel III standards
The differing estimates of the capital requirements needed by banks to
comply with the requirements of Basel III show the scale of the efforts
demanded:
• In its first impact study, the Basel Committee had concluded, based on
balance sheets at end-December 2009, that the banks would need
EUR602bn of additional common equity 6 .
• Then, on the basis of the 30 June 2011 balance sheets of a sample of 212
banks, the Basel Committee recently estimated that the big banks with
international operations would need a further EUR485.6bn in core common
equity (CET1), with the other players needing EUR32bn 7 .
• Most recently, credit rating agency Fitch, based on end-December balance
sheets, estimated that the 29 institutions with systemic importance, known as
G-SIFIs, could need to raise USD566bn (EUR470bn) of common equity by
2018 to meet the targets set by Basel III, or 23% of their current common
equity 8 .
Banks have upped their common equity significantly since 2008, but the
worsening of the sovereign debt crisis has once again placed bank
solvency firmly centre-stage and the timeframe has shortened. The
requirements imposed by the EBA have contributed to the demand for a faster
pace of compliance now announced by the big banks for 2013. Because access
to the capital markets is difficult at present, banks are going about things
differently – by cutting dividends, managing their liabilities, and, above all, by
reducing their risk-weighted assets – in other words, by scaling back on the
activities that consume most equity and concentrating on „core‟ businesses and
countries.
6
Basel Committee on Banking Supervision, Results of the comprehensive quantitative impact
study, December 2010
7
Basel Committee on Banking Supervision, Results of the Basel III monitoring exercise 30 June
2011, April 2012
8
FitchRatings, Basel III: Return and Deleveraging Pressures, May 2012.
Macro Prospects – no. 137 – 3 rd quarter 2012 11

Estimated overall capital shortfalls –
small banks (EURbn)
21
5,5
7.3
8.6
Minimum *
* Minimum : CET1 = 4.5%, Tier 1 = 6%, Total
=8%
** Minimum plus buffer : CET1 = 7%, Tier 1 =
8.5%, Total = 10.5%
Source: BIS, Crédit Agricole SA
61
11,6
16.6
32,4
Minimum plus
buffer **
CET1 Tier 1 Total
In its central projection, the IMF has estimated the potential reduction in the
balance sheets of Europe‟s 58 biggest banks could come to USD2.6trn, or 7% of
bank assets, by 2013 (see first chart above) 9 . The upshot would be that bank
lending would shrink by 1.7% over two years, with a negative impact on the
outlook for economic growth (see second chart above). This central IMF
projection could, however, result in an even more fragile situation. Combined with
the ongoing process of private sector deleveraging and budget restrictions, and at
a time when most financing for the European economy depends on bank and not
market intermediation, there are fears that the tighter regulations will trigger a
perverse dynamic with a chain of additional negative consequences. It is
also worth noting that, after a financial crisis, lending generally remains at a
standstill for a lengthy period of between five and seven years 10 .
With respect to the effect of the new liquidity ratios, the Basel Committee, based
on end-June 2011 balance sheets, has estimated that the one-month ratio,
known as the LCR, will generate a need for EUR1.76trn in funding, and the 12-
month ratio (NSFR) a need for EUR2.78trn. This quantitative impact could call
into question the role of banks in transforming short-term deposits into longermaturity
loans: it would encourage the banks to ensure a closer match between
maturity and growth in lending on the one hand, and their sources of funding on
the other. These ratios will, therefore, be especially punitive for activities in
the corporate financing sphere, as corporates are net, long-term borrowers
and generate relatively little liquidity. They could foster a shift from the
European model, where banks finance the economy, towards the American
model where financing is through the capital markets.
In other words, the banks will be forced not to carry the loans they grant
directly but, because they have to lighten their balance sheets, to prefer a model
of intermediation where their role will consist in helping their customers to issue
and place their debt on the markets. This change raises questions and involves a
number of risks:
• While big companies can envisage obtaining disintermediated finance
through the bond markets, this option will be difficult for SMEs;
• Because Greece, Portugal, Spain and Italy are the European economies
most dependent on bank lending and have a large SME sector, the divergent
growth rates between the countries at the centre of the monetary union and
those on its periphery could widen still further;
• The encouragement aimed at banks to scale back their assets in „non-core‟
markets could rapidly trigger contagion effects on non-Eurozone countries,
and in particular on Central and Eastern European countries, and even those
further afield;
• The unregulated shadow banking system could grow as a result, accelerating
the need for regulation to limit its inherent risks.
9
IMF, Bank Deleveraging-Why, What, by How Much, and Where?, Global Financial Stability
Report, April 2012
10
Bank of England, Financial Stability Report.
Macro Prospects – no. 137 – 3 rd quarter 2012 12

US Interest Rates: Benefits of a ‗risk-free‘ asset
We have revised our forecast for the US 10Y to 2.5% by the end of the year. The status of the UST market as the world‟s
risk-free haven suggests a longer period of trading upon fear not fundamentals. Risk premia are negative and, adjusted for
default risk, nominal 5Y yields are close to zero. Prices are volatile and so, if looking for risk-free, stay in the sub-2Y area.
US 5Y vs 5Y CDS
3.0
2.5
2.0
1.5
1.0
0.5
0.0
Jan-10 Jul-10 Jan-11 Jul-11 Jan-12
5Y CDS (%)
5Y UST yield
5Y UST adj for credit risk
Source: Bloomberg, Crédit Agricole CIB
Term risk premia
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
-0.5
-1.0
-1.5
Source: Federal Reserve
Fed programmes
4.5
4.0
3.5
3.0
2.5
2.0
1.5
%
%
90 92 94 96 98 00 02 04 06 08 10
2Y term premium
5Y term premium
10Y term premium
% USD100bn GSE,
USD500bn MBS
USD1.25trn GSE,
USD300bn UST
Source: Federal Reserve
USD600bn UST
Twist
May-08 May-09 May-10 May-11 May-12
Mostly, US debt markets are being buffeted by events in Europe although lately
American economic data has weakened too. However, the economic data has
not moved to anywhere near recessionary territory and finally the banking sector
is looking healthy again. Yet, the market is extreme in its opinions and desires,
and it was a long time ago that Treasury yields accurately reflected fundamental
valuations.
At the moment, US Treasuries are considered to be one of the few risk-free
instruments on the planet. The pool of triple-A, risk-free assets has become
very small over the course of the sovereign debt crisis compared with the
quantity of risky assets. This fact has exaggerated the reaction in Treasury yields
to the riskier environment and many investors are chasing very few assets. Yet,
to call Treasuries safe is debateable. US credit default swap spreads are running
close to 50bp at 5Y maturities. Thus, buying a 5Y Treasury with a yield of 0.74%
and better protecting it against default with a CDS produces a nominal yield of
near zero for the next five years. Buying Treasuries is not for value hunters and
forecasting yields is mostly a risk-on or risk-off affair.
We have significantly downgraded our 10Y UST yield and associated
forecasts to reflect the drag from Europe, where the crisis has scaled new
heights; escape velocity is going to take longer to achieve and uncertainty will
hang in the air for longer. By end-2012, we now assume only a 2.5% 10Y yield
as opposed to 3.0% previously.
A yield of 2.5% is a low UST yield by any fundamental valuation but it is still quite
a bit higher than where we are today. Our US macro forecasts are now slightly
weaker but we do not forecast a dip back into recession. Nor are we are
expecting a „Grexit‟ despite the obvious risks; and, whilst there is pain in Spain,
we ultimately see the situation as correctable.
With our 2.5% forecast, we are not assuming that all uncertainty regarding
Europe is cleared up by the end of the year. Sovereign spreads will remain
volatile and the depth of problems in Europe has created strong suspicions of any
improvement in risk sentiment.
The Federal Reserve‟s Maturity Extension Programme (MEP) will be extended for
a few months to make it look as if the Fed is still in the game following the recent
market stresses. But, growth is not so weak that the unemployment rate is
expected to rise again and the case for QE3 is limited. So, we see MEP
continuing in approximately its current form, since altering the programme for a
short time would limit the effectiveness of any programme.
A QE3 programme is unlikely to pull down Treasury yields. The observable
pattern from previous Fed programmes is that yields might decline as a knee-jerk
reaction to a new QE programme, but soon after yields will begin to rise as risky
assets begin to perform once again.
If investors are looking for a risk-free asset, we strongly suggest 0-2Y US
paper but there is no benefit in going out further along the yield curve. A safe
haven should protect capital but the rising volatility in bond prices fails this test. It
is not unreasonable to forecast yields of 2.5%; such a yield is still low but would
produce nearly a 9% decline in the value of the investment.
David Keeble
david.keeble@ca.cib.com
+1 212 261 3274
Macro Prospects – no. 137 – 3 rd quarter 2012 13

Eurozone Interest Rates: When (how) will the crisis end?
Contrary to our expectations, the trend towards even lower „core‟ yields and even wider periphery sovereign risk spreads
returned in full force in Q2 and seemingly remains in place. With yields apparently divorced from the usual „macro‟ factors,
the crucial issue is when and how the downward spiral of the periphery can be halted. Expect a „hot summer‟.
Rolling three-year correlation to
OBL yields
1.0
0.5
0.0
-0.5
-1.0
Source: Bloomberg, Crédit Agricole CIB.
What does it take to break
momentum like this?
10
9
8
7
6
5
4
3
2
1
0
Jan-03 Jan-06 Jan-09 Jan-12
5Y - risk correl 5Y - macro correl
Sep-90 Sep-95
Source: Bloomberg, Crédit Agricole CIB.
Periphery bank buying of
government bonds
35
30
25
20
15
10
5
0
-5
-10
%
EUR bn
Source: ECB, Crédit Agricole CIB.
Luca Jellinek
luca.jellinek@ca.cib.com
+44 20 7214 6244
5Y OBL yield
Sep-00 Sep-05 Sep-10
Jul-11 Oct-11 Jan-12 Apr-12
Spain Italy
At the time of the last quarterly, the economic surprise index was near a relative
peak and we opined that Eurozone rates should catch up with that reality, given
the strong signs of reduced periphery sovereign risk aversion. Since then, macro
figures have consistently disappointed expectations, even as the latter have
been continuously adjusted downwards. The root cause for the unexpected
bullish run in core bonds, however, is not really down to poor cyclical
performance but rather to the sharp re-emergence of crisis levels in periphery
sovereign bond yields. Indeed, the intensity of the crisis is likely to be one of the
main reasons why the Eurozone economy – as well as the broader context of the
Atlantic rim – has turned for the worse. The waning importance of purely
economic data in determining yield levels is evident when considering how
models calibrated up to 2009 seem to have broken down almost completely and
even, from a simple statistical standpoint, by the falling correlation between rates
and macro indexes, as opposed to risk measures (top chart). In our example, the
„risk‟ index is the average of the normalised level of average 10Y periphery EGB
swap spreads and the average 10Y bank CDS level for the major European
banks.
If the cause of the strength of the core Eurozone market is clearly the constantly
mounting periphery risk aversion, the symptom of that strength is the relative
ease with which new lows have been continuously set in German yields and
swap rates. A similar tendency to break violently lower has been evident in the
10s30s spread and other longer-maturity curve slope measures, with the very fact
of breaking through key levels bringing with them hedging flows that perpetuate
the trend.
What are the prospects for a turnaround in the poor periphery sentiment? The
root of the problem is the difficulty that many sovereigns continue to have in
addressing their fiscal stance, growth prospects and banking system. All
this has been aggravated by grudging, often perverse (think PSI) policy response
from the Eurozone as a whole. While EU/ECB support has gradually become
more flexible and plentiful, the delivery has tended to lag badly behind
requirements. Overall, for instance, we view the very recent decision to support
Spain‟s banking industry recapitalisation through a „non-programme‟ EFSF or
ESM loan as positive, but we are less sure that it will be enough to foster the sort
of renaissance in „foreign‟ demand that periphery markets badly need. Following
the ECB‟s late-2011 liquidity support step-up, Spanish and Italian banks
became the key buyers of government supply but, as markets began to exact a
rising toll on their cost of capital and natural deposit growth decelerated (into
negative territory for some), local banks‟ appetite for government auctions
appears to have waned (bottom chart). On top of all that, the perception of
Greece‟s inability to stem its red ink weighs heavily on the market, despite the
generally positive electoral outcome. Going into the often difficult summer period,
the question of how well bid Spanish and Italian supply will be remains
unanswered.
Our core set of forecasts is based on the assumption that, however gradually, the
combination of EU/ECB support and home-grown economic/fiscal reform will
deliver some stabilisation. In other words, that some broader demand is
glimpsed in time for the primary market to remain open to Spain and Italy at
terms that they can more or less afford. In such a scenario, core yields
should rise from the lows they have set (negative yields all the way out to 10Y
and beyond). Nonetheless, the ‗risk‘ scenario of further deterioration in the
funding access of periphery sovereigns cannot be considered a very low
probability one and, under such a scenario, further compression towards (and
below) 0% for core rates would be likely, especially as such a scenario would
have very negative repercussions on the real economy.
Macro Prospects – no. 137 – 3 rd quarter 2012 14

JPY
JPY
CHF
CHF
SEK
SEK
EUR
USD
GBP
GBP
NOK
NOK
NZD
NZD
CAD
AUD
AUD
CAD
Exchange Rates: USD reigns supreme
The USD continues to reign supreme and is likely to strengthen further over the coming weeks against the background of
elevated risk aversion. Further out into Q3 and especially in Q4 we see some stabilisation of risk currencies and, while the
USD will remain firm versus EUR, JPY, GBP and CHF, we expect it to lose ground against high-beta currencies
USD to rise gradually
125
115
105
95
85
75
65
01 03 05 07 09 11 13
USD Index
USD Index (CA CIB forecast)
Source: Crédit Agricole CIB, Bloomberg
Commodity currencies offer the best
G10 FX returns
15
10
5
0
-5
-10
-15
%
12M Carry-adjusted Return
(vs USD)
Source: Crédit Agricole CIB, Bloomberg
Most currencies set to strengthen
versus EUR
15
10
5
0
-5
-10
-15
% 12M Carry-adjusted Return
(vs EUR)
Source: Crédit Agricole CIB, Bloomberg
Mitul Kotecha
mitul.kotecha@ca-cib.com
+852 28 26 98 21
forecasts
Risk has once again been the dominant theme running through FX markets with
fundamentals counting for little. The jump in our risk barometer above its high
risk-aversion band means that FX markets have moved into risk-‗hating‘
territory. The road ahead is unfortunately not going to be a smooth one and, as
our short-term forecasts reveal, there are still plenty of downside risks to highbeta
currencies in the weeks ahead. Most currencies are finding direction from
events in Greece, Spain and the Eurozone in general. The lack of independent
direction means investors with USD positions dominant in their portfolios are
doing either very well or very badly. While we see risks of further USD
appreciation against most currencies over the short term, we are wary of extreme
market positioning (USD speculative long positions have reached a record level)
and consequently a snap-back in risk currencies in the event of good news. Our
preference in the current environment is to play relative value trades.
The game of brinkmanship being played by national governments and the ECB
suggests that little action will be forthcoming any time soon. This will leave risk/
high-beta/commodity currencies under pressure. Although there is scope for
periodic reversals we suggest selling into risk rallies until there are clearer
signs of concrete Eurozone action. Even then, one should not take the
Eurozone in isolation. Markets are becoming increasingly concerned with global
growth. While a disaster or Eurozone break-up would undoubtedly result in a
sharper-than-anticipated slowing in global growth, there are signs that growth
momentum is already slowing. In this respect, currencies with high sensitivity to
the global growth cycle will be threatened further.
The authorities globally have some ammunition to defend against the deepening
crisis but the efficacy as well as desire to utilise fresh crisis-fighting measures is
debatable. In Europe, many are looking to the ECB to act as lender of last resort,
perhaps monetising Eurozone debt or at the least providing a third long-term
refinancing operation (LTRO). This would undoubtedly help to calm nerves,
boosting the EUR and risk currencies. Whether there would be any lasting
impact is doubtful unless progress on underlying structural issues moves forward.
The ECB is reluctant in any case to provide more support as it does not want to
let national Eurozone governments off the hook in their austerity drives.
Similarly, if there were steps towards a common Eurobond, Europe-wide bank
deposit guarantees, generally stronger co-operation between governments, US
Fed QE3, and fresh stimulus in China, etc, a more sustainable rally in the EUR
and risk currencies would occur. At least one or two of these are possible but it
will require an even bigger deterioration in sentiment/escalation in crisis risks for
policymakers to move into action. In the meantime, any periods of easing in
pressure will be few and far between. The EUR will be prone to further selling
pressure and a potential drop to around 1.20 before any recovery can take
place, although bouts of short covering cannot be ruled out.
Our forecasts reflect some stabilisation and even recovery for most currencies
against the USD into Q3 and especially in Q4 when (we hope) there will be some
resolution of the situation in the Eurozone. In turn, a calmer Europe will allow
risk appetite to improve and capital flows to emerging-market currencies to
resume as relatively attractive fundamentals prove irresistible to investors. Major
currencies will also experience some shift in trend over the medium term (Q3 and
Q4), with safe-haven currencies registering less demand, resulting in weakness in
the JPY and CHF. The EUR will see some recovery towards year-end but will still
end the year below 1.30, while in contrast commodity currencies such as AUD,
NZD and CAD will perform well. GBP will also make up some ground against the
USD and will likely stabilise around 0.80 against the EUR, benefiting from
relatively better growth prospects than the Eurozone.
Macro Prospects – no. 137 – 3 rd quarter 2012 15

Gold: downside risks
Gold prices have dropped sharply, notwithstanding its recent bounce. Gold is clearly losing its lustre as reflected by
weakening speculative demand. Although uncertainty over more Fed QE and elevated risk aversion imply that any decline
in gold prices will be gradual, we expect further downside over coming months to USD1,475 by the end of 2012.
Firmer USD weighs on gold prices
72
74
76
78
80
82
84
Jun-11 Sep-11 Dec-11 Mar-12
DXY, inverted Gold prices (rhs)
Source: Crédit Agricole CIB, Bloomberg
Speculative appetite for gold slides
200
190
180
170
160
150
140
130
120
Source: Crédit Agricole CIB, Bloomberg
Gold losing its safe-haven allure
Source: Crédit Agricole CIB, Bloomberg
Mitul Kotecha
mitul.kotecha@ca-cib.com
+852 28 26 98 21
2000
1900
1800
1700
1600
1500
1400
Sep-11 Nov-11 Jan-12 Mar-12 May-12
Net Gold Speculative Contracts (000)
Gold price (rhs)
135
125
115
105
95
85
75
Jun-11
.
Sep-11 Dec-11 Mar-12
CACIB Risk Barometer
Gold prices rhs
1850
1750
1650
1550
2000
1900
1800
1700
1600
1500
1400
Interestingly, and perhaps surprisingly, after a strong rally during the first couple
of months of the year, gold prices have dropped sharply, albeit notwithstanding
the recent bounce in prices. The fall in gold is surprising because it has come at a
time when risk aversion has intensified. Indeed, gold‟s relationship with risk has
actually inverted over recent months, with a negative but significant correlation
registered over the past three months between gold prices and the Crédit
Agricole CIB Risk Aversion Barometer. The lustre of gold as a safe haven
seems to have faded as investors pull capital out of this asset class. However,
gold‟s drop is not unusual when compared to other commodity prices, with oil and
copper prices falling too. Our forecasts continue to show a steady decline in
gold prices over coming months, with the recent bounce likely to prove
temporary.
The deterioration in sentiment towards gold prices has been reflected in the drop
in speculative appetite for the commodity. Speculative demand for gold hit a
cyclical high in August 2011 but since then there has been a steady
reduction in gold demand from these investors. Indeed, CFTC IMM data
reveals that speculative gold positioning has dropped well below its three-month
average although it is still well above its all-time lows reached in February 2005.
Investors became increasingly bullish about gold prices through 2011, with prices
reaching a high around USD1,921 in September last year. The sharp drop in gold
prices over the same month, in part due to an increase in margin requirements at
the CME, shook speculative investors, and it appears that confidence has not
recovered since.
Heightened global uncertainty and elevated risk aversion may yet prevent
gold prices from slipping too quickly although the bigger impact may come
from expectations of another round of US Fed quantitative easing. Recent weaker
US data, especially the May jobs report, has fuelled expectations of fresh Fed
balance sheet expansion. In turn, this has driven gold prices higher over recent
weeks. Clearly, should the Fed implement more QE it will help to renew the
attraction of gold, given that once again markets will see a consequence of the
Fed‟s action as a means to debase the USD.
Despite the softer data we doubt that the Fed is on the verge of embarking on
more QE, although a shift in stance cannot be ruled out if US economic
conditions worsen further and/or the Eurozone crisis escalates. Assuming no
more QE and no more USD debasement, gold prices ought to decline over
coming months. In fact, there are more prospects for USD strength than
weakness, and one of the biggest factors putting downward pressure on
gold prices has been the strength of the USD. While we do not expect the
USD to continue to strengthen at the same pace, further gradual gains in the
currency will imply lower gold prices
Another determinant of gold prices is demand from India and China. Growth in
both countries is slowing, suggesting that gold demand will also weaken.
While we certainly do not expect a collapse in demand from either country we
have no doubt that, compared to last year, the strength of demand will be softer
over coming months. Although we still look for a soft landing in China, the Indian
economic picture has clearly deteriorated while the INR has weakened.
Overall, a weaker real demand picture taken together with reduced speculative
demand implies little support for gold prices. Elevated risk aversion and
uncertainty about QE will help to limit any downside pressure on gold prices.
However, a firmer USD in general will continue to weigh on prices. Assuming
that risk appetite eventually improves, it will imply even less upward
potential for gold prices.
Macro Prospects – no. 137 – 3 rd quarter 2012 16

Energy: Oil prices back to more sustainable levels
Three months ago, we expected a gradual easing of the Iranian crisis, hence an end-year target of USD110/bl for Brent.
Indeed, although the dispute over Iranian nuclear ambitions has softened, the Eurozone debt crisis and fears regarding
global growth have also made a major comeback. Our updated end-year target is USD105/bl, with downside risks.
The ‘Iranian’ premium vanishes
135
130
125
120
115
110
105
27-12-2011: First
Iranian threats in
regard Strait of
Hormuz
200
190
180
170
160
100
=> ...end of oil
150
95
underperformance?
140
Oct-11 Dec-11 Feb-12 Apr-12 Jun-12
Brent (USD/bl)
End May 2012.
End of the specific
Iranian premium?
Base metals Index (rs)
Source: Crédit Agricole CIB, Bloomberg
Jean-François Perrin
jean-francois.perrin@ca-cib.com
+33 1 41 89 94 22
During Q211, crude oil prices (Brent) retreated sharply, from USD122/bl on
average in March to less than USD100/bl in early June. Some of the correction is
related to the weaker economic environment and depressed risk appetite, factors
which also justify the retreat in other industrial commodities like base metals.
However, the correction in oil has been sharper than that for metals (see chart),
because of some oil-specific factors. More precisely, (1) a shrinking Iran-related
crisis premium (fewer headlines on the topic) and (2) supply continuing to
progress, namely in the US, Saudi Arabia, and Libya.
Our central scenario for oil, which was slightly bearish in April (end-year target of
USD110/bl vs spot prices around USD120/bl) and more cautious than the
consensus, as it already included some softening of the Iranian threat, has been
adjusted downwards modestly, with an end-year target of USD105/bl. The
expected recovery now comes from less acute risk sentiment expected by yearend
(see our macro and European rates forecasts) and from expected lower oil
stocks, as consumption will resume in Q3 and Q4.
Beyond the central target, which has not changed that much, the upside risk of
early Q212 has turned into a downside risk. Indeed, as the Iranian threat now
looks less uncontrollable, the very uncertain short-term outlook on the global
economy (Europe in particular but also China and India) combined with more
stable supply (also from still-growing US production) means a risk of prices
falling even more and gyrating around USD100/bl rather than around
USD110/bl.
Macro Prospects – no. 137 – 3 rd quarter 2012 17

US: Muddling through
We look for growth at a 2.0-2.5% rate this year and next. At that pace unemployment will be slow to decline. Inflation is
expected to remain close to the Fed‟s 2% inflation target and monetary policy will remain exceptionally accommodative
throughout the forecast horizon. Fiscal consolidation is unlikely to be excessive but policy uncertainty will weigh on growth.
Pent-up demand drives auto sales
12
11
10
9
8
7
6
Jun-08 May-09 Apr-10 Mar-11 Feb-12
Ind Prod: Motor Vehicles (SA,
2007=100) rhs
Total Domestic Light Vehicle Retail
Sales (SAAR, m Units)
Source: Autodata, Federal Reserve Board/
Haver Analytics
Spending outpacing income
4%
3%
2%
1%
0%
-1%
-2%
Jan-10 Sep-10 May-11 Jan-12
Source: Bureau of Economic Analysis/Haver
Analytics
Mike Carey
michael.carey@ca-cib.com
+1 212 261 7134
120
110
100
90
80
70
60
50
40
30
20
4%
3%
2%
1%
0%
-1%
-2%
Real Personal Consump Expends
(SAAR, USDbn chn 2005) % chg YoY
Real Disposable Personal Income
(SAAR, USDbn chn 2005) % chg YoY
We look for real GDP growth near 2.0% in Q212 and around 2.3% in the
second half of the year. Barring external shocks, domestic growth should
strengthen in 2013 as the headwinds facing growth from housing, balance
sheet deleveraging and policy uncertainty abate.
Consumer spending over the near term is expected to grow at a moderate
pace this year, faced with both positive and negative influences. On the
positive side, we see pent-up demand continuing to drive spending on big-ticket
items such as motor vehicles. The latter averaged a 14.5m unit sales pace in Q1
compared with 12.8m for 2011. In addition, declining energy prices are boosting
real discretionary consumer spending power. That will come in handy as there
are also forces at play that will throttle consumer spending moving forward.
Recent revisions to Q4 compensation data show that income grew much more
slowly than previously estimated and it is lagging behind the growth in spending.
That can only go on for so long, as the savings rate has been declining and
consumers, with the notable exception of student loans, are still reducing their
use of credit.
The excess supply of homes, foreclosure sales and tight lending conditions
have held back housing activity to levels well below those consistent with
the underlying economic and demographic trends. This has been an
important headwind that has led to a weak economic recovery. However, there
are signs that home prices are forming a bottom this year, and many markets will
see a pick-up in prices and in building and sales activity this year that will become
more pronounced and widespread in 2013. The improvement in housing will also
generate increased consumer spending on household durable goods to put in the
new homes.
The underlying fundamentals for capex spending, such as healthy
corporate balance sheets and rising capacity utilisation, will likely support
solid growth in business spending on equipment and software. Nonresidential
business investment spending slowed in Q1. Some of that slowdown
may reflect the end of bonus depreciation allowances last year, but we believe
that uncertainty over the outlook (for taxes, healthcare costs & global demand)
led to increasing caution on the part of businesses that will slowly lessen in the
second half. Business investment in inventories will likely make a negative
contribution to Q2 real GDP growth but play a minor role in the second half of the
year.
We do not expect a significant positive contribution to growth from real net
exports given the expected strengthening of the USD and weak economic
conditions in Europe and slower growth in emerging markets.
Inflation is expected to remain restrained this year and next with core
inflation running just below the Fed‘s 2.0% target. While inflation rose with
higher energy prices last year, the most recent declines in energy prices will put
downward pressure on the top-line inflation figures as expected by the Fed. The
slack in the labour market will take time to be absorbed with growth near its
potential rate. This suggests that wage pressures will be quite modest, and it is
difficult to get a sustained inflationary process in train without wages growth
outpacing productivity growth. In our view, commodity shock inflation is selflimiting
as it does not enter the wage-price nexus given the current structure of
the US labour market. This was not always the case historically when wage price
indexation was more prevalent. Moreover, inflation expectations remain well
anchored. The latter reflects some confidence that policymakers will respond at
the right time to the withdrawal of the current exceptional monetary policy
accommodation and avoid any potential inflationary pressures.
Macro Prospects – no. 137 – 3 rd quarter 2012 18

Fundamentals support rising capex
84
80
76
72
68
64
Source: Federal Reserve Board, Census
Bureau/Haver Analytics
Core inflation subdued
2.8%
2.4%
2.0%
1.6%
1.2%
0.8%
02 03 04 05 06 07 08 09 10 11 12
Source: BEA, WSJ/Haver
Fiscal cliff!
70000
60000
50000
40000
30000
20000
10000
Mfrs' New Orders: Nondefense Capital
Goods ex Aircraft (SA, USDm) rhs
Capacity Utilization: Ind (SA, % of
Capacity)
Deficit reduction under current law USDbn
Deficit FY12 1,171
Deficit FY13 612
Reduction in deficit 560
1) Changes in revenues 399
of which expiring „Bush Taxcuts‟ 221
2) Changes in spending -103
of which BCA automatic cuts -65
3) Other changes in rev + spending -58
0
140
120
100
80
60
40
20
02 03 04 05 06 07 08 09 10 11 12
Spot Oil Price: West Texas
Intermediate [Prior'82=Posted Price]
(USD/bbl) rhs
PCE less Food & Energy: Chain Price
Index (SA, 2005=100) % Chg YoY
Fiscal policy in dysfunctional Washington DC
As opinion polls show that economic growth is a more important election
issue than the deficit, we expect Washington officials to avoid committing
political suicide. The looming „fiscal cliff‟ at year-end 2012 will move back into
focus as the November election nears. In addition, the Federal government debt
ceiling will have to be raised again, likely early in 2013. The Congressional
Budget Office estimates that programmes slated to expire at year-end would trim
the Federal deficit by roughly 5% of GDP between calendar year 2012 and 2013.
That would likely result in a mild recession early next year if implemented. Mr
Bernanke has stated that, given the size of the fiscal cliff, the Federal Reserve
would not be able to use monetary policy to offset the negative impact on growth.
We believe that most of the current tax rates will be extended. However,
current low payroll tax rates are expected to revert back to previous
(higher) rates and emergency unemployment benefits may be reduced or
eliminated, creating fiscal drag of about 1.5-1.75% of GDP. No progress is
expected until after the November elections. Depending on the election results, a
deal could be reached during the „lame duck‟ session or early next year with the
results made retroactive to 1 January. A deal may be linked to broad income tax
reform measures that could lower some tax rates but increase revenues by
eliminating deductions and other tax preferences, thereby broadening the tax
base. The uncertainty related to economic policy outcomes will likely lead firms to
hold back on significant investment and hiring decisions until clarity improves.
The „last-minute‟ deals typical in DC are also likely to add to financial market
volatility.
Fed state of play
The Fed funds target rate was left unchanged at 0.00-0.25% in June and
conditions are expected to warrant exceptionally low levels for the Federal
Funds rate at least until late 2014. The FOMC decided to extend its current
maturity extension program through year-end by USD267bn.
The FOMC decision to increase its policy accommodation through the maturity
extension program is based on concerns that the recent slowdown in economic
activity increases the risk that the Fed will not make material progress in reducing
unemployment in line with its mandate. The Fed remains “prepared to take further
action as appropriate to promote a stronger economic recovery and sustained
improvement in labor market conditions in a context of price stability”.
Extending Operation Twist by about USD267bn buys more time for the Fed to
evaluate incoming data. It has the advantage of not expanding the Fed‟s balance
sheet and avoids some of the problems of a larger Twist programme. It shows
that the Fed is flexible in responding to evolving risks, which should be supportive
for market sentiment.
Source: Crédit Agricole CIB
Steady Fed policy
8
7
6
5
4
3
2
1
0
Appropriate Timing of Policy
Firming
2012 2013 2014 2015 2016
January April
Source: Federal Reserve Board
Macro Prospects – no. 137 – 3 rd quarter 2012 19

Q111
Q211
Q311
Q411
Q112
Q212
Q312
Q412
Q113
Q213
Q313
Q413
Japan: Mind the external risks
The Japanese economy, after stalling in the Oct-Dec quarter, yet again showed a robust recovery with +1.2% QoQ real
GDP growth in Jan-Mar. We maintain our view of strong real GDP growth for this year of +2.5%. However, one of the
lessons from the Lehman crisis for Japan is that the Eurozone government crisis is not just a misfortune of strangers.
Real GDP growth projection
2.5
2.0
1.5
1.0
0.5
0.0
-0.5
-1.0
-1.5
-2.0
-2.5
Source: Cabinet Office, Crédit Agricole CIB
Inflation outlook
0.8
0.6
0.4
0.2
0.0
-0.2
-0.4
-0.6
-0.8
-1.0
% QoQ
Source: Ministry of Internal Affairs and
Communications, Crédit Agricole CIB
International exposure of Japanese
banks (Dec 2011)
150
140
130
120
110
100
90
80
70
60
50
% YoY
Source: Bank for International Settlements
Yoshiro Sato
yoshiro.sato@ca-cib.com
+81 3 45 80 53 37
Forecasts
Forecasts
11 12 13 14
Core CPI
USDbn %
Q105 Q306 Q108 Q309 Q111
Total exposure to Portugal, Italy,
Ireland, Greece and Spain
Share of total exposure (rhs)
7.0
6.0
5.0
4.0
3.0
2.0
1.0
0.0
The Japanese economy, following a stall in Oct-Dec, yet again showed a robust
recovery with +1.2% QoQ real GDP growth. Although capex declined significantly
by -2.1% QoQ, highlighting that the uncertain economic outlook for major foreign
economies is weighing on business sentiment, other demand components
showed that domestic economic conditions look set to return to a steady recovery
path, especially with the sharp increase in public investment (+3.8% QoQ)
proving the smooth execution of the counter-disaster stimulus packages.
Although we do note that the robust economic growth was partly on the back of a
technical factor brought in by the leap-year effect (ie, one more day than usual for
economic activities), we still maintain our view that (1) steady labour market
conditions should support private consumption despite a near-term technical
adjustment due to the calendar impact, and (2) the execution of counter-disaster
stimulus packages on public investment should have positive repercussions on
private capex. These factors should lead the economic recovery, and we
continue to expect strong real GDP growth of +2.5% for 2012 followed by an
adjustment to near-potential growth of +1.1% for 2013.
Despite the steady economic recovery expected going forward, the monetary
policy stance of the Bank of Japan should continue to stay on the dovish
side. As we assume, much of the economic recovery will come from domestic
demand but we do point out that risks to the growth forecast lie to the downside
especially if the Eurozone government debt issue deteriorates more than our
main scenario assumes and/or China‟s economic adjustment turns out to be
more severe. In addition, while it should be the case that the robust growth
recorded in the Jan-Mar quarter and the stable economic recovery going forward
should contribute to a moderate rise in the inflation rate through a narrowing
output gap, our inflation forecast envisages that it will still be short of the BoJ‟s
price stability goal of +1% for the foreseeable forecast horizon. All in all, it is the
case that the present economic conditions are almost as the Bank of Japan
assumes in its main scenario, but the central bank has no choice but to stay
cautious due to the combination of external risks and only benign inflation rate. In
other words, the Bank of Japan would like to avoid having only a few choices left
by maintaining a dovish stance despite the economic recovery. We currently
expect that the Bank of Japan could decide to take further accommodative
measures (possibly expansion of the asset purchase fund) in the October
meeting where the BoJ has to present its economic outlook up to FY14.
Aside from the fact that Japan‘s debt to nominal GDP ratio is by far the
highest among developed economies, one of the major lessons from the
global financial crisis triggered by Lehman is that the Eurozone government
bond crisis is never just a misfortune of strangers. When the last global
financial crisis emerged in the form of the widespread securitised products that
incorporated subprime loans, the instant reaction from the Japanese policy
authorities was generally that it would have a minor impact, if not tiny, on the
Japanese economy given the relatively smaller exposure of domestic financial
institutions to such financial products. Looking at the current issue, according to
data from the Bank for International Settlements, Japanese banks‟ total
international exposure to troubled Eurozone countries (Portugal, Italy, Ireland,
Greece, and Spain) amounted to USD73.0bn as at December 2011 (ultimate risk
basis) – and this is only 2.7% of the total international exposure of USD2.7trn.
However, as the experience of the last crisis tells us, what really matters is not
the size of the direct exposure but rather that the kind of crisis the global
economy is currently facing takes its toll on real economic activity through
international trade. Japan recently expressed an intention to increase its stake in
the IMF, which means issuing more debt; it is also in the country‟s interest to
prevent the crisis from turning into another disaster.
Macro Prospects – no. 137 – 3 rd quarter 2012 20

Eurozone: Waiting for Godot?
The Eurozone is buying time until it can develop a common strategy and decide how much sovereignty that means
abandoning in order to put a halt to the spiralling crisis. In our scenario, that incremental approach will succeed in keeping
the Eurozone economy‟s head above water. We consider that the risk of backsliding has increased sufficiently for
politicians to take it firmly in hand and reassert the common vision, downgrading the possibility of exit of one or more EMU
members to extreme status with a very low probability.
Eurozone: public deficit forecasts
% of GDP
-2
-4
-6
-8
-10
-12
-14
-16
Source: Crédit Agricole SA
EMU: growth forecasts (%)
6
4
2
0
-2
-4
-6
-8
0
2009 2010 2011 2012 2013
Italy France Spain Portugal Greece
Source: Crédit Agricole SA
EMU: contributions to growth
2.0
1.0
0.0
-1.0
-2.0
07 08 09 10 11 12
EMU
France
Spain
%YoY
Germany
Italy
2010 2011 2012 2013
Change in inventories
Domestic demand
Net export
GDP
Source: Datastream, Crédit Agricole SA
Paola Monperrus-Veroni
paola.monperrus-veroni@credit-agricole-sa.fr
+33 1 43 23 67 55
At a time when the risk of financial meltdown leading to the break-up of
EMU is rising, the EU‘s economic authorities are trying their best to stave
off the crisis and normalise market conditions. But there is scant room for
manoeuvre, since the Treaty did not make any provision for the eventuality of one
of its member states defaulting. The future of the Eurozone is in the hands of the
politicians, who must now decide how far they should go in consolidating the
Eurozone edifice. And the electoral cycle is not conducive to a rapid lifting of
uncertainties or to the resumption of constructive dialogue between
member states. In the meantime we move slowly towards a more growthoriented
strategy, with an emphasis on structural reform (in the German version)
and also on innovative forms of quality project finance or infrastructure finance at
a pan-European level (in the French version).
Efforts made in 2011 with respect to balancing current account deficits and
fiscal consolidation have made a degree of strategic easing possible, which
should dampen any moves towards greater austerity aimed at offsetting the
cyclical deterioration in public balances. Our own scenario, which does not
buy into the idea of Greece‘s ordered and painless exit from the euro,
involves the Troika making concessions to Greece and Portugal, with
austerity plans revised to smooth adjustments over time and so make them
bearable. In core countries the combination of targeted fiscal stimulus limited to
the short term, along with more generous wage concessions, should drive a
certain dynamism in domestic demand and positively affect the Eurozone‟s
overall momentum. But the uncertainties surrounding the euro‟s future are likely
to lift only gradually, taking the Eurozone into modest recession in 2012 and
curbing the outlook for growth in 2013.
The lull in the crisis in the early part of the year helped the Eurozone as a whole
avoid falling back into recession in Q1, but this masks the increasing divergences
between the north, which continues to grow (Germany, Austria, Belgium, Finland)
or at worst stagnate (France), and the south, which is unable to extricate itself
from recession. The reactivation of the sovereign debt crisis against the backdrop
of Greece‟s political stalemate has destroyed all hope of any immediate recovery
driven by core countries. The rate of fall in the confidence surveys of
purchasing managers (PMI) gathered pace in April and May in all the
Eurozone‘s big economies. Hard data for economic activity has confirmed
this gloomy outlook, with a fall-off in orders in Q1 and an uptick in the
unemployment rate to 11% in April.
Of course, the global environment remains buoyant, with Chinese and US growth
rates still proving resilient. The EUR‟s recent depreciation should help the
Eurozone to benefit from this foreign demand. Domestic demand remains
depressed, however. Although the Eurozone‟s banking sector seems able to
meet the EBA‟s demands overall, banks on the periphery are hurting. The
recessionary environment has led to a deterioration in asset quality,
strengthening the trend towards a squeeze on credit that is inhibiting any return to
growth. The uncertainty, the funding difficulties, domestic demand
depressed by a negative fiscal impulse (1.6ppt of GDP) are enough to
encourage businesses to defer investment and inventory-rebuilding
decisions. According to our own forecasts, GDP should fall slightly in Q2 (by
0.2% QoQ), and then stagnate until year-end. The deployment of a more cooperative
strategy, with the south still taking its austerity medicine but the
north consuming more, should lead to a recovery in 2013. The very sluggish
growth regime is, at any rate, here for the duration – a sort of price to pay for
purging past financial excess.
Macro Prospects – no. 137 – 3 rd quarter 2012 21

France: Growth reprieved…
Until now, French growth has only just escaped a contraction in economic activity, posting virtually zero growth over the
past two quarters (0.0% Q1/Q411; +0.1% Q4/Q3). On the basis of the surveys, however, activity is forecast to fall slightly in
Q212 (-0.1% QoQ) and then pick up slowly thereafter (+0.2% QoQ in Q3 and Q412). The annual growth figure should
show a very marked slowdown in 2012 (0.3% compared with 1.7% in 2011), and then a slight, 1.1%, recovery in 2013.
Insee's industry survey
60
40
20
0
-20
-40
-60
-80
Source: Insee, Crédit Agricole SA
Growth and its components
6
5
4
3
2
1
0
-1
-2
-3
-4
Source: Insee, Crédit Agricole SA
Consumption and investment
10
5
0
-5
-10
-15
00 01 02 03 04 05 06 07 08 09 10 11 12
Managers' personal outlook
Managers' overall outlook
YoY contributions
to growth, %
00 01 02 03 04 05 06 07 08 09 10 11 12 13
Investment
Stock rebuilding
External trade Consumption
GDP
YoY, %
Source: Insee, Crédit Agricole SA
Forecasts
00 01 02 03 04 05 06 07 08 09 10 11 12
Household consumption
Business investment
Forecasts
Olivier Eluère
olivier.eluere@credit-agricole-sa.fr
+ 33 1 43 23 65 57
Werner Perdrizet
wener.perdrizet@credit-agricole-sa.fr
+ 33 1 57 72 08 54
The relative resilience of the French economy has been confirmed. For the
time being France is the only big European economy not to have experienced a
drop in its activity over the past six months. The economic picture is not
brilliant by any means, however. Activity is hardly moving: after rising very
slightly in Q411 (0.1% QoQ), GDP remained flat in Q112 (+0% QoQ). At the start
of the year, the economy had difficulty finding new growth drivers. Domestic
demand has slowed, partly dragged down by the fall in corporate investment,
down 1.2% QoQ. Consumption, on the other hand, has picked up slightly (+0.2%
QoQ, after +0.1%), fuelled by a sharp increase in energy spending (+4% QoQ) as
a result of February‟s cold snap. To this should be added a 0.1 point negative
contribution to growth by foreign trade due to the rebound in imports, up 0.7%
QoQ, after a drop of 1.4%, and the marked slowdown in exports (+0.3% after
+1.1%). Although exports have been driven by large-scale orders from outside
the Eurozone late last year, mainly in the aviation sector, they are fundamentally
hampered by weaker demand from France‟s main European trading partners.
Businesses‘ outlook for activity does not afford any hope of an
improvement in the short run and is still shrouded in uncertainty. The
surveys in the first two months of Q212 testify to a marked deterioration in
activity, especially by SMEs, where the index level of 44.7 in May is moving
further and further away from the activity expansion threshold of 50 and above. A
degree of caution is nevertheless called for as regards the interpretation of
this survey, in particular, by a very negative perception of the overall outlook for
production, whereas the personal outlook appears more resilient. This mismatch
shows up clearly in Insee surveys and suggests a less-marked contraction
in Q2 activity (forecast at -0.1% QoQ).
The 2012 annual growth forecast is likely to remain virtually unchanged
(relative to the previous Economics Quarterly) with a very modest uptick in
activity of 0.3%. Household consumption (+0.1% after +0.2% in 2011), the
traditional mainstay of French growth, is forecast to rise very slightly. Compare
that with its average increase of 2.3% pa between 2000 and 2007. Since then,
with the marked slowdown in the rate of increase in households‟ purchasing
power and the deterioration in the labour market, households have reined in their
spending and are being encouraged to save for precautionary reasons. Corporate
spending is also depressed due to the very limited visibility, the lack of pressure
on industrial capacity and poor profit levels. Whereas business investment was in
a catch-up phase (+4.6% in 2010; +5.3% in 2011) after falling heavily in 2009
(-13.3%), its rate of increase looks set to fall significantly in 2012 (+0.6%).
Businesses‟ inventory behaviour is more or less tracking the same cyclical trend.
In 2011, restocking had contributed +0.9ppt to growth, after contributions of -
1.2ppt in 2009 and +0.1ppt in 2010. In 2012, businesses are likely to run their
inventory levels down slightly, hence their negative contribution of 0.6ppt.
Our forecast for 2013 is surrounded by a great deal of uncertainty. Based
on an assumption of a very gradual improvement in the European
sovereign debt crisis, our central projection forecasts a very modest growth
recovery (+1.1%) sustained by a slight uptick in domestic demand. This
relative improvement is contingent on the impact of the measures to be
implemented by the new government over the next few months, the details of
which have yet to be specified. While some measures are likely to bolster the
economy (increase in the back-to-school allowance, public sector job creation,
reduction in the company income tax rate for SMEs, creation of a public
investment bank, etc), they are likely to be offset by a number of fiscal tightening
measures notably affecting high incomes, income from savings, major corporates.
Macro Prospects – no. 137 – 3 rd quarter 2012 22

2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Germany: brain teaser
Germany fundamentally knows that it has everything to lose from a break-up of the Eurozone but would like to minimise the
cost of solidarity. At the same time as it is counting on further sustained non-Eurozone demand, it has eased its economic
policy slightly, allowing itself more wage inflation and a little less austerity – its way of helping the rest of the EU.
Germany: activity in industry
70
65
60
55
50
45
40
35
30
May-06 Nov-07 May-09 Nov-10 May-12
PMI manufacturing IFO (rhs)
Source: Cesifo, Markit, Crédit Agricole SA
Germany: Labour market recovery
38
37
37
36
36
35
35
34
Source: Destatis, Crédit Agricole SA
Germany: contributions to growth
4
2
0
-2
points
millions
persons
%YoY
millions
hours
Dependent employment
Hours worked
2010 2011 2012 2013
Change in inventories
Domestic demand
Net export
GDP
Source: Destatis, Crédit Agricole SA
120
115
110
105
100
Paola Monperrus-Veroni
paola.monperrus-veroni@credit-agricole-sa.fr
+33 1 43 23 67 55
95
90
85
80
12400
12200
12000
11800
11600
11400
The +0.7% growth overhang in Q112, on the strength of a 0.5% QoQ rise in
GDP, could strengthen the German leadership‘s illusion that it can escape
the crisis that is raging everywhere else in Europe. The very positive
contribution of foreign trade (+0.9%) is driven by continued sustained demand
from outside the Eurozone, while private and public consumption, up by 0.4% and
0.2% respectively, are rising due to higher household incomes and to the room
for manoeuvre left by the spontaneous improvement in the public sector balance.
But the effects of the crisis are looming over the German economy and are
already materialising through the channel of uncertainty, as shown by the
drop in capital investment (-0.2%) and the marked slowdown in inventory
build-up (-0.4% contribution to GDP growth). It is also the resulting import
stagnation that has caused trade to make such a positive contribution. However,
the sluggishness of exports to the Eurozone (up 0.9% in Q112) makes the
German economy more dependent on trends in non-European demand (up
11.2%). Yet this is likely to feel the impact of the crisis. According to the latest
available survey data, the spread of uncertainty is translating into a deterioration
in the outlook for the US and China.
The marked fall-off in foreign manufacturing orders in April (-3.6%) and the
very sharp drop in the May PMI survey (to 49.6) indicate a contraction in
economic activity for the first time since 2009. Most other indicators,
however, remain at values corresponding more to a standstill in activity.
This was the case not only for the April fall in turnover on both domestic and
foreign markets, but also for the May IFO business survey, which saw marked
falls in industry, construction and retail that were more brutal as regards
sentiment about the current situation than about expectations. Others, such as
the IFO survey of services, were still on the upside in May. Although the
inability to repeat the growth rate observed at the start of the year seems
incontrovertible to us, Germany should escape recession. We are
forecasting that activity will stabilise in Q212 (+0.1% QoQ), with a very
gradual recovery in the second half of 2012.
Although the unemployment rate has now been stable for two months, it is at an
historical low and the number of jobless has not risen. The knock-on effect of job
creations has led to a new increase in the workforce. Although hiring prospects
are down for the first time in two years, according to the May IFO survey, on the
other hand the IAB‟s index of labour demand was up again, and working hours
are back at their pre-crisis levels. We expect no more than a stabilisation in
the unemployment rate in response to the activity slowdown, sustained by
a slight discouraged-worker effect on the workforce. The recent negotiated
wage agreements in the chemicals sector (+2.8% for 2012), public sector (+3%),
steel industry (+3%) and electrical engineering (+4%) are likely to translate into a
spurt in wages in comparison with 2011 (+1.9%). Although it is not possible to talk
about any real excessive wage awards, because the negotiated agreements
apply to only one-third of wage-earners, this boost should help sustain
consumption, helping to offset a degree of wait-and-see in investment decisions.
Crisis-induced uncertainty justifies a certain caution, but the fundamentals
remain positive, hence the slower, but still positive, rate of increase in
capital investment. Despite the deterioration in the margin ratio as a result of
wage concessions and the downturn in the productivity cycle, the investment ratio
is still a long way from returning to its pre-crisis levels, the self-financing rate is
still very high and lending conditions are still favourable.
This projection, based on a gradual dissipation of uncertainties about the euro‟s
future, posits that any electoral tactics with an eye to the general election in 2013
will not depart from the long-standing consensus on Germany‟s strategic interest
in defending the integrity of the EU at all costs.
Macro Prospects – no. 137 – 3 rd quarter 2012 23

Italy: Keeping it under control
At the mercy of the markets, the Italian economy is clinging to its hopes for the uncertain recovery in global demand as it
attempts to limit the damage done to domestic demand by a draconian austerity policy compounded with the difficulties of
the country‟s banking sector. By honouring its fiscal commitments as best it can, the government can hope to mould market
expectations and so keep risk premia at acceptable levels. Italy should, therefore, manage to preserve the quality of its
sovereign signature, but at the potential price of a long period of lacklustre activity.
General government net lending
0
-1
-2
-3
-4
-5
-6
Source: Istat, Crédit Agricole SA
Contributions to growth
3.0
2.0
1.0
0.0
-1.0
-2.0
-3.0
-4.0
% of
GDP
2007 2008 2009 2010 2011 2012 2013
Source: Istat, Crédit Agricole SA
Industrial activity
30
20
10
0
-10
-20
-30
-40
YoY %
Forecasts
Forecasts
2010 2011 2012 2013
Domestic demand ex inventory
Inventory chg
Foreign trade
GDP
% YoY
Apr-06 Oct-07 Apr-09 Oct-10 Apr-12
Industrial production
Orders to industry
The latest drop in GDP in Q112 (-0.8% QoQ, after a fall of 0.7% in Q4) is
consistent with the recessionary effects of a draconian austerity plan,
compounded with difficulties in the banking sector. The inability to use the
exchange rate to stimulate economic activity marks a sharp difference between
the situation today and that of 1992. The ambient uncertainty is not helping either,
with economic agents (consumers and businesses) mired in wait-and-see
territory, which will contribute to keeping the economy in recession throughout
2012.
Following an expected drop in all components of GDP in Q112, a
continuation of the recessionary wave in Q212, signalled by our leading
indicator (-0.7%), seems plausible and has been confirmed by several other
indicators. Q1 order books have fallen again (-5.1% QoQ, after -4.5%),
especially as regards the domestic demand component (-6.1%). Industrial
production in April was again down, by 1.9%, while the Confindustria survey
again pointed to a further drop in orders in April (-0.6% MoM). Istat‟s May
business survey was at its lowest since end-2009. The capacity utilisation rate
saw a further fall, wiping out any chance of a rebound in business investment.
The large number of SME insolvencies recorded in Q112 – the highest in the
past decade with the exception of 2009 – underscores the fragility of the
industrial fabric and the lengthy ongoing restructuring process. The
succession of earthquakes in one of the most heavily industrialised regions of
northern Italy, and the prolonged interruption in economic activity, will have an
adverse effect on industrial production beyond Q2. The only indicator to rise in
May was the PMI, which nevertheless remains on the contracting activity side of
the line.
The marked fall in household confidence in May is the outcome of a
deterioration in all components of the survey and is underpinned by a
savings ratio (12% at end-2011) at its lowest since 1995. That is not enough
to cushion the drop in real incomes and smooth the consumption profile, which
will therefore continue to adjust downwards. Only a degree of resilience in
exports to non-EU countries (aided by a depreciating EUR), combined with weak
exports, has resulted in a positive contribution from foreign trade.
The risk in connection with fiscal execution is controllable. Additional
spending cuts planned in the Spending Review, which is currently going
through Parliament, and receipts from the fight against tax evasion, which
have not been counted in the Finance Act, leave the government with a little
room for manoeuvre. That should offset, partially at least, the cyclical
deterioration in the government balance, thereby averting any request for
additional austerity measures from the EU, in a context that would justify the
application of exceptional circumstances. But, although the risk of an early
election is receding with the recent defeat of the coalition parties
supporting the technocrat government of Mario Monti, popular support is
waning and the social climate is becoming tenser. The main risk linked to our
growth forecast (-1.9% in 2012 and +0.1% in 2013) is on the downside and would
derive from poor management of the sovereign debt crisis leading to panic and
contagion, with the markets unable to discriminate and recognise Italy‟s efforts.
Source: Istat, Crédit Agricole SA
Paola Monperrus-Veroni
paola.monperrus-veroni@credit-agricole-sa.fr
+33 1 43 23 67 55
Macro Prospects – no. 137 – 3 rd quarter 2012 24

Greece: Alarming situation
The economy continues to contract sharply (Q112 GDP: -6.2% YoY) under the weight of the painful austerity measures.
The reform programme has suffered serious delays due to the prolonged election period.
Employment and unemployment
rate
25
20
15
10
5
Jan-08 Jan-09 Jan-10 Jan-11 Jan-12
Source: Hellenic Statistical Authority
Business expectations & consumer
confidence indicators
140
120
100
80
60
40
20
Source: Foundation for Economic and
Industrial Research (IOBE)
Output retail trade, private building
activity, manufacturing
10
0
-10
-20
-30
-40
Employment (annual % chg, rhs)
Unemployment rate (%)
08 09 10 11 12
Consumer Conf. Indicator (rhs)
Manufacturing
Construction
Retail Trade
Services
Annual % change of 12-month moving
average
Source: Hellenic Statistical Authority
Aikaterini Anagnostopoulou
anagnostopoulou.k@emporiki.gr
+ 30 2 10 32 10 952
4
2
0
-2
-4
-6
-8
-10
-20
-35
-50
-65
-80
-95
2008 2009 2010 2011 2012
Retail Trade
Private building activity
Manufacturing
The risk of the May 2012 elections not producing a stable government
materialised. The ensuing high uncertainty has resulted in serious delays in the
implementation of the structural reform agenda agreed upon with the Troika in the
context of the second financing programme. Additional measures to meet the
programme's targets this year have been postponed until after the new
elections on 17 June.
The deep recession is continuing and the outlook for the economy remains
fragile. Real GDP contracted by 6.2% YoY in Q112 (overall in 2011: -6.9%).
Consumer spending remains low as unemployment is soaring (February 2012
unemployment rate: 22.6%) and the business environment is anything but
conducive to undertaking new projects.
Domestic demand is undermined by receding bank financing of households
and enterprises as liquidity conditions in the economy are exceptionally
tight. Major projects in the context of the ESPA (National Strategic Reference
Framework) are stalling due to the serious shortage of either domestic or
European resources to finance them. Besides, the public investment programme
has been cut drastically in the context of economising on public expenditure.
Activity should be underpinned by net exports. The decline in imports should
account for the greatest part of net exports' positive contribution to GDP
growth this year. Despite competitiveness gains brought about by reductions in
unit labour costs, the export momentum is not particularly strong. Demand for
Greek goods from abroad may be weaker as the external economic environment
is losing strength, while the tourism sector – the country's 'heavy industry' – may
perform worse than expected this year (Q112: non-resident arrivals -11.7%, nonresident
travel spending -15.1% YoY).
Considering the deteriorating external environment and the setbacks from the
prolonged election period, the decline in activity in all of 2012 will most likely be
more intense – in the region of -6.0% – than the official projections for a GDP fall
of less than 5.0% and our previous forecast of -5.0%.
On an encouraging note, the central government deficit in the January-April 2012
period stood at EUR9.1bn versus a target of EUR11bn in the same period. This
was the result of reining in expenses as public revenue was off target (by
EUR0.5bn) due to tax evasion and also decreased consumption. However,
failing to form a government and declaring new elections is estimated to
have resulted in a more serious shortfall in tax revenue in May 2012,
jeopardising the smooth execution of the budget.
Reducing fiscal imbalances and advancing structural reforms remain key
challenges in an economy mired in recession for five consecutive years.
Downside risks are considerable. Forming a stable government which will
proceed with the needed structural reforms is crucial for the country's prospects.
Other risks relate to social reaction and the difficulties the banking sector is
facing. But, in any case, the timely realisation of the targets of the bailout
programme is being put to the test as the deep recession continues.
Macro Prospects – no. 137 – 3 rd quarter 2012 25

Apr-06
Oct-06
Apr-07
Oct-07
Apr-08
Oct-08
Apr-09
Oct-09
Apr-10
Oct-10
Apr-11
Oct-11
Apr-12
Spain: Fears accumulating
Spain‟s recession is deepening, with a more pronounced drop in activity forecast for the coming quarters. We are
forecasting a fall-off in activity in 2012 (-1.8%), which is likely to extend into 2013 (-0.8%). Despite a series of relatively
timely reforms, concerns about Spain‟s banking sector have resurfaced. Europe has been forced once again to react,
providing financial assistance of up to EUR100bn to Spanish banks.
Unemployment rate and NPL
evolution
12%
10%
8%
6%
4%
2%
0%
99 01 03 05 07 09 11
Source: Bank of Spain
Business climate
65
60
55
50
45
40
35
30
25
Source: Markit, Crédit Agricole SA
Residential home prices
Base index 100 = Q3 1996
400
350
300
250
200
150
100
Source: Halifax & CSO , Spanish MoD, Fnaim,
Crédit Agricole SA
Bénédicte Kukla
benedicte.kukla@credit-agricole-sa.fr
+ 33 1 43 23 18 89
Antonio Teixeira
antonio.teixeira@credit-agricole-sa.fr
25%
20%
15%
10%
5%
Unemployment rate (rhs)
NPL - Total
NPL - Mortgages
NPL - Consumer credit
CDL - Enterprises (incl. Real estate)
Points
Contraction in activity
PMI manufacturing
Expansion in activity
PMI services
96979899000102030405060708091011
UK Spain Ireland
Spain‟s GDP fell by 0.3% in Q112, for the second quarter running. However,
unlike Q411, the drop was mainly due to shrinking external demand. Exports fell
by 0.9% over the quarter, reflecting falling demand from the country‟s European
trading partners. Imports were also down (by 0.4% QoQ), in line with the
contraction in domestic demand. This is because domestic activity continues
to suffer from the aftershocks of the burst housing bubble, with a further
large-scale correction in construction investment, down 3.3% QoQ in Q112.
However, it is also likely that the underground economy, accounting for c.20% of
the economy, is cushioning some of the contraction in activity. Private
consumption rose by 0.1% in Q112, while the unemployment rate was a
persistent 24.1% in March 2012.
Business climate surveys point to a more pronounced drop in activity in the
quarters ahead. PMI surveys in manufacturing and services remain well below
the 50-point threshold forming the line between contraction and growth in activity.
In addition, expected orders remain gloomy, even for export orders. On the
household front, consumer confidence is falling due to concerns about the
deployment of further austerity measures. The Spanish government – forced by
the markets to deploy a draconian austerity plan in 2012 – could go back on its
promise not to increase VAT in 2013. In the first four months of the year, VAT
receipts fell 8.2% relative to the same period in 2011. The risk Spain faces is of
falling into an austerity trap, asphyxiated by both recession and public finances.
We are forecasting a drop in activity in 2012 (-1.8%), which should extend
into 2013 (-0.8%). The relative good behaviour of budgets in the autonomous
regional authorities in Q1 has reduced the risk of slippage in public finances, but
the recession and banking risk have amplified risk aversion towards Spain.
Since 2010, a process of mergers between the Cajas, with the subsequent
participation of the commercial banks, together with increased capitalisation for
the banking system, has been rolled out. In 2012, the government launched a
second raft of reforms, notably including the requirement to write additional
provisions for property assets in order to reassure the markets (EUR74bn in 2012
on top of the EUR110bn already provisioned). Despite these relatively timely
reforms, concerns about Spain‘s banks have not been put to rest. The
government‟s hesitant communication, coupled with the nationalisation of Spain‟s
fourth-biggest bank, Bankia, exacerbated fears regarding the solidity of the
banking sector, at a time when risk premiums on sovereign debt had already
moved higher (+151bp on the 10Y rate since January 2012). The ability of the
government aid programme, the FROB, to raise the funds needed to recapitalise
Bankia (EUR4.5bn already allocated by the government + EUR19bn requested
from the FROB) seemed limited given the adverse market conditions. Europe was
thus obliged to come to Spain‟s rescue, providing a bank bailout of up to
EUR100bn in order to cover recapitalisation needs. While the amount is known
and duly calibrated (IMF estimates recapitalisation needs to be EUR40-80bn), the
details of the plan remain unknown (source of funding, EFSF or ESM, degree of
seniority between creditors, financial conditions…). The bank bailout will have a
significant impact on the public debt-to-GDP ratio (an increase of up to 10% of
GDP if the entire sum is used); however, no additional austerity measures are
expected as a strong fiscal adjustment programme is already underway (reducing
the deficit to 3% in 2013). The low level of public debt before the crisis had given
the government some room for manoeuvre, but this is rapidly decreasing. The
sustainability of Spanish public debt could become an additional cause for
concern, especially if fiscal adjustment disappoints and risk premia remain high.
The real or anticipated fragility of public finances could retrograde onto Spanish
banks, which carry an increasing amount of sovereign risk.
Macro Prospects – no. 137 – 3 rd quarter 2012 26

Portugal: On hold
The outlook for the Portuguese economy is highly dependent on external factors, such as the ability of exports to offset the
fall in domestic activity, and the impact of the sovereign debt crisis on economic sentiment. We forecast a fall in GDP of
2.4% in 2012. The balance of risks is tilted to the downside, linked to the high risk of contagion from the Greek crisis.
Annual contrib. to GDP growth
6
4
2
0
-2
-4
-6
-8
Source: Crédit Agricole SA
Contribution to annual export
growth by destination
40
35
30
25
20
15
10
5
0
-5
2007 2008 2009 2010 2011 2012
Trade balance (export-import)
Chg in inventories
Investment (total)
Public consumption
Household consumption
GDP (rhs)
Source: IMF trade data, Crédit Agricole SA
Impact on prices of indirect tax
hikes (%)
5
4
3
2
1
0
-1
-2
-3
%
Dec-10 Mar-11 Jun-11 Sep-11 Dec-11
France
Germany
UK
Netherlands
EU other
Export gwth YoY %
Italy
Spain
excl EU
Apr-04 Apr-06 Apr-08 Apr-10 Apr-12
difference
Harmonised CPI
Harmonised CPI (at constant tax rate)
Source: Eurostat
Bénédicte Kukla
benedicte.kukla@credit-agricole-sa.fr
+ 33 1 43 23 18 89
4
2
0
-2
-4
The contraction in Q112 GDP was significantly smaller than expected, with a drop
of 0.1% QoQ, compared with the -0.7% QoQ forecast by our leading indicator,
and -1.3% QoQ in Q411. According to the INE, this relatively limited contraction in
overall activity is linked to a weaker-than-expected slowdown in domestic
demand. Imports also fell less than expected in Q1. As a result, the contribution
of net exports to GDP was small, despite a relatively good performance in exports
over the quarter. Moreover, following a significant run-down in inventories in
Q411, inventory changes and investment made a positive, although
temporary, contribution to GDP in Q112. Looking ahead, domestic demand
remains under increasing pressure from both fiscal tightening and the uncertain
environment linked to developments in the sovereign debt crisis. This is mostly
due to the level of fiscal adjustment forced on Portugal by its international
creditors. In 2012, Portugal has to cut its public deficit by 3.3 points of GDP
compared to its 2011 level (excluding the transfer of EUR6bn worth of pension
funds from the banking system to the state in 2011), which is comparable to that
initially required of Greece in 2011 (-2.9 points of GDP) and to that required of
Spain in 2012 (-3.5 points). Households‘ disposable income is to remain
under very strong pressure with the rise in the unemployment rate (+2.7
points since October 2011, to 15.3% in March), a fall in wages, and higher
taxes (in particular the VAT hike, which is being increased from 21% to 23%).
On the business front, emergence from the crisis will mainly depend on the
export performance of enterprises. In 2011, non-European exports accounted
for over one-third of total exports. These are encouraging figures, but they are
probably not yet sufficient to immunise Portuguese exports against the Eurozone
business climate, and Spain‟s in particular. In addition, Portugal‟s manufacturing
base is still handicapped by a lack of capital investment and very high debt ratios.
Even if the banks are reportedly trying to channel financing more towards
export businesses, their ability to lend is hampered by the necessity of
bank deleveraging. The fall in unit labour costs, together with reforms to make
the labour market more flexible and attract foreign investment, should enable
Portugal to catch up with a certain level of competitiveness and productivity.
However, as with the other fragile Eurozone countries, these measures are
progressive and will not help Portuguese exports to make up entirely for the fall in
domestic demand in the short run.
Overall, we expect the recession to continue over the coming quarters, despite
this upside surprise in Q1. However, the scale of the recession has been revised
down in 2012 from -3.6% of GDP to -2.4%. While the non-European export
performance may still surprise us on the upside, we feel that the balance of
risks is still unfavourable for Portugal if contagion from the Greek crisis
spreads. For the foreseeable future, it is unlikely that Portugal will be able to
return to the financial markets, and a further request for financial assistance from
the Troika should prove necessary before the end of 2012. For the time being,
provided the government satisfies the demands of the structural deficit criteria,
the Troika has not announced any further requirements above and beyond those
already included in the EU/IMF adjustment programme, given the scale of the
expected adjustment and the ongoing recessionary environment. In our view,
fiscal slippage remains a possibility, but should remain within the bounds of
acceptability, especially if the Eurozone eases its position by accepting a certain
degree of deviation for those overly ambitious deficit-reduction targets as a
means of preserving growth.
Macro Prospects – no. 137 – 3 rd quarter 2012 27

UK: Not in Olympic shape
The pattern of growth will remain volatile in 2012 and, with exports threatened by the European crisis and fundamentals for
domestic demand remaining weak, the UK economy is set to register a contraction this year. The persistent squeeze in real
incomes and weak labour market will likely continue to weigh on household spending before a gradual recovery next year.
UK growth – contributions
1
0
-1
Source: ONS, Crédit Agricole CIB
Compressed profit margins
20
18
16
14
Mar11 Dec11 Sep12 Jun13
GFCF
net trade
HH cons.
inventories
gov. cons.
GDP
Source: ONS, Crédit Agricole CIB
Money growth picks up but credit
remains weak or falling
25
20
15
10
5
0
-5
% QoQ
%
forecasts
00 02 04 06 08 10
corporate profit share
% YoY
00 01 02 03 04 05 06 07 08 09 10 11 12
Households
Private non financial companies
M4 (aggregate excl. OFC)
Source: BoE, Crédit Agricole CIB
Slavena Nazarova
slavena.nazarova@ca-cib.com
+ 33 1 41 89 99 18
GDP officially contracted by 0.3% QoQ in Q1 but, excluding the weakness in the
construction sector, growth in output was actually flat. Together with relatively firm
business surveys at the beginning of this year, the expenditure breakdown of
Q1 GDP data does not suggest an economy in genuine recession. Net trade
was broadly flat in Q1 and domestic consumption registered relatively solid
growth (0.5% QoQ), within which household consumption made a small but still
positive contribution. However, this was more than compensated by a sharp fall in
inventories. The latter subtracted 0.6ppt from overall growth, a similar pattern to
that observed in Q411. Abstracting from the volatility of the inventories
component, growth in total domestic demand was relatively firm (0.4% QoQ) and
even accelerated slightly relative to Q411.
In the near term, however, leading indicators argue for a prolonged contraction in
overall activity into Q2. We have revised down the growth outlook for 2012 to
-0.2% (from 0.5% previously), partially as a result of the negative carryover effect,
but we have also factored in weaker prospects for exports and have assumed
domestic demand will suffer from the fall in asset prices and higher funding costs.
Meanwhile, special factors will introduce significant volatility to growth this year:
the Diamond Jubilee celebrations will likely result in activity being partially
delayed from Q2 to Q3. Hosting the Olympic Games (27 July to 9 September) will
translate into higher expenditure on goods and services in Q3 but that effect will
be reversed in Q4.
In the medium term, we continue to believe that easing inflationary pressures will
allow for a gradual improvement in household consumption while the public
sector will continue to weigh on growth. As part of the fiscal consolidation
strategy, public sector net investment will continue to fall sharply by 2014-15.
Gross fixed capital formation fell by 0.3% QoQ in Q1 and, together with a firm
rebound in business investment of 3.6% QoQ, this suggests that the weakness in
fixed investment was concentrated in the public sector.
CPI inflation will likely continue to ease further in the coming months, though
some upside risks remain in the near term. Increases in indirect taxes on utilities
prices as well as some rebuilding of companies‟ margins will likely put pressure
on prices. Nevertheless, favourable base effects and the recent fall in commodity
prices mean that CPI inflation will continue to fall towards target while the
weakness in credit flows and the slack in the labour market speak of low
domestically generated price pressures. With the recovery projected to restart
next year, we do not forecast a significant undershoot in CPI inflation
relative to target in the medium term. Money growth has started to pick up,
from low levels, possibly leading to some easing in the downside risks to mediumterm
inflation.
UK policymakers have taken bold measures recently to try to mitigate the
impact of the Eurozone crisis on the UK economy. The response is taking the
form of additional monetary stimulus rather than fiscal measures. More asset
purchases (possibly GBP50bn) will likely be announced as soon as in July, which
would bring the APF to GBP375bn (about 25% of nominal GDP). The BoE has
also activated its Extended Collateral Term Rate Facility, through which it will
auction sterling liquidity (of at least GBP5bn per month) with a maturity of 6M. A
„funding for lending‟ scheme will be implemented jointly by the BoE and Treasury
within a few weeks, aiming to provide cheap funding to banks conditional on their
performance in lending. Although such actions will likely result in lower interest
rates (but not necessarily lower GBP), their efficiency in boosting bank loans
remains uncertain as long as the demand for credit is constrained.
Macro Prospects – no. 137 – 3 rd quarter 2012 28

Australia: Hit by external woes
Australia‟s economy grew strongly in Q1 but its outlook has deteriorated amid the ongoing Eurozone crisis and China
slowdown. We have revised down our GDP growth forecasts to 2.8% and 3.0% in 2012 and 2013, respectively. We have
revised our CPI inflation and policy rate forecasts, with one more rate cut to 3.25% likely by the end of 2012.
Weaker growth ahead
2.5
2.0
1.5
1.0
0.5
0.0
-0.5
-1.0
-1.5
-2.0
%
Australia GDP
QoQ
QoQ F
YoY (rhs)
YoY F (rhs)
00 02 04 06 08 10 12
Source: Crédit Agricole CIB, Bloomberg
KinTai Cheung
kintai.cheung@ca-cib.com
+852 28 26 10 33
%
8
7
6
5
4
3
2
1
0
-1
The Eurozone crisis and China slowdown have led to a deterioration in the outlook
for Australia. Given its high exposure to China (which represents around 23%
of exports), a slowing in Chinese growth will be a drag on the economy. On
the domestic side, the announcement of a surplus budget plan suggests less
government stimulus in the years ahead. Taking into account these
developments, we have revised down our GDP growth forecasts to 2.8% and
3.0% in 2012 and 2013, respectively. Meanwhile, strong capital expenditure
readings, alongside USD180bn of natural gas projects in the pipeline, suggest that
the resource boom will continue and investment will be a major component of
growth over coming years.
Against this backdrop, the RBA delivered aggressive rate cuts in May and June on
lower CPI inflation and rising external uncertainties. The inflation outlook
remains soft due to falling oil and food prices, although the introduction of the
carbon tax in H212 will likely push CPI inflation upwards. We have revised our CPI
forecasts and our call for policy rates, with one more rate cut to 3.25% likely by
the end of 2012. Q1 growth came in strong, suggesting less pressure on the RBA
to cut its policy rates more aggressively. Indeed, we believe that the current
market interest rate expectation, with over 100bp of rate cuts priced in, is
overdone. If our central scenario that risk appetite recovers later this year proves
correct, the correction in interest rate expectations will likely bring the AUD back to
1.08 and 1.04 by the end of 2012 and 2013, respectively.
New Zealand: Rebuilding coming soon
Considering the small size and export-oriented growth of New Zealand‟s economy, ongoing Eurozone woes continue to
pose significant downside risks to its growth. We have revised down our GDP and CPI inflation forecasts, with GDP to
grow at 2.3% and 3.3% and CPI inflation to rise by 2.5% and 3.0% in 2012 and 2013, respectively.
Reconstruction to support growth
2.0
1.5
1.0
0.5
0.0
-0.5
-1.0
-1.5
%
New Zealand GDP
QoQ
QoQ F
YoY (rhs)
YoY F (rhs)
00 02 04 06 08 10 12
Source: Crédit Agricole CIB, Bloomberg
KinTai Cheung
kintai.cheung@ca-cib.com
+852 28 26 10 33
%
6
5
4
3
2
1
0
-1
-2
-3
-4
Considering the small size and export-oriented growth of New Zealand‘s
economy, ongoing Eurozone woes continue to pose significant downside
risks to its growth. Meanwhile, the darkening outlook for trading partners‟
demand is likely to put a drag on growth, suggesting that the domestic sector will
likely play a more important role for overall growth. With favourable climate
conditions, the primary sector is expected to strengthen over the year, keeping
growth supported. At the same time, delayed rebuilding activity is expected to
kick off later this year. This will likely boost growth and raise upward inflationary
pressure later this year, although the inflation outlook remains soft on the back of
spare capacity. Overall, we have revised down our GDP and CPI inflation
forecasts, with GDP to grow at 2.3% and 3.3% and CPI inflation to rise by 2.5%
and 3.0% in 2012 and 2013, respectively.
On the policy front, the RBNZ has maintained its policy rate at 2.5% for over a
year. Recently, the RBNZ‟s stance has turned a bit dovish, noting that it would
need to reassess its policy outlook if the NZD remains strong. Given the recent
retracement in the NZD (which implies higher imported inflationary pressure), we
do not expect the RBNZ to deliver more rate cuts over the forecast period, but the
RBNZ is likely to lift its rates later than expected on the back of the deepening
Eurozone crisis. We have revised our call for policy rates and now look for a first
rate hike in Q213. At the same time, the Kiwi will likely outperform the AUD on
its upward interest rate expectation, climbing to 0.84 and 0.79 in 2012 and
2013, respectively.
Macro Prospects – no. 137 – 3 rd quarter 2012 29

Jun-08
May-11
Jun-11
Jul-11
Aug-11
Sep-11
Oct-11
Nov-11
Dec-11
Jan-12
Feb-12
Mar-12
Apr-12
May-12
Dec-08
Jun-09
Dec-09
Jun-10
Dec-10
Jun-11
Dec-11
Canada: External risks temper the outlook
The Canadian economy grew at a 1.9% pace in the first quarter; however, the composition of growth was less supportive
for the outlook. We see domestic economic conditions gradually improving but we do not expect any withdrawal of policy
stimulus by the Bank of Canada until early next year.
Slower Q1 domestic spending
8%
4%
0%
-4%
-8%
Source: Statistics Canada/Haver Analytics
Recent inflation trends
4%
3%
2%
1%
0%
-1%
Source: Statistics Canada/Haver Analytics
Employment springs back
Source: Statistics Canada/Haver Analytics
Mike Carey
michael.carey@ca-cib.com
+1 212 261 7134
8%
4%
0%
-4%
-8%
GDP at market prices (SAAR, CADm Chn
2002) % Chg - Annual Rate
Personal Consump Expend (SAAR, CADm
Chn 2002) % Chg - Annual Rate
May-08 May-09 May-10 May-11 May-12
CPI: All Items [V41690914] (SA,
2002=100) % Chg - YoY
17520
17480
17440
17400
17360
17320
17280
2.8%
2.4%
2.0%
1.6%
1.2%
0.8%
Bank of Canada Core CPI ex Indirect
Taxes [V41690926] (SA, 2002=100) %
Chg - YoY
Canada: Employment: Both Sexes,
15 Years and Over
SA, Thous
Given the lacklustre pace of growth expected south of the border, a strong
pick-up in Canadian activity appears unlikely. The Q1 real GDP figures
showed a slower pace of domestic demand with consumption slowing to a 0.9%
pace from a more robust 2.8% rate in Q4. That was not surprising given that real
retail sales were essentially flat in Q1. Investment in inventories increased,
adding a full percentage point to growth last quarter. A softer pace of consumer
spending and rising inventories raise some concerns over the pace of growth
moving ahead.
With imports outpacing exports in the first quarter, net exports trimmed 0.6
percentage points from the quarterly GDP advance. A recovery in real net
exports is likely to be soft given modest external demand and persistent
strength in the CAD. A smaller merchandise trade surplus in the first quarter
contributed to the deterioration in the Q1 current account to -CAD10.3bn. That is
2.3% of GDP down from an average of 2.8% last year. However, some
deterioration in the current account is likely next quarter given the less optimistic
outlook for exports and the recent declines in commodity prices.
Government spending and investment declined at a 2.1% pace. Given the
constraints on government budgets, growth should be modest at best. However,
residential investment surged 12.3% and business investment in non-residential
structures and equipment maintained a 4.9% growth rate in Q1.
There have been positive developments in the labour markets; after a 14,000
decline in employment in Q4, March and April racked up a 141,000 increase!
While we do not expect such gains to be continued in the months ahead, the
pick-up in hiring in the goods-producing sector was encouraging. The
unemployment rate has declined to 7.3% from 7.6% at the beginning of the year.
Inflation is expected to remain close to the Bank of Canada‘s 2% target
given ―a small degree of excess capacity,‖ according to the Bank‟s June rate
announcement. Last quarter‟s GDP growth came in below the Bank of Canada‟s
2.5% projection, suggesting that the output gap may close a bit more slowly than
estimated in the Spring Monetary Policy Report.
In April, the BoC introduced a tightening bias and indicated that ―some
modest withdrawal of the present considerable monetary policy stimulus
may become appropriate‖. In June, the forward-looking language retained the
tightening bias but toned it down by making it conditional on the extent to which
“the economic expansion continues and the current excess supply in the
economy is gradually absorbed”. We see this as reflecting the increased
uncertainty over the global outlook with heightened risk in Europe and a slower
pace of growth in emerging markets.
On balance, we see domestic economic conditions gradually improving in
the quarters ahead but we do not expect any withdrawal of policy stimulus
until early next year. The global risks emanating from Europe are likely to
persist for a while even as Europe muddles through with a mild recession. Later
this year, concerns over US growth (so important for Canada) will be linked to the
budget imbroglio in Washington and the approaching fiscal cliff. Given that risk
profile for the balance of the year, we think the Bank of Canada will see it as
prudent to wait before beginning to hike rates.
Given our view that the Fed is not likely to hike rates through 2013, when the
Bank of Canada begins to withdrawal its policy accommodation it will proceed at
a leisurely pace in 25bp moves as it raises the real policy rate out of negative
territory. We believe that the Bank will have to wait for the Fed before moving the
policy rate above 2% given concerns over potential appreciation of the loonie.
Macro Prospects – no. 137 – 3 rd quarter 2012 30

Emerging Markets: Time to use the existing leeway
EMs, and BRICs in particular, are decelerating more than expected. However, it is key to note that consumer demand is
more resilient than exports. Moreover, the existing monetary and fiscal leeway should help (in China in particular). In our
central scenario, we expect EM economic growth to slow by about 1ppt to a still-decent 5.3% in 2012.
Slowing momentum: BRICs…
20%
15%
10%
5%
0%
-5%
Source: Bloomberg, Datastream, Crédit
Agricole CIB
… and BRI (excluding China)
20%
15%
10%
5%
0%
-5%
-10%
-15%
Source: Bloomberg, Datastream, Crédit
Agricole CIB
EM real interest rates
10%
8%
6%
4%
2%
0%
-2%
06 07 08 09 10 11 12
Retail sales YoY IP YoY
Source: Bloomberg, Datastream, Crédit
Agricole CIB
Sébastien Barbé
sebastien.barbe@ca-cib.com
+ 33 1 57 87 17 23
BRIC
'BRI' (excl. China)
06 07 08 09 10 11 12
Retail sales YoY IP YoY
04 05 06 07 08 09 10 11 12
EM average real policy interest rate
EM average policy interest rate
EM average inflation (CPI YoY)
BRICs under pressure
Emerging countries have come under mounting pressure in Q2. This has been
reflected in the sharp depreciation observed in the EM universe. Even the CNY
has depreciated significantly, to an extent that has never been seen before.
China has been the first source of worries. Chinese momentum has weakened
across the board, with industrial production and investment, in particular,
softening to a significant extent. The decline in PMI indices has not helped. These
releases, as well as the absence of any strong reaction from the authorities so
far, have fuelled fears of a hard landing. Other BRICs are also facing significant
challenges. India‟s Q1 GDP growth reached a multi-year low in Q1 (5.3% – down
from more than 9% just one year earlier). The pattern is worse in Brazil while
Russian prospects are being challenged by declining oil prices.
Weak outside, more resilient inside
In a nutshell, the risk to growth in Q3 is to the downside for EMs in general and
BRICs in particular. However, interestingly, these economies are suffering
from slowing exports and the prospects of slower external demand, but
they are more resilient internally. There is actually a significant difference
between how supply and demand indicators have behaved over the past few
months. As illustrated in the side charts, industrial production (pink line) has
dropped, but retail sales (green line) has been more resilient. This is even more
so when China is excluded (a set including only Brazil, India and Russia is
considered – see second chart). This reflects that the shock is coming from
outside. Weakening global demand (mainly because of Europe, partly because of
China) has impacted the manufacturing sectors in EMs (Asia in particular). But
EM consumers seem more resilient for the time being. This may not remain
the case for too long, but at least most EMs enjoy some leeway that could be
used to limit the impact of the global shock on domestic demand.
What leeway to address the challenge?
Once again, to focus on BRICs, there is significant fiscal leeway in China,
Russia, and to a lesser extent Brazil (not so much in India). On the monetary
front, there is leeway in China and to a more limited extent in the other three
EM giants. A key point here is that China enjoys both monetary and fiscal
leeway. True, China will try to avoid overshooting, like it did in 2008-09 when a
large (too large?) stimulus was unveiled. However, we do expect a mix of greater
bank credit, lower reserve ratios and government-driven investment to deliver a
soft landing. BRICs apart, should there be a persistent problem with demand
coming from developed markets, fiscal leeway would be used to support
domestic demand. Lower oil prices will also provide some fresh air to
manufacturing sectors in EMs (Asia in particular).
Our central scenario
In a nutshell, under a central scenario whereby Greece does not exit the
Eurozone and European institutions find a way to cap the financial stress, we
expect EMs‘ economic growth to stabilise at some point in H2. We expect
EMs to decelerate by about 1ppt from 6.2% in 2011 to 5.3% in 2012. The main
risks to this scenario are: (1) the possible persistence of financial stress in
Europe; (2) a stronger-than expected deceleration in China, possibly coming from
the property price correction; and (3) improvements in the US job market falling
short of expectations.
Macro Prospects – no. 137 – 3 rd quarter 2012 31

Brazil: A clogged engine (for now)
Economic growth has failed to pick up until now, in spite of the significant level of monetary stimulus. This is probably
related to rising NPLs and the household debt burden. However, we believe that this situation will not prevent stronger
growth in H212. The BCB will probably cut the Selic rate by another 50bp at its July meeting, keeping it at this level until
the end of the year. The currency has depreciated and this trend may continue in the short term. However, more
pronounced weakening will occur only if there is a disruption to the international economic environment
Brazil: household debt service to
disposable income (%)
25
20
15
10
5
0
Source: BCB
Brazil: USD/BRL
2.2
2.1
2.0
1.9
1.8
1.7
1.6
1.5
05 06 07 08 09 10 11 12
Amortization Interest
Jan-10 Jul-10 Jan-11 Jul-11 Jan-12
Source: BCB
Industrial production
2003=100, s.a.
135
130
125
120
115
110
105
100
07 08 09 10 11 12
Source: IBGE
Industrial Production
3 per. Mov. Avg. (Industrial Production)
Most economic indicators released in Brazil during Q212 were disappointing,
particularly those related to manufacturing. These negative surprises are
occurring even though labour market conditions remain tight, fiscal policy
is not becoming more restrictive and significant monetary stimulus is being
given to the economy. Part of this can be explained by the uncertainty
surrounding the international environment. However, since economic growth in
Brazil is usually driven by household consumption and the economy is relatively
closed, the monetary stimulus should be working by now.
We believe that the main reason behind the surprisingly weak activity up
until now is the increase in the household debt burden that has taken place
over recent years, causing it to reach an all-time high at the beginning of 2012.
This in turn has led to an increase in NPLs and has created some hurdles for
PCE growth. Under these conditions, both banks and families are reluctant to
take advantage of easier credit conditions. The credit channel of the
transmission of monetary policy will remain clogged until this situation is
somehow alleviated.
There are many reasons to expect that the deleveraging of Brazilian families will
not be as painful or long-lived as in developed countries. Firstly, the labour
market is very tight, causing nominal labour income to grow by as much as 12%
on a yearly basis. Also, the average maturity of household debt is very short
(slightly above 600 days), causing it to be amortised rather quickly. Thirdly, while
total new credit concessions to households have decelerated lately, mortgages
are still surging and there is no reason to expect that this trend will not continue.
This change in the composition of credit concessions also helps to reduce the
debt burden, since mortgages have much longer maturities and lower interest
rates. Finally, the government is putting a lot of pressure on public banks to
reduce spreads and offer more credit to consumers. So, we remain optimistic
that growth will pick up in H212.
Meanwhile, inflation continues to fall and the BCB is likely to keep cutting its
policy rate. Currently, the Selic rate is at 8.5%, an all-time low, and we believe
that it will be cut again to 8% in July before the easing cycle is over.
In the FX market, the combination of lower interest rates in Brazil, aggressive
intervention, taxation of capital inflows and a deterioration of the international
scenario has finally caused the BRL to become weaker – a development that the
government has been trying to achieve for quite some time. In fact, the sharp
depreciation over the past month has led the government to intervene on the
other side, selling FX swap contracts in order to avoid problems on the inflation
front. While the intervention has worked to reverse the downward trend, if risk
aversion remains high and commodity prices fall, we could see the
currency depreciating a little bit further. However, the government has
many tools at its disposal to smooth this trend: from the possibility of further
interventions through derivatives to the dismantling of the capital controls
framework. Last but not least, it also has USD370bn in reserves. Thus, unless
there is further disruption to the international environment in the short
term, we do not expect the FX rate go higher than USD/BRL 2.15.
Vladimir Vale
vladimir.vale@ca-cib.com
+55 11 38966418
Macro Prospects – no. 137 – 3 rd quarter 2012 32

Russia: Long-term challenges front-loaded
The recent depreciation of the RUB highlights the need to diversify the economy out of oil and to modernise the country‟s
structural framework. Low inflation should allow interest rates not to be hiked too quickly, and the fiscal leeway may help to
weather the global shock as well. But Russia has to decide quickly how it wants to change its business model.
Investment and retail sales
40%
30%
20%
10%
0%
-10%
-20%
-30%
Source: Datastream, Crédit Agricole CIB
Supportive job market
25%
20%
15%
10%
5%
0%
-5%
-10%
Source: Datastream, Crédit Agricole CIB
Trade surplus and oil prices
160
140
120
100
80
60
40
20
0
01 02 03 04 05 06 07 08 09 10 11 12
Retail sales (real YoY 3mma)
Fixed investment (real YoY 3mma)
01 0203 04 0506 07 0809 10 1112
Real wages YoY (LHS) 3mma
Unemployment rate (3mma %)
01 02 03 04 05 06 07 08 09 10 11 12
Oil prices WTI (USD/b LHS)
Trade surplus (USD Bn RHS)
Source: Datastream, Crédit Agricole CIB
Sébastien Barbé
sebastien.barbe@ca-cib.com
+ 33 1 57 87 17 23
11%
10%
9%
8%
7%
6%
5%
4%
25
20
15
10
5
0
The RUB has been under strong pressure over the past few weeks, reflecting not
only the rise in global risk aversion, but also specific challenges currently facing
Russia.
Under oil’s influence
True, as with almost every single EM currency, the RUB has been sold amid a
rise in global risk aversion. However, Russia‟s case is special: Russia‟s
vulnerability comes from oil prices. The rather sharp decrease in oil prices
suggests that the record-large trade surplus recorded in the December-
March period is unlikely to be replicated immediately ahead. From more than
USD20bn on average during that period, the trade surplus may drop to about
USD15bn in coming months – still a rather large surplus, but also meaning
significantly less support granted to the currency. More fundamentally, the drop in
oil prices suggests that Russia is poised for a structural decline in its current
account surplus, given the robust momentum of domestic demand and the lack of
strong production capacity in the manufacturing and consumer goods sector.
Momentum slowing
Beyond the impact on the balance of payments, lower oil prices also challenge
future economic growth. True, GDP growth has been strong in Q1. GDP actually
increased by a stronger-than-expectations 4.9% YoY. This certainly provides
some leeway in the short term. However, the economic momentum seems to
have moderated since March, on the supply (industrial production) as well as
the demand side (retail sales). True, a rather supportive job market and rising
PMI in April-May suggest only a mild deceleration ahead, rather than a hard
landing.
What business model?
However, softening growth reminds investors that Russia needs to diversify its
economic model out of oil. True, fiscal leeway is not a problem here. Russia
displays one of the lowest government-debt-to-GDP ratios in the world, and
such fiscal leeway could be of great help in modernising and diversifying
the economy. Still, as at today the strategy to achieve this goal is not completely
clear. In particular, there seems to be an ongoing debate between those willing to
invest in the hydrocarbon sector to enhance Russia‟s role as a super-power in the
energy sector and those that would prefer the money to be spent outside of the
oil & gas industry in order to diversify the economy. Also, in both cases, the
institutional framework would have to be improved for Russia to unleash its
potential. This is, however, a medium-term task. In the short term, Russia is
vulnerable to lower oil prices, and to capital outflows, which have remained rather
large in April.
Balancing act
The reaction of the central bank to the global negative shock that seems to be
intensifying (bad US jobs reports, recent European PMIs, disappointing Chinese
numbers) is likely to be a mix of growth-supporting measures together with
attempts to limit the RUB depreciation. Hence, we recently revised down our
interest rate forecasts. We now expect the CBR to increase interest rates only
very gradually. We also acknowledge that the risk remains on the downside:
should the global shock intensify, rates could be kept stable for longer. FX-wise,
the CBR has stepped in and increased its FX interventions in order to limit the
depreciation of the RUB. It will likely continue to do so, and we expect the RUB to
stabilise against its reference EUR-USD basket in Q3 as oil prices stabilise.
Macro Prospects – no. 137 – 3 rd quarter 2012 33

India: Going through a rough patch…
Economic activity is marking time (somewhat), inflation still looks threatening, the current account deficit is widening and
the INR is in free-fall. The Indian authorities have scant room for manoeuvre. It looks like high time they re-launched the
structural reform programme, but this is difficult in the current climate. Growth is likely to disappoint in 2012/13 and to settle
durably below the 8-9% potential level to which India could aspire even quite recently.
India: INR and current account
balance
60
55
50
45
40
35
Jun-07 Dec-08 Jun-10 Dec-11
Current acct balance (12-mth aggr,
USDbn) (rhs)
USD/INR
Source: RBI, Ministry of Trade and Industry,
Reuters)
India: inflation
25
20
15
10
5
0
-5
-10
-15
Source: OEA
India: capital goods production and
car/motorcycle sales
70
50
30
10
-10
-30
Source: CSO, OEA
Sylvain Laclias
sylvain.laclias@credit-agricole-sa.fr
+33 1 43 23 65 55
0
-10
-20
-30
-40
-50
-60
-70
Jun-07 Dec-08 Jun-10 Dec-11
Wholesale prices Food products
Energy products Manuf. products
YoY, %
Jun-07 Dec-08 Jun-10 Dec-11
Capital goods production
Motorcycle sales
Car sales
Growth came out at 5.3% YoY in Q112 (the fourth in India‟s financial year), ie,
below the 6.1% of the previous quarter. This was due, first off, to the slower rate
of increase in public and private consumption. On the other hand, investment
rebounded, although the general trend was anaemic. Over 2011/12 as a whole,
GDP grew 6.7%. We need to go back nine years, to 2002/03, to find a worse
performance.
The slowdown in economic activity that began in the second quarter of
2011 thus extended into the first three months of 2012, and in a rather
marked fashion. This trend could prompt the Reserve Bank of India (RBI) to cut
its interest rates a little more in the near future, or at least to take quantitative
measures to boost the liquidity in circulation in the economy. Inflation is a
problem, however, as it is proving sticky on the downside. This is due to
supply-side constraints (and in the agriculture and agribusiness sectors in
particular), the high price of oil, and the depreciation of the INR (by around 13%
since February, taking it to a record low), rather than to an excessively
accommodative monetary policy. Even so, it limits the RBI‘s room for
manoeuvre.
The government‘s elbow room seems even more restricted. For the past
three years, the federal government‟s budget deficit has run at around 9% of
GDP. Public debt stands at 65-70% of GDP, and the growth slowdown will do
little to help bring it down. The condition of the state‟s financial accounts calls for
a degree of austerity, especially as S&P put India‟s sovereign rating on credit
watch with a negative outlook in April.
There is unlikely to be any external helping hand in the short term – not from
European demand, at any rate. Foreign investors, for their part, seem likely to
remain cautious, as the deterioration in India‟s economic climate, also marked by
a widening of its current account deficit (currently at 3.5-4.0% of GDP), together
with the lack of political visibility (see below), is having a negative and perhaps
lasting impact on foreign investor perceptions of Indian risk. Only the recent fall in
the oil price, if it lasts, could ease pressures on the price of energy products.
Because of this, Indian growth is likely to continue to disappoint over the
coming months. In any event, the latest capital goods production and car &
motorcycle sales data points to continued poor investment and consumption
levels at the start of the second quarter of the calendar year. From now on, the
central scenario is based on GDP growth close to 6.7% in 2012/13, comparable
to that in 2011/12.
Unless, that is, the weather conditions during the June-September monsoon
season result in an excellent harvest – which is highly unlikely – and unless,
above all, the government can find in this difficult economic climate a sufficiently
strong reason to clarify its policy and re-launch its programme of structural
reforms. This is not outside the realms of probability, but the currently weak
position of the Congress Party raises fears of a certain inaction or only very
modest and insufficient advances. There are even grounds for fearing a
heightening of political tension, especially as the prospect of a general election in
2014 is likely to exacerbate uncooperative behaviour within the ruling coalition.
That in turn would affect foreign investor confidence even more, undermine the
INR further and, at the end of the day, weigh further on economic activity.
India‘s economy is in a parlous state. It is up to the country‘s leadership to
react. The challenge is not only short-term, but also medium-term, namely
to safeguard both growth potential and India‘s country/sovereign risk
profile.
Macro Prospects – no. 137 – 3 rd quarter 2012 34

China: Growth target at risk
Slowing growth momentum is threatening the 7.5% policy target. Unless policymakers stimulate the economy by the
summer, it will likely be missed. We expect another 25bp in lending rate cuts and up to 150bp in RRR cuts.
Stimulus needs to happen soon to
support 2012 growth target
14
12
10
8
6
4
2
0
GDP growth
Q108 Q109 Q110 Q111 Q112 Q113
QoQ YoY
Source: CEIC, Crédit Agricole CIB
CNY appreciation has stalled
6.50
6.45
6.40
6.35
6.30
6.25
%
Source: Bloomberg, Crédit Agricole CIB
Chinese policy rates
8
7
6
5
4
3
2
Stimulus of
9 Nov 2008
recovery
takes 1 - 2
quarters
USD/CNY
Jun-11 Sep-11 Dec-11 Mar-12
%
USD/CNY
USD/CNY fixing
1Y USD/CNY NDF
Forecasts
Downward
trend reversed
-25bp
-85bp
+7.5bp
-25bp
Forecasts
Jul-08 Jul-09 Jul-10 Jul-11 Jul-12
1Y benchmark lending
1Y best lending
1Y benchmark deposit
1Y best deposit
Time for policymakers to act more decisively
The latest data is pointing to an accelerated slowdown in growth momentum.
Both demand and output indicators have weakened, and sentiment measures
point to further deceleration. At the same time, the deteriorating external
environment and slowing domestic residential real estate market are posing
additional downside risks.
The situation in Europe is particularly dangerous. Exports to the Eurozone are
shrinking, which will likely contribute to trade subtracting 1.0-1.5ppt from 2012
growth. The Eurozone crisis is also exacerbating the already sharp
slowdown in capital spending. Investment contributed only 2.7ppt to Q1 YoY
GDP growth – the least in the history of the data series – partly due to weak
direct investment coming from the Eurozone. In the first months of 2012, foreign
direct investment fell 2.4% YoY – mostly because inflows from seven key
Eurozone countries dropped 12.1%.
The housing market is another weak spot. Home prices have been falling for
almost ten months. This reflects the government‟s policy to make housing more
affordable. Recent State Council comments point to the maintenance of real
estate curbs, which implies that prices will keep declining. This is having a major
negative impact on demand and construction, and poses a bigger risk to
GDP growth than weak exports.
As a result, GDP growth is likely to slow towards 7.0% YoY in Q212 and Q312,
threatening the annual target of 7.5%. Unless the government acts soon, the
target may be missed. We believe that an extra CNY500bn in aggregate
demand is needed this year. Fortunately, policymakers have begun to act. PM
Wen said that they should give “more priority to maintaining growth”, and the
State Council announced a series of measures to stimulate demand. They
have not been billed as a Lehman-style package, because downside risks to
growth are smaller and the government does not want to grow through debt. The
announcement listed three avenues through which the stimulus will be delivered:
infrastructure investment, increase in financing, and support for consumption. We
also continue to expect another 25bp in lending rate cuts following the reduction
earlier in June, and up to 150bp in RRR cuts.
Another tool being used for stimulus is FX policy. In May, the CNY saw its biggest
monthly fall since 1994, which was policy-driven, as most of it can be explained
by weaker fixings. The slowdown in exports convinced the PBoC that it
needs to provide support for exporters, and FX policy has apparently
shifted away from gradual appreciation against the USD towards preventing
further REER gains. In an environment where the USD is rising against most
currencies of China‟s major trading partners, stabilising the REER requires a
decline in the CNY against the US unit. As long as the USD keeps rising in global
markets, the CNY will likely weaken. Gains may not resume until either the
USD falls in global markets or the Eurozone crisis eases enough to convince
policymakers that further REER appreciation will not weigh unduly on exports and
thus on GDP growth.
Source: Bloomberg, Crédit Agricole CIB
Dariusz Kowalczyk
dariusz.kowalczyk@ca-cib.com
+852 28 26 15 19
Macro Prospects – no. 137 – 3 rd quarter 2012 35

Central Europe: Hopes dashed
Central European growth has continued to deteriorate and will barely rebound in the months ahead given the renewed
European tensions. Hopefully, Central European countries are on track to meet fiscal targets, but mounting unrest may
spur a higher risk premium. Therefore, central banks‟ room for manoeuvre is limited and they should cap FX depreciation.
Growth outlook deterioration
20
15
10
5
0
-5
-10
%
Jun-08 Jun-09 Jun-10 Jun-11 Jun-12
CZK PLN HUF
Source: Bloomberg, Crédit Agricole CIB
Guillaume Tresca
guillaume.tresca@ca-cib.com
+33 1 41 89 18 47
While the CE4 rally in Q1 raised hopes, economic activity has finally deteriorated
in Central Europe with the Czech Republic and Hungary falling back into
recession. The renewed tensions within the Eurozone will cap any rebound
in the months ahead and activity will remain anaemic.
The economic background, in other words, is roughly similar to what we observed
three months ago while the outlook is worsening on the back of the European
deterioration. Exports will hardly rebound while domestic demand is hampered
by austerity measures. Thankfully, fiscal slippage seems to be minimal and
budget targets will likely be reached.
Nevertheless, as in the Eurozone, unrest is mounting, challenging the ruling
governments in the implementation of austerity. It should not be a major threat
but will likely push risk premia higher. In Romania, the new government is likely
committed to following the IMF‟s requests while the Czech government should
face a new confidence vote. Poland and Hungary seem to be more immune.
Given this backdrop, central banks‘ room for manoeuvre is limited. Economic
deceleration would call for easier monetary policy but capping FX depreciation
will remain one of the main objectives, especially in Poland (FX intervention and
tighter monetary policy) and Hungary, where the central bank should remain on
hold. Admittedly, any agreement with the IMF would ease the Hungarian central
bank‟s stance and pressure on the HUF, but we sense that the negotiation path
will be bumpy, with the government reluctant to commit to the IMF‟s demand.
Turkey: Delicate landing
For the first time in 15 years, Ankara looks like achieving a successful soft landing. However, the country is still one of the
most sensitive to a downturn in market confidence. This keeps the exchange rate highly volatile and locks in its sovereign
rating.
Turkey: activity and prices
20
15
10
5
0
-5
-10
-15
-20
-25
Moving 3-month avges
% change, YoY
2006 2007 2008 2009 2010 2011
Industrial prod.
Consumer prices (rhs)
Source: Crédit Agricole SA
Tania Sollogoub
tania.sollogoub@credit-agricole-sa.fr
+33 1 43 23 49 27
14
12
10
8
6
4
2
0
The two best indicators of a soft landing are industrial production (strongly
correlated with GDP), which fell to 1.9% in April compared with 4.4% in February,
and lending to the economy, which should dip below the 20% threshold in 2012.
The slowdown in domestic demand is contributing to a rebalancing of the
external accounts: the current account deficit came out at USD71.8bn in March
(12-month aggregate), compared with a deficit of USD78.6bn in October, while
the April trade deficit is 27% down on its 2011 level. Most importantly, the
speedy redirection of export flows reveals the flexibility in the economy
(while also benefiting from a weak TRL): the EU now accounts for only 38% of
sales compared with 49% in 2011, and trade with the Middle East is rocketing
(Iraq is Turkey‟s biggest export market after Germany). The shrinkage in the
current account deficit is reinforcing market confidence and it is easy to roll over
commercial borrowing (down for banks). Public debt levels are also reassuring,
falling to 37% of GDP in 2012.
Despite all this, currency risk remains high, and promotion to investment
grade is out of the question: the amounts to finance are too high, currency
reserves too low relative to short-term debt levels, and inflation too high, coming
in at 9.2% in May. In view of this, the central bank is acting cautiously, stabilising
interest rates (and regulating liquidity thanks to obligatory reserves). This caution
is essential, as Greek turbulence could spill over at any time, making financing
more difficult for Turkey.
Macro Prospects – no. 137 – 3 rd quarter 2012 36

South Africa: Weak ZAR and lacklustre growth
The ZAR‟s current weakness is due more to a widespread rise in risk aversion than to the South African economy‟s poor
growth performance. This has been disappointing, however, and could fall further if tensions worsen in Europe.
South Africa: ZAR and risk aversion
120
115
110
105
100
95
90
85
80
1/1/2010=100
2010 2011 2012
ZAR/USD
BRL/USD
INR/USD
EMBI Global Composite (rhs)
Source: Reuters, JP Morgan, Crédit Agricole
SA
Jean-Louis Martin
jean-louis.martin@credit-agricole-sa.fr
+33 1 43 23 65 58
500
450
400
350
300
250
200
150
100
The ZAR has deteriorated sharply in recent months, with two periods where
it plummeted – in September 2011 (down 12.6% over one month) and, after
rallying, in May 2012, this time depreciating by 9.6%. Its trajectory, especially
over the past year, correlates closely with levels of risk aversion (see graph) far
more than for other emerging currencies (the BRL, INR, MXN and COP, etc),
almost all of which have depreciated. The ZAR‟s weakness is, therefore, much
more closely linked to a general trend towards capital flight than to South Africa‟s
specific economic performance.
The Governor of South Africa‘s central bank has also said that she is not
considering intervening on the markets, arguing that this would not be an
effective use of its foreign currency reserves. She even went further, saying
that more weight should be accorded to growth prospects in any decision on
interest rates, even though the key rate has been below the inflation rate since
September 2011.
Growth prospects, however, are poor. Growth was no more than 2.1% in Q112,
after falling in each quarter in 2011 (3.7%, then 3.3%, 2.9%, 2.6%). It will be very
difficult for the South African economy to come close to 3% growth in 2012. It
therefore risks shedding more jobs (75,000 in Q1, with the unemployment rate
rising from 23.9% to 25.2%).
Mexico: Growth is helping, but what will politics do?
Mexico is traversing through acceptable economic fundamentals. The question, however, is whether or not this will be
enough to counteract current political trends that increasingly seem to be becoming tighter. Although the PRI is still the
frontrunner in the presidential election race, the PRD is closing the gap quickly.
Mexico and US IP: Carbon-copy
cycles
10
5
0
-5
-10
-15
-20
%, YoY
07 08 09 11
US IP
MX IP
Source: Bloomberg
Mario Robles
mario.robles@ca-cib.com
+1 212 261 7736
On the one hand, the Mexican economy continues to deliver good results in spite
of the global deceleration trend seen in past quarters. The close links to the US
seem to be working in its favour, as the demand for Mexican exports,
manufacturing in particular, continues to be a pillar of growth. Moreover,
auto-mobile production remains an industry that has been delivering better-thanexpected
results, in line with still-acceptable US domestic demand and
consumption trends.
On the other hand, politics – presidential race campaigning, a topic that seemed
harmless until a few weeks ago – is gaining momentum. The latest polls show
that the gap between the frontrunner, PRI, and PRD is closing at a fast pace.
During 2006, the same event created a stir in local markets as participants
punished local assets, with local rates and the MXN being the chosen vehicles to
do so. This time around, the picture is moving in the same direction according to
some polls published recently. while other surveys still do not clearly show the
same results. In any case, this is an outcome that has not been priced in until
recently and thus there may be room for volatility in the run-up to election day, 1
July.
Macro Prospects – no. 137 – 3 rd quarter 2012 37

Egypt: A welcome stabilisation in currency reserves
The stabilisation of Egypt‟s currency reserves since April, after a prolonged fall over 15 months, plus the news of a Saudi
Arabian loan, has slowed the deterioration in the central bank‟s ability to ensure exchange rate stability during summer
2012. A strong, rapid devaluation of the EGP during that period could negatively impact the political transition process.
Currency reserves and exchange
rate
40
35
30
25
20
15
10
5
0
USDbn
May-10 Nov-10 May-11 Nov-11
Currency reserves
USD/EGP (rhs)
Source: Central Bank of Egypt
USD/EGP
Riadh El-Hafdhi
riadh.el-hafdhi@credit-agricole-sa.fr
+33 1 57 72 33 35
6.1
6.0
5.9
5.8
5.7
5.6
5.5
5.4
In 2011, in the wake of the revolution, Egypt posted a record 8% of GDP
balance of payments deficit. In parallel, the country‘s foreign currency
reserves fell from the equivalent of eight months‘ imports to three between
January 2011 and May 2012. That fall raises the spectre of a rapid and perhaps
disorderly devaluation of the EGP, which is currently being supported by the
central bank at close to USD/EGP 6. For several weeks, the markets have also
been forecasting a 20% devaluation by end-2012. It is highly likely that a largescale,
rapid devaluation of the EGP would have a negative impact on the political
transition by driving already high inflation even higher and widening the budget
deficit, already forecast at close to 10% of GDP.
News of a stabilisation in the country‘s foreign currency reserves since
April has, therefore, been welcome. In the short term, this will strengthen the
central bank‟s ability to maintain, if it so wishes, a degree of stability in the EGP
during the weeks of the ongoing fragile and difficult political transition – all the
more since the central bank should receive about USD4bn in June (a Saudi loan
and proceeds from the sale of Mobinil shares). The stabilisation of the currency
reserves is also strengthening a number of other positive signals, such as the
20% rise in the stock market since January, higher exports, and the recent
success of an over-subscribed USD-denominated bond issue. At present,
financial assistance representing close to 5% of GDP would be sufficient to
avert the gloomiest crisis scenarios over the next year, but that support
would be facilitated by a successful transfer of transitional powers to a
legitimate government during the summer months. This still remains a
challenge.
Morocco and Tunisia: Serious budget difficulties in 2012
Price subsidies are pushing public budgets to record highs, and the slowdown in the European economy is affecting trade
and currency inflows. The two countries want to limit their application to the markets this year because of the high cost, but
they will have to come up with new sources of tax receipts.
Morocco and Tunisia: budget
balance
2%
0%
-2%
-4%
-6%
-8%
-10%
% GDP
2007 2008 2009 2010 2011 2012f
Tunisia: budget deficit
Morocco: Budget deficit
Source: Crédit Agricole CIB
Riadh El-Hafdhi
riadh.el-hafdhi@credit-agricole-sa.fr
+33 1 57 72 33 35
Both Morocco and Tunisia will run 2012 budget deficits of 6% of GDP. For
each country, limiting the deficit to this already high level will be something of a
challenge because growth in tax receipts is limited by unprecedented political and
social unrest – especially in Tunisia, by the economic crisis in Europe, and by a
system of food and oil price subsidies that is widening the public deficit as prices
rocket. Zero growth in Europe, the political crisis in Tunisia, and the forecast 40-
50% drop in Morocco‟s cereals production have also caused official 2012 growth
forecasts to be revised downwards, to 3% in Morocco and 2.5% in Tunisia.
The question of financing public deficits is thus one of the main challenges
facing the two newly-elected governments against degraded social
backdrops. Morocco can still rely on its foreign currency reserves that add up to
close to 5 month of imports, while Tunisia has a US guarantee to raise up to 600
million dollars. But those funds alone will not be enough for Tunisia, which wants
to pursue a stimulus policy. In addition, Morocco‟s foreign exchange reserves are
expected to take the hit of the European economic slowdown and decrease
markedly through 2012. Increased support from multilateral agencies would
seem useful for the two economies, failing any sharp falls in oil and food
prices, or the decision to implement higher taxes.
Macro Prospects – no. 137 – 3 rd quarter 2012 38

Exchange rate forecasts
21-Jun Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Jan-00
USD Exchange rate
Industrialised countries
Euro EUR/USD 1.26 1.27 1.26 1.26 1.25 1.25 1.25 0.00
Japan USD/JPY 80 81 83 87 88 89 90 0
United Kingdom GBP/USD 1.57 1.57 1.58 1.58 1.58 1.60 1.60 0.00
Sw itzerland USD/CHF 0.95 0.94 0.98 1.01 1.06 1.06 1.06 0.00
Canada USD/CAD 1.02 0.99 0.96 0.94 0.93 0.95 0.96 0.00
Australia AUD/USD 1.01 1.03 1.08 1.08 1.06 1.05 1.04 0.00
New Zealand NZD/USD 0.80 0.80 0.84 0.82 0.80 0.81 0.79 0.00
Asia
China USD/CNY 6.36 6.29 6.20 6.16 6.13 6.09 6.05 0.00
Hong Kong USD/HKD 7.76 7.77 7.77 7.77 7.77 7.77 7.77 0.00
India USD/INR 56.52 56.00 52.00 51.25 50.50 49.75 49.00 0.00
Indonesia USD/IDR 9479 9400 9200 8975 8750 8525 8300 0
Malaysia USD/MYR 3.18 3.18 3.09 3.03 2.97 2.91 2.85 0.00
Philippines USD/PHP 42.4 44.0 42.7 42.3 41.9 41.4 41.0 0.0
Singapore USD/SGD 1.27 1.29 1.25 1.23 1.21 1.19 1.17 0.00
South Korea USD/KRW 1152 1185 1140 1113 1085 1058 1030 0
Taiw an USD/TWD 29.9 29.9 29.3 29.1 28.8 28.6 28.3 0.0
Thailand USD/THB 31.7 31.5 30.9 30.5 30.1 29.7 29.3 0.0
Vietnam USD/VND 20920 21150 21300 21500 21750 22000 22250 0
Latin America
Argentina USD/ARS 4.50 4.65 4.50 4.40 4.30 4.30 4.30 0.00
Brazil USD/BRL 2.03 2.10 2.02 1.95 1.95 1.90 1.95 0.00
Mexico USD/MXN 13.73 13.40 12.60 12.40 12.20 12.50 12.40 0.00
Africa
South Africa USD/ZAR 8.26 7.80 7.70 7.50 7.40 7.40 7.40 0.00
TRY/ZAR 4.59 4.46 4.53 4.55 4.63 4.63 4.63 0.00
Emerging Europe
Poland USD/PLN 3.37 3.44 3.41 3.41 3.44 3.36 3.32 0.00
Russia USD/RUB 32.93 32.55 33.35 32.68 33.71 33.71 34.16 0.00
Basket/RUB 36.85 36.50 37.25 36.50 37.50 37.50 38.00 0.00
Turkey USD/TRY 1.80 1.75 1.70 1.65 1.60 1.60 1.60 0.00
Euro Cross rates
Industrialised countries
Japan EUR/JPY 101 103 105 110 110 111 113 0
United Kingdom EUR/GBP 0.807 0.810 0.800 0.800 0.790 0.780 0.780 0.000
Sw itzerland EUR/CHF 1.20 1.20 1.24 1.27 1.33 1.33 1.33 0.00
Sw eden EUR/SEK 8.84 9.20 9.30 9.40 9.35 9.32 9.30 0.00
Norw ay EUR/NOK 7.50 7.45 7.40 7.35 7.30 7.25 7.20 0.00
Central Europe
Czech Rep. EUR/CZK 25.56 25.30 25.00 25.00 24.60 24.60 24.60 0.00
Hungary EUR/HUF 287 300 300 300 300 290 290 0
Poland EUR/PLN 4.26 4.37 4.30 4.30 4.30 4.20 4.15 0.00
Romania EUR/RON 4.46 4.40 4.40 4.40 4.30 4.30 4.30 0.00
Source: Crédit Agricole CIB
Macro Prospects – no. 137 – 3 rd quarter 2012 39

Interest rate forecasts – developed countries
21-Jun Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Jan-00
USA
Fed funds 0.25 0-0.25 0-0.25 0-0.25 0-0.25 0-0.25 0-0.25 0.00
3M 0.47 0.40 0.40 0.40 0.40 0.55 0.60 0.00
2Y 0.30 0.40 0.75 1.30 1.80 2.15 2.50 0.00
10Y 1.63 2.25 2.50 2.60 2.75 3.20 3.50 0.00
Japan
Call 0.08 0-0.10 0-0.10 0-0.10 0-0.10 0-0.10 0-0.10 0.00
3M 0.20 0.20 0.20 0.20 0.20 0.20 0.20 0.00
2Y 0.10 0.10 0.15 0.15 0.20 0.20 0.25 0.00
10Y 0.82 0.95 1.05 1.15 1.25 1.30 1.40 0.00
Eurozone
Repo 1.00 0.50 0.50 0.50 0.50 0.50 0.50 0.00
3M 0.57 0.50 0.50 0.50 0.75 0.75 0.75 0.00
2Y (Ger) 0.14 0.10 0.30 0.70 1.00 1.50 2.00 0.00
10Y (Ger) 1.59 1.50 1.75 2.00 2.25 2.75 3.25 0.00
United Kingdom
Base rate 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.00
3M 0.92 0.80 0.75 0.75 1.00 1.00 1.00 0.00
2Y 0.29 0.35 0.55 0.95 1.25 1.75 2.25 0.00
10Y 1.75 1.90 2.10 2.30 2.55 3.05 3.55 0.00
Sw eden
Repo 1.50 1.50 1.50 1.50 1.50 1.75 2.00 0.00
Norw ay
Deposit 1.50 1.50 1.50 1.75 2.00 2.25 2.50 0.00
Canada
Overnight Target 1.00 1.00 1.00 1.25 1.50 1.75 2.00 0.00
Australia
Cash Target 3.50 3.50 3.25 3.25 3.25 3.50 3.50 0.00
New Zealand
Official Cash Rate 2.50 2.50 2.50 2.50 2.75 2.75 3.00 0.00
Note: 3M rates are interbank, 2Y and 10Y rates are government bond yields
Source: Crédit Agricole CIB
Macro Prospects – no. 137 – 3 rd quarter 2012 40

Interest rate forecasts – emerging countries
USA
Japan
Eurozone
21-Jun Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Jan-00
Fed funds 0.25 0-0.25 0-0.25 0-0.25 0-0.25 0-0.25 0-0.25 0.00
3M 0.47 0.40 0.40 0.40 0.40 0.55 0.60 0.00
2Y 0.30 0.40 0.75 1.30 1.80 2.15 2.50 0.00
10Y 1.63 2.25 2.50 2.60 2.75 3.20 3.50 0.00
Call 0.08 0-0.10 0-0.10 0-0.10 0-0.10 0-0.10 0-0.10 0.00
3M 0.20 0.20 0.20 0.20 0.20 0.20 0.20 0.00
2Y 0.10 0.10 0.15 0.15 0.20 0.20 0.25 0.00
10Y 0.82 0.95 1.05 1.15 1.25 1.30 1.40 0.00
Repo 1.00 0.50 0.50 0.50 0.50 0.50 0.50 0.00
3M 0.57 0.50 0.50 0.50 0.75 0.75 0.75 0.00
2Y (Ger) 0.14 0.10 0.30 0.70 1.00 1.50 2.00 0.00
10Y (Ger) 1.59 1.50 1.75 2.00 2.25 2.75 3.25 0.00
Asia
China 1Y lending rate 6.31 6.06 6.06 6.06 6.31 6.31 6.56 0.00
Hong Kong Base rate 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.00
India Repo rate 8.00 7.50 7.50 7.50 7.50 7.75 7.75 0.00
Indonesia BI rate 5.75 5.75 5.75 5.75 6.00 6.00 6.00 0.00
Korea Call rate 3.25 3.25 3.25 3.25 3.50 3.50 3.50 0.00
Malaysia OPR 3.00 3.00 3.00 3.00 3.00 3.00 3.00 0.00
Philippines Repo rate 4.00 4.00 4.00 4.00 4.25 4.25 4.50 0.00
Singapore 6M SOR 0.50 0.59 0.63 0.66 0.66 0.69 0.70 0.00
Taiw an Redisc 1.88 1.88 1.88 1.88 1.88 2.00 2.13 0.00
Thailand Repo 3.00 3.00 3.00 3.00 3.00 3.25 3.50 0.00
Vietnam Refinancing rate 11.00 11.00 11.00 11.00 11.00 11.50 12.00 0.00
Latin America
Argentina 3M deposit 12.60 16.00 17.00 17.00 16.00 16.00 16.00 0.00
Brazil Overnight/Selic 8.50 8.00 8.00 8.00 8.00 8.50 9.00 0.00
Mexico Overnight rate 4.50 4.50 4.50 4.75 5.00 5.25 5.50 0.00
Emerging Europe
Czech Rep. 14D repo 0.75 0.75 0.75 0.75 0.75 0.75 0.75 0.00
Hungary 2W repo 7.00 7.00 6.75 6.50 6.25 6.00 6.00 0.00
Poland 7D repo 4.75 4.75 4.75 4.50 4.25 4.25 4.25 0.00
Romania 2W repo 5.25 5.25 5.00 5.00 5.00 5.00 5.00 0.00
Russia O/N Deposit rate 4.00 4.25 4.25 4.50 5.00 5.50 6.00 0.00
O/N repo rate 5.25 5.25 5.25 5.25 5.75 6.25 6.75 0.00
Turkey 1W repo rate 5.75 5.75 6.25 6.50 7.00 7.00 7.00 0.00
Africa & Middle East
South Africa Repo 5.50 5.50 5.75 6.00 6.25 6.50 7.00 0.00
UAE Repo 1.00 1.00 1.00 1.00 1.00 1.50 2.00 0.00
Saudi Arabia Repo 2.00 2.00 2.00 2.00 2.00 2.50 3.00 0.00
Source: Crédit Agricole CIB
Macro Prospects – no. 137 – 3 rd quarter 2012 41

Economic forecasts
Real GDP (YoY. %)
CPI (YoY. %)
Current Account (% GDP)
11 12 13 11 12 13 11 12 13
USA 1.7 2.2 2.3 3.1 2.2 2.2 -3.1 -3.3 -3.1
JAPAN -0.7 2.5 1.1 -0.2 0.4 0.5 2.0 2.1 2.3
EUROZONE 1.5 -0.3 0.8 2.7 2.4 1.8 0.0 0.1 0.5
Germany 3.1 1.0 1.5 2.5 2.2 2.2 5.8 4.7 5.0
France 1.7 0.3 1.1 2.3 2.1 1.9 -2.2 -1.8 -2.3
Italy 0.5 -1.9 0.1 2.9 3.3 2.0 -3.2 -3.6 -2.5
Spain 0.7 -1.8 -0.8 3.1 1.8 1.4 -3.5 -2.8 -1.9
Greece -6.9 -6.0 -1.4 3.1 1.2 0.8 -9.4 -7.3 -6.5
Other developed countries
United Kingdom 0.7 -0.2 1.1 4.5 2.9 2.0 -3.0 -3.0 -2.5
Norw ay 1.7 2.2 2.7 1.3 1.5 1.9 13.2 16.0 15.5
Sw eden 4.0 0.8 2.3 3.0 1.6 2.0 6.7 6.9 6.7
Sw itzerland 1.8 0.2 1.5 0.2 -0.4 1.0 12.5 11.0 11.0
Canada 2.4 2.0 2.4 2.9 2.2 2.1 -2.8 -2.7 -2.7
Australia 2.0 2.8 3.0 3.4 2.8 2.9 -2.2 -3.1 -2.6
New Zealand 2.0 2.3 3.3 4.0 2.5 3.0 -4.0 -3.3 -2.5
Asia 7.3 6.6 7.3 5.9 4.1 4.6 1.8 0.8 1.0
China 9.2 8.0 8.5 5.4 3.4 4.0 2.7 1.3 1.1
Hong Kong 5.0 2.5 5.0 5.6 3.8 4.0 6.6 4.8 7.5
India 6.7 6.7 7.5 8.8 6.7 6.9 -4.2 -3.9 -3.8
Indonesia 6.5 5.9 6.0 5.4 4.6 5.0 0.2 -0.3 0.7
Korea 3.6 3.6 5.0 4.0 3.0 4.2 2.4 1.9 2.8
Malaysia 5.1 3.2 4.0 3.2 2.2 2.6 11.0 8.9 10.0
Philippines 3.7 3.5 4.5 4.8 3.0 3.8 0.2 1.2 2.0
Singapore 4.9 3.4 5.5 5.3 4.1 4.5 21.8 18.0 20.0
Taiw an 4.0 3.4 5.0 1.4 2.0 1.5 8.8 5.8 6.5
Thailand 0.1 4.5 4.5 3.8 3.2 3.3 4.9 2.5 3.8
Vietnam 5.9 4.9 6.3 18.7 9.5 10.5 -3.4 -3.6 -3.5
Latin America 3.9 3.0 4.2 5.9 5.8 6.0 -1.7 -2.0 -2.1
Argentina 8.5 3.5 4.0 11.0 12.0 14.0 -0.5 -1.1 -0.8
Brazil 2.7 2.3 4.7 6.3 5.5 5.7 -2.7 -3.0 -3.2
Mexico 3.9 3.9 3.7 3.4 3.8 3.4 -0.8 -1.1 -1.0
Emerging Europe 4.8 3.1 3.4 6.7 5.9 5.4 -0.7 -0.8 -2.0
Czech Republic 1.6 0.1 1.9 2.1 3.0 2.0 -3.7 -3.0 -3.5
Hungary 1.7 -0.5 1.6 4.0 4.3 4.0 1.9 3.2 3.8
Poland 4.4 2.7 2.8 4.3 4.0 3.0 -5.4 -4.1 -3.9
Russia 4.3 3.9 3.3 8.5 5.4 6.5 5.3 3.2 1.0
Romania 2.4 1.5 3.3 5.8 4.0 3.3 -4.1 -5.0 -5.3
Turkey 8.7 3.5 5.0 6.5 10.2 6.5 -10.0 -7.0 -7.5
Africa & Middle East 4.2 3.7 4.3 5.1 5.6 4.8 8.8 8.4 6.7
Algeria 2.5 3.0 4.0 4.5 4.5 3.0 10.0 11.0 10.5
Egypt 1.8 2.5 4.5 10.2 11.0 10.0 -2.5 -2.0 -0.5
Kuw ait 4.4 5.0 5.0 3.1 4.0 4.0 42.0 40.0 35.0
Lebanon 1.5 2.8 4.0 3.1 4.5 3.0 -27.0 -26.0 -24.0
Morocco 4.9 2.5 3.5 1.4 1.5 2.4 -8.2 -9.0 -5.9
Qatar 14.0 7.5 6.0 2.1 3.0 4.0 30.0 33.0 31.0
Saudi Arabia 7.0 5.0 5.0 5.0 4.5 3.5 25.0 23.0 16.0
South Africa 3.1 3.0 3.5 5.0 6.0 5.0 -3.3 -4.0 -4.0
United Arab Emirates 3.3 3.5 4.0 0.9 2.0 1.5 7.5 8.9 6.2
Tunisia -2.2 2.3 3.5 3.5 4.5 4.0 -7.2 -8.0 -6.5
Total 3.6 3.2 3.7 4.2 3.3 3.3 0.1 -0.3 -0.2
Industrialised countries 1.3 1.3 1.6 2.6 2.1 1.9 -1.1 -1.2 -0.9
Emerging countries 6.2 5.3 6.1 6.0 4.7 4.9 1.6 0.8 0.6
Notes:
(1) CPI – for UK: HICP; for India: wholesale prices; for Brazil: IPCA
(2) India – fiscal year ending in March
Source: Crédit Agricole CIB
Macro Prospects – no. 137 – 3 rd quarter 2012 42

Economic forecasts – quarterly breakdown
Real GDP grow th, QoQ %
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
USA (annualised) 0.4 1.3 1.8 3.0 1.9 2.0 2.4 2.2 1.9 2.4 2.9 3.0
JAPAN -2.0 -0.4 1.9 0.0 1.2 0.3 0.2 0.1 0.4 0.4 0.3 0.5
EUROZONE 0.7 0.1 0.1 -0.3 0.0 -0.2 0.0 0.1 0.3 0.3 0.4 0.4
Germany 1.3 0.3 0.6 -0.2 0.5 0.1 0.2 0.3 0.4 0.4 0.5 0.6
France 0.9 0.0 0.3 0.1 0.0 -0.1 0.2 0.2 0.4 0.3 0.4 0.3
Italy 0.1 0.3 -0.2 -0.7 -0.8 -0.7 -0.1 0.0 0.0 0.1 0.3 0.3
Spain 0.4 0.2 0.0 -0.3 -0.3 -0.7 -1.0 -1.1 -0.1 0.4 0.5 0.6
United Kingdom 0.2 -0.1 0.6 -0.3 -0.3 -0.2 0.4 0.2 0.3 0.3 0.4 0.4
Consumer prices, YoY %
USA 2.2 3.3 3.8 3.3 2.8 2.2 1.9 2.0 2.1 2.1 2.2 2.2
JAPAN -0.8 -0.3 0.2 -0.2 0.1 0.2 0.3 0.4 0.4 0.5 0.6 0.6
EUROZONE 2.5 2.8 2.7 2.9 2.7 2.5 2.3 2.0 1.9 1.6 1.9 1.9
Germany 2.2 2.5 2.6 2.6 2.4 2.3 2.1 1.9 1.8 1.9 2.3 2.6
France 2.0 2.2 2.3 2.6 2.6 2.1 1.8 1.7 1.7 1.8 2.1 2.0
Italy 2.3 2.9 2.7 3.7 3.6 3.6 3.2 2.8 2.5 1.6 2.0 1.7
Spain 3.2 3.3 2.9 2.7 1.9 2.0 2.0 1.7 1.7 0.9 1.4 1.4
United Kingdom 4.1 4.4 4.7 4.7 3.5 3.1 2.8 2.3 1.9 1.8 2.0 2.1
Unemployment rate, %
2011 2012
2013
USA 9.0 9.0 9.1 8.7 8.3 8.2 8.0 8.0 7.9 7.8 7.7 7.7
JAPAN 4.7 4.6 4.4 4.5 4.5 4.3 4.3 4.3 4.3 4.3 4.2 4.2
EUROZONE 10.0 10.0 10.2 10.5 10.8 11.0 11.2 11.3 11.3 11.3 11.3 11.2
Germany 6.3 6.0 5.9 5.6 5.5 5.5 5.5 5.5 5.4 5.4 5.3 5.3
France 9.6 9.6 9.6 9.8 10.0 10.1 10.3 10.3 10.3 10.3 10.4 10.4
Italy 7.9 8.1 8.5 9.1 9.8 10.0 10.5 11.0 11.0 10.7 10.2 9.7
Spain 20.7 20.9 22.0 23.0 23.8 24.8 25.3 25.8 26.0 26.1 26.1 26.0
United Kingdom 7.7 7.9 8.3 8.4 8.2 8.5 8.7 8.7 8.6 8.6 8.6 8.4
Source: Crédit Agricole CIB
Macro Prospects – no. 137 – 3 rd quarter 2012 43

Economic forecasts
Government balance
Public debt
11 12 13 11 12 13
USA -8.7 -7.6 -6.1 67.3 72.6 76.4
JAPAN -11.9 -9.8 -9.2 204.7 212.0 219.5
EUROZONE -4.1 -3.2 -2.3 87.2 91.4 91.7
Germany -1.0 -0.8 -0.4 81.2 82.2 80.7
France -5.2 -4.4 -3.0 85.8 89.1 89.6
Italy -3.9 -2.6 -1.8 120.1 124.4 123.8
Spain -8.9 -6.3 -4.9 68.5 80.1 85.7
Netherlands -4.6 -4.1 -2.8 65.6 69.6 70.0
Belgium -3.7 -2.8 -2.2 98.0 98.9 97.8
Greece -9.1 -6.9 -5.3 165.3 160.1 166.0
Ireland -13.1 -8.3 -7.7 108.2 115.4 120.6
Portugal -4.2 -5.2 -4.1 107.8 111.3 114.8
United Kingdom -8.3 -7.0 -6.9 85.7 91.2 95.0
Source: Crédit Agricole CIB
Commodities forecasts
Oil price forecasts
Source: Crédit Agricole CIB
End quarter prices
2012 2013
21-Jun Q3 Q4 Q1 Q2 Q3 Q4
Brent USD/bl 91.87 104 105 106 107 108 110
Metals forecasts
Precious metals
2012
2013
21-Jun Q3 Q4 Year Q1 Q2 Q3 Q4 Year
Gold USD/oz 1,598 1,500 1,475 1,540 1,405 1,340 1,260 1,190 1,299
Source: Crédit Agricole CIB
Publication Manager: Jean-Paul BETBEZE
Chief Edition: Hervé GOULLETQUER, Isabelle JOB
Production and Sub-Editor: Fabienne Pesty
Contact : publication.eco@credit-agricole-sa.fr
Crédit Agricole S.A. — Economic Research Department— 75710 PARIS Cedex 15 — Fax : +33 143 23 58 60
This publication reflects the opinion of Crédit Agricole S.A. on the date of publication, unless otherwise specified (in the case of outside
contributors). Such opinion is subject to change without notice. This publication is provided for informational purposes only. The information and
analyses contained herein are not to be construed as an offer to sell or as a solicitation whatsoever. Crédit Agricole S.A. and its affiliates shall not
be responsible in any manner for direct, indirect, special or consequential damages, however caused, arising therefrom. Crédit Agricole does not
warrant the accuracy or completeness of such opinions, nor of the sources of information upon which they are based, although such sources of
information are considered reliable. Crédit Agricole S.A. or its affiliates therefore shall not be responsible in any manner for direct, indirect, special
or consequential damages, however caused, arising from the disclosure or use of the information contained in this publication.
www.credit-agricole.com - Economic Research
Subscribe to our free online publications
Macro Prospects – no. 137 – 3 rd quarter 2012 44