February March 2009

February - March 2009
Economic
Market
Monitor
February-March 2009
Summary economic-research.bnpparibas.com
Chief Editor: Philippe dArvisenet
Page
Editorial 2
United States 7
Government to the rescue
Japan 14
Fukyo
Eurozone 19
Significant downturn in 2009
Germany 24
Can't we just skip this year?
France 28
Annus horribilis
Italy 33
A gloomy recession
Spain 37
The die is cast
United Kingdom 41
Combating recession with an almost empty purse
Financial forecasts 46
3, 6 and 12 months
Interest and foreign exchange rate 47

Recent data
Economic Research Department 48
Completed 26 February 2009
1 | Economic Research Department

Editorial February-March 2009
Editorial
The recession, which has been affecting OECD countries for several quarters, worsened at the end of the summer of 2008,
both in terms of its intensity and its scope, definitely showing that the idea of a decoupling was a mere dream. The IMFs 2009
growth forecast, released in September, projected world GDP growth of 3%, with 0.5% in the advanced economies and 6.1%
in the emerging countries. As early as October, this scenario was revised downwards: 2.2% for the global economy, -0.3% for
advanced economies and 5.1% for emerging countries. Given the messages sent at that point by cyclical indicators, these
updated projections still seemed excessively bullish. On the basis of our main scenario for advanced countries and for the
main emerging countries, the possibility of a worldwide recession was perfectly realistic. In other words, global GDP is unlikely
to grow this year and should even contract slightly (cf. Chart 1). Cyclical indicators and surveys pointed to the most severe
recession in the post-World War II period for several economies: e.g. the USA, EU, UK and Japan. In fact, GDP plummeted in
the United States, Europe and Japan in late 2008, leading to negative growth carry-over for 2009. However, while available
indicators in the United States and in Europe picked up somewhat in January, they stood at historically very low levels,
suggesting that economic activity will contract in the first quarter of 2009 as much as in late 2008.
Emerging countries have been noticeably hurt. Very open countries have seen their economies deteriorate via external trade.
This was notably the case in Asian industrialised countries such as South Korea, Taiwan and Singapore, not to mention China
of course (cf. Charts 2, 3 and 4). Commodity-exporting countries (OPEC, Russia, Brazil, etc.), which enjoyed a highly
favourable situation until mid-2008, were hit by a swift deterioration in their terms of trade after commodity prices ebbed from
the end of the summer of 2008 onwards. The exacerbation of financial strains has led to repricing of risks and capital
repatriation1 (cf. Chart 5). The slump in stock markets has resulted in a negative wealth effect (cf. Chart 6). Credit conditions
have tightened, undermining the position of countries that had to cover their current-account deficit. By consequence, some
exchange rates have drastically depreciated or, in the countries that have kept an exchange rate target, official reserves have
dramatically declined (Russia, for instance)2. Exchange rate depreciation increased the vulnerability of countries whose debt
was denominated in foreign currencies, e.g. several Eastern European countries, and in which households have taken out
mortgage loans in euros to a massive extent for instance3.
In these conditions, the IMF was forced to review downwards its 2009 forecasts once more, lowering its global growth
projection to 0.5%, down from 5.2% in 2007, as well as predicting a 2% contraction in GDP in advanced economies (versus
2.7% in 2007 and 3.4% in 2008) and 3.3% growth in emerging countries, to be compared with 8.3% in 2007 and 6.3% in 2008.
Global trade, against the backdrop of a worldwide recession, is expected to stop growing, after increasing 7.2% in 2007 and
4.1% in 2008, and in fact should decline 2.8%. Such slightly positive global growth, as projected by the IMF, still seems overly
optimistic, since it would be driven by only a few major emerging countries, while the outlook for advanced economies looks
even bleaker (cf. below).
Unsurprisingly, in such a context, the risk that protectionist temptations might reappear is back at centre stage in the economic
debate. The lessons learned from the Smoot-Hawley Act of 1930 (which imposed 50% customs tariffs and duties) mean that
similar radical measures can be ruled out as their consequences are well known: retaliation by trade partners and the
appearance of a vicious depressionary circle. The World Trade Organisation (WTO), with its 153 members, defends the
principle of free trade. President Obama has rejected the proposal of a Buy American Act for steel. Nonetheless,
protectionism can come in many guises: an undervalued exchange rate target or alternatively distortions in competition
resulting from measures aimed at supporting certain sectors of activity.
1 According to IIF projections, the current-account surplus of emerging countries, after tumbling from USD 434 bn in 2007 to USD 387 bn in 2008,
will likely not exceed USD 327 bn this year. In two years, net FDI inflows would plummet from USD 304 bn to USD 197 bn, portfolio investments in
equities would post a negative balance for the third year in a row, down to USD (2.7 bn) in 2009 from USD (89.3 bn) and USD (8 bn), respectively,
in 2008 and 2007. Net capital inflows, in the form of bank loans and debt securities, should contract from USD 632 bn in 2007 to USD 291.7 bn in
2008 and be replaced by net outflows in 2009 (USD (29.5 bn)).
2 According to the IIF, growth in official reserves in emerging countries dropped from USD 948.7 bn in 2007 to USD 444.3 bn in 2008 and will likely
dip to USD 245.9 bn in 2009.

3 See Conjoncture Emerging countries are on the verge of recession in 2009 February 2009, Guy Longueville, Franois Faure.

The persistence of financial strains has led to fresh interventions by governments, i.e. further capital injections and guarantees
of toxic assets for Bank of America and Citigroup, and yet another bailout plan in the United Kingdom. The recession has led
central banks and governments to implement massive stimulus policies. President Obamas package is the latest example.
Two questions spring to mind in view of this trend. On the one hand, is the stimulus large enough in view of both the scale of
the recession and the fact that the adjustment in the balance sheet of households is likely to drag on in countries where they
are highly indebted? On the other hand, what are the longer term risks resulting from the surge in public debts? One could
highlight Japans situation in the 1990s when the increase in public debt was merely a substitute for private (primarily
corporate) debt that was dwindling (cf. Chart 7), and underscore the fact that, generally speaking, a substantial public debt
goes hand in hand with a small private debt (cf. Chart 8).
Notwithstanding, recent developments in the euro zone, where certain sovereign spreads have drastically widened (cf.
Chart 9), show that the situation is not always that simple (cf. Box below).
Greece, Portugal and Spain have just been hit by a downgrading of their ratings, while Irelands rating has been put on
negative credit watch. Spreads on the sovereign debts of these countries, which had dropped to extremely (abnormally?) low
levels after they joined the euro, illustrated the lack of selectiveness with respect to risk. They have dramatically widened,
above all in the very last few months, even as governments are implementing stimulus plans that will lead them to tap the
market to a greater extent.
Some of these countries are characterised by a high public debt ratio, such as Italy and Greece. The others had benefited
from a period of robust growth primarily driven by a surge in private indebtedness, and this had helped keep their public debt
in check. This period has unfortunately ended, and the effects of the recession on tax revenues and the consequences of
excessive debt leverage in financial sectors are leading governments to mop up toxic debts and extend guarantees. A
deterioration in public finances is thus inevitable.
The low selectiveness witnessed in the last few years paved the way for low rates that stimulated private indebtedness. This
led to robust growth, but also an increase in imbalances (Spains current-account balance provides a striking example) and a
deterioration in competitiveness: between Q1 2000 and Q2 2008, unit labour costs rose merely 0.6% in Germany while they
surged more than 28%, in Italy as well as Spain.
Unsurprisingly, the debate on whether the euro will survive has been rekindled. Could one or several countries default and be
tempted to pull out from the EMU, even though others, currently outside the zone, are showing greater interest in joining the
EMU? In particular, such countries now keener on joining EMU have been hurt by capital outflows and a steep depreciation in
their currency. Said depreciation is weighing on economic agents indebted in foreign currencies (the euro in particular) and is
worsening the situation of their banking sectors.
If a country of the zone, and even more so several of them, were to default, nothing is planned to support them: the lack of
fiscal federalism is definitely an Achilles heel of the European Monetary Union (and one of the reasons that make it impossible
to call the euro zone an optimal currency area). California's budget woes and the premium investors demand on the securities
California issues have not, for instance, resulted in a debate breaking out as to whether it might pull out from the United
States! The provisions of the Stability Pact that are aimed, inter alia, at keeping public debt within sustainable limits and
provide room for manoeuvre in a period of turbulence were meant to play the role of a corrective restoring force. They have
now naturally been put on the backburner.
Nonetheless, one fails to see how a country could withdraw from the euro. Such a decision would result in interest rates
soaring to an extremely high level and foreign exchange risk reappearing while inflation would come back because of the rise
in import prices. The depreciation in the countrys exchange rate would lead to a sharp rise in debt servicing denominated in
euros, while savers would be primarily concerned in keeping their assets in euros. Of course, this country would also face the
legal problems stemming from changing its currency. In all likelihood, the other member countries would step forward to help
the defaulting country, while evidently imposing IMF-like conditionalities to ensure a turnaround in public finances and keep
the risk of moral hazard in check. Obviously, such aid would not necessarily be provided in the form of a fiscal stimulus
package, since this would require approval by national parliaments. By contrast, nothing would prevent the ECB from acting.
In fact, while it cannot legally subscribe to public debt when it is issued, it can buy Treasury securities on the secondary
market. Actually, the current worsening of the crisis increases the probability of a further step towards fiscal federalism.

Current strains lead to a few fundamental conclusions. First of all, the evolution of the euro zone towards a situation where it
would become an optimal currency area, something one hoped would be an endogenous process, has not occurred. This
justifies, ex post, the stance propounded in Germany in the 1990s: the euros creation had to crown a more thorough
integration process. In fact, loss of control of exchange rate policy has not led member countries to launch sufficiently wide-
ranging reforms to avoid the real appreciation of their exchange rate: the purchasing power of a euro in Spain, for example,
has constantly eroded in comparison with that of a euro in Germany. Quite on the contrary, the advantage of low rates has
resulted in sustained growth and led to a kind of benign neglect with respect to competitiveness. Any improvement in
competitiveness that is not achieved via the exchange rate implies enhanced flexibility of the economy. At least initially, this
implies sacrifices and can have a political cost (cf. the Irish referendum).
Are governments going to pay enough attention to improving their fiscal situation? Economic normalisation, as it will lead to a
decline in risk aversion, is likely to result in an upturn in long-term interest rates. Their rise will combine with two other factors
and result in the consolidation of public finances becoming even tougher. First, there is the double risk of less room for
manoeuvre for public finances (due to the increase in debt servicing), in a situation characterised by growth in expenses
stemming from population ageing (pensions, healthcare) and, second, a crowding-out effect on investment, with a negative
impact on potential growth.
Which factors could lead to economies pulling out of recession?

Obviously, they are the fiscal stimulus and accommodating monetary policies.
The decrease in interest rates, while it should not be expected to trigger a fresh wave of private indebtedness, even as priority
is given to cleaning up the financial situation (calling to mind the image of monetary policy pushing a string), leads to a
reduction in interest expenses in the countries where households are massively indebted at floating rates (UK and Spain for
instance). Likewise, a decline in long-term mortgage interest rates has resulted in a fresh wave of mortgage buybacks in the
United States.
Global liquidity is still growing at a robust pace. The fact that current-account surpluses have disappeared and there has been
an inversion in capital flows have led to growth in official reserves and monetary creation coming to a stop in many emerging
countries. Monetary creation now results from the quantitative policies conducted by the central banks of advanced countries.
The downward normalisation of inventories, which started from a high initial level, is dampening economic activity. Once
completed, the retrenchment in inventories will no longer weigh on business conditions.
Lastly, the decline in commodity prices (first and foremost energy prices) is leading to rapid disinflation that, in view of the
downward stickiness of nominal pay, is substantially boosting the purchasing power of incomes (see below). A comeback by
inflation is not on the cards. The negative output gap is widening throughout the world and will continue to do so next year.
This is because, even if growth returns, it will remain far lower than its potential in 2010.

Real GDP annual growth Industrial production

y-o-y % change y-o-y % change, 3-month moving average
8 25
Developing countries
7
13
5
4
0
2
1
-13 China Korea
-1 World
Singapore Taiwan
-2 -25
80 82 84 86 88 90 92 94 96 98 00 02 04 06 08e 02 03 04 05 06 07 08
Chart 1 Sources: IMF and BNP Paribas Chart 4 Source: national
US ISM & Asian trade growth Emerging markets : net capital flows
y-o-y % change index USD bn (*)
20 65 300
(*) change of foreign reserves - trade balance
60 250
15 200
55
150
50
10 100
45
US ISM r 40
50
5
s
Developing Asia:
manufacturing
35 -50
0
exports, volume
0 30 -100
97 98 99 00 01 02 03 04 05 06 07 08 09 00 01 02 03 04 05 06 07 08
Chart 2 Sources: IMF and ISM Chart 5 Sources: Central Banks, IMF and BNP Paribas
Exports of goods Emerging markets: spread EMBI+

volume, y-o-y % change Spread over US Treasury Note 10-year, in BPS
40 1600
1400 Composite
Latin America
20 1200 Asia
Eastern Europe
1000
0 800
600
-20 Korea 400
Singapore
Taiwan 200
-40 0
00 01 02 03 04 05 06 07 08 09 00 01 02 03 04 05 06 07 08 09
Chart 3 Source: national Chart 6 Source: JP Morgan

Japan: debt as % of GDP by sector & 10-year interest rate 10-year interest rate spread
400 8 basis points
160
Total debt 7
350 140
Italy - Germany
6 120 France - Germany
300
Spain - Germany
5 100
250 Private sector debt
4 80
200 60
3
150 40
2
General 20
100 government debt
r
10-year Benchmark rate
1 0
50 0 -20
90 92 94 96 98 00 02 04 06 08 99 00 01 02 03 04 05 06 07 08 09
Chart 7 Sources: OECD and BoJ Chart 9 Source: Reuters
Euro zone: debt as % of GDP in 2007

220
Netherlands
Ireland
200
Spain Portugal
Non financial private debt
180
160
France
140
Austria
Germany
120
Belgium Italy
Finland
Greece
100
20 40 60 80 100 120
Government debt
Chart 8 Source: European Commission
Philippe dArvisenet
philippe.darvisenet@bnpparibas.com

United States February-March 2009
United States
The recession got deeper in the fourth quarter of 2008 and will continue in the first half of 2009, as
the key drivers of consumption (employment, household wealth and credit) and business
investment (expected demand, earnings and credit) remain weak. In response, government
authorities are pursuing their economic policy initiatives (fiscal stimulus package, financial
stabilization plan and quantitative monetary policy) to support private demand and credit markets.
Government to the rescue

Recession takes turn for the worse
Q4 2008 sees sharpest Although the recession began officially in December 2007, it took a more sinister turn in the fall of
drop in GDP since 2008. This was recently confirmed by national accounts figures for the fourth quarter of last year,
1982. which revealed an annualised 3.8% q/q contraction in GDP, the sharpest drop since 1982.
Domestic demand excluding inventories fell at a substantially steeper rate and alone shaved 5.2
points off the quarter's growth. Despite the exceptional deceleration of inflation, as in Q3 real
consumption plunged as consumers were hit hard by job losses, diminished household wealth and
tighter credit. Residential investment continued to decline, for the 12th straight quarter, while
business investment suffered its sharpest contraction since 1975, against a backdrop of weaker
demand and scarcer credit. But unlike the previous quarter, the slump in domestic demand
excluding inventories was not offset by higher net exports (rising only 0.1 point), as both exports
and imports shrank at similar rates. Only the 1.3 point positive contribution of inventory changes
prevented an even sharper contraction. The increase in inventories at this point in the business
cycle suggests that companies were surprised by the speed at which demand fell. This will be a
drag on growth in the first quarter of 2009.
GDP growth
8
0
q/q saar (%)
-2 y/y (%)
-4
90 92 94 96 98 00 02 04 06 08
Source: BEA
Domestic demand The first half of 2009 will apparently be at least as weak as the second half of 2008. All of the main
likely to keep shrinking drivers of private domestic demand seem to be having problems. Consumer spending is not likely
in the first half, as to improve until the announced tax cuts start boosting disposable income (in the second quarter),
exports weaken. considering that unemployment is now rising so sharply, the negative household wealth effect is
encouraging consumers to save, and credit markets continue to be clogged. There are also
several reasons why a sharper drop in investment in the first half of the year is likely: residential
investment still shows no signs of stabilizing (see below); the correction in the commercial
property market (to be expected after such surprising strength in 2008) just got underway late last
year; the key determinants of productive investment (capacity utilization rate, earnings, uncertainty

and access to credit) are negative; and durable goods orders (a leading indicator of capital
spending) have been falling at a steep pace up until the end of last year, including in such sectors
as primary metals, which are far upstream in the manufacturing chain. There also seems to be
little chance that exports will make a strong positive contribution to growth this time, since the
other developed economies are feeling the pinch of recession just as much as the US and the
dollar has gained 16% against both a small and a large basket of currencies between mid-2008
and mid-February. Moreover, the dollar is not likely to weaken over the next few quarters,
considering the high level of risk aversion and capital repatriation and the Federal Reserve's
massive purchases of dollar-denominated securities. Even if GDP is practically stable in the
second half of the year, if we assume GDP contraction at an annualised rate of 4% or more in the
first half of the year (which is plausible) this would mean annual negative growth of about 2.5% to
3.0% in 2009. This would be the sharpest drop since the data series began in 1947.
Non-farm payroll and unemployment

700 2.5
600 Non farm payrolls (m/m 3mma, thousands)
Unemployment rate (%, inverted) 3.0
500
400 s 3.5
4.0
300
200 4.5
100 5.0
0 5.5
-100 6.0
-200
-300
r 6.5
-400 7.0
-500 7.5
-600 8.0
90 92 94 96 98 00 02 04 06 08
Source: BLS
Labour market goes from bad to worse

Most jobs lost since The 598,000 decrease in non-farm payroll in January was in line with the 597,000 and 577,000
1974. jobs lost in November and December respectively and was the sharpest drop since 1974. As a
result, half of the 3.572 million jobs lost since January 2008 have disappeared over the past three
months (1.771 million). The decline in weekly working hours to 33.3 also reflects the weaker
demand for labour and is the lowest figure since the data series began in 1964. Unsurprisingly,
the jobless rate has risen sharply since last fall, from 5.8% in July to 7.6% in January, which is
near the previous decade's peak of 7.8%, in 1992. Although the labour market's substantial
deterioration can be mostly attributed to the spreading of the recession to the services sector
(which had been relatively spared up to last summer), manufacturing and construction payrolls
have also continued to shrink at an increasing pace. Since there are currently no signs that the
economy will soon stabilize or improve, we are of course quite likely to see more net job losses
over the coming quarters, although probably not as many as in Q4. So far, the surge in
unemployment has not had a significant impact on hourly wages, which in January were still
growing 3.9% yoy. Nonetheless, we expect wages to moderate. Along with the sharp decline in
energy prices, the strength of nominal wages has been one of the few things supporting
household consumption.

Property and credit markets still weak

No respite for the Even though the sharp downturn in property markets began three years ago, there are still no
housing sector. signs of a pick-up. The housing sector in particular continues to decline at a rapid pace. Not only
did residential investment contract at an annualised rate of 23.6% q/q in Q4 2008 (the 12th
straight quarter of contraction), leading indicators continue to point downward. Housing starts and
building permits have been falling steadily from July to January and are now at their lowest levels
since these figures were first compiled in 1960. The housing market index of the National
Association of Home Builders (NAHB) also reached a record low of 8 in January, before edging up
to 9 in February. It should be noted that a reading of 50 indicates a stable market. Despite having
fallen by 79% since their peak in January 2006, housing starts continue to significantly outpace
new-home sales and to reflect the stubborn imbalance between supply and demand. The latter
may also be partly attributed to foreclosures, which by depressing the prices of existing homes
makes them more attractive in comparison. We therefore expect residential investment to continue
to slump in coming quarters.
Housing starts
2.75 100
2.50
s Housing market index (NAHB) r
Housing starts (million, annualised) 90
2.25 80
2.00 70
1.75 60
1.50 50
1.25 40
1.00 30
0.75 20
0.50 10
0.25 0
90 92 94 96 98 00 02 04 06 08
Sources: US Department of Commerce and NAHB
Banks continue to The credit market, which is another key contributor to the current recession, also shows no signs
tighten lending of improving. The Federal Reserve's last quarterly Senior Loan Officer Opinion Survey, released
standards, as the in January, continues to show a tightening of lending standards and weaker demand from both
demand for credit consumers and businesses for all types of credit, including mortgage, consumer, commercial and
slumps. industrial and commercial property loans. The only somewhat positive note is that respondents
were often a bit less negative in January than in October, reflecting a less systematic tightening of
lending standards and a less marked drop in demand. This may be explained by the fact that most
of the tightening had already been accomplished and also by the recent initiatives of US
authorities. The declining demand for credit may also be partly attributed to the efforts of some
economic agents (particularly households) to reduce their debt burden. This suggests that
stimulating the supply of credit might not be enough to revive credit markets.
Almost $800 billion worth of fiscal stimulus

Tax cuts will be rapidly, The US economy could begin to stabilize in the second half of the year, as the recent stimulus
but only partially, measures take effect. In response to the recession's increasing severity, Congress passed the
effective. proposed $787 billion stimulus package, which represents 5.5% of GDP (to be spent over various
years). Two thirds of this amount ($500 billion) will be spent on transportation, Internet and energy
infrastructure and on various social programs (health care and unemployment), while the
remaining $287 billion will consist of tax cuts for households and businesses. On the spending
side, $120bn will be allocated to infrastructure, while $54bn will be put into a stabilisation fund
aimed at supporting states facing cash shortages. When it comes to tax reductions, households

will receive a new tax credit (making work pay tax credit) of up to $400 per person and $800 per
family in 2009 and 2010 (amounting to about $115bn). Millions of households will also be exempt
from paying the Alternative Minimum Tax (costing about $70bn), and various targeted tax credits
will be introduced (on education expenses and first home purchases) or enhanced (earned
income tax credit, child tax credit). Over the near term, most of the economic stimulus will be
provided by tax cuts and the increased social spending. These measures have the advantage of
being immediately effective, unlike investment expenditures. On the other hand, some of the tax
credits and cuts will not be spent but saved, especially given the sharp rise in unemployment and
the deterioration of household wealth. On the basis of survey data, M. Shapiro and J. Slemrod
estimate that two thirds of the 2008 tax credit were used to reduce debt and increase savings1.
Economic stimulus spending

Infrastructure
120
Medicaid
Aid for states
Other spending
Tax cuts
287
87
54
239.4
Source: Reuters
Financial Stabilization Plan

Toxic asset purchases, Although the government's fiscal stimulus package is necessary, it does little to address the
more support to credit challenges facing the financial sector. This is the objective of the Financial Stabilization Plan,
markets, capital which targets four types of actions. 1) Setting up a $500 million (and perhaps $1 billion) public-
injections and relief for private investment fund to purchase toxic assets from banks. 2) Extending, from $200 billion to
over-indebted $1,000 billion, the Federal Reserve's Term Asset-backed Securities Loan Facility (TALF) to
households. support holders of ABS backed by consumer and small-business loans, and expanding its scope
to include commercial mortgage-backed securities. The Treasury would commit $100 billion to this
program. 3) Injecting more capital into banks in exchange for preferred shares that could be
converted into common stocks, provided that these banks can pass a "stress test" to ensure they
will be viable lenders and also agree to various constraints related to such things as dividends,
executive pay and acquisitions23. 4) Measures are being introduced to support indebted
households in the mortgage market, worth a total of $275bn ($50bn from TARP, $25bn financed
by Fannie Mae and Freddie Mac, and $200bn invested by the Treasury in Fannie Mae and
Freddie Mac to strengthen their capital and help them finance this plan). Indebted households who
cannot currently refinance their mortgage with Fannie Mae and Freddie Mac because the value of
their home has fallen too much (so that the loan represents more than 80% of the value of their
property) will have access to this option (4 to 5 million households could be eligible). Loans to
borrowers facing repayment difficulties will also be restructured to limit repayments to 31% of
1Shapiro M. et Slemrod J. (2009), Did the 2008 tax rebates stimulate spending?, American Economics Association Annual Meetings, January
2009.
2 The government could convert part of the $45 billion of convertible bonds it owns in Citigroup into ordinary shares. Potentially, the government
stake in Citigroup could rise to 40%.

3 This would involve stress-testing the capital of institutions with more than $100bn of assets. If more capital is needed, banks will have to turn to the
private sector in the first instance then, if that is not successful, they will be able to call on the government.

income (3 to 4 million households could be eligible). These loan modifications will be covered
jointly by lenders and the Treasury.
Few details provided. Wall Street responded poorly to this plan, given the few concrete details that Treasury Secretary
Geithner provided during his presentation and the risk that some of the measures may not be that
effective. Although the majority of analysts certainly believe that purchasing toxic assets from
banks (the initial idea behind the TARP initiative) is a good idea and that there are obvious
advantages to a public-private partnership (to avoid accusations of overpaying for these assets
and overburdening public finances), the lack of details as to how the public-private investment
fund would function and the incentives granted to private investors have made this idea seem a bit
vague. The question of how much to pay for assets of doubtful quality has not been answered,
since holders of these assets will ask for more than the current market price. As for strengthening
TALF, this should be effective in supporting securitization and therefore the supply of credit. There
is a risk however that under current conditions the demand for credit may not be strong enough to
enable this measure to be fully effective in boosting the number of car, commercial and industrial
loans, for example, given the current slump in planned car purchases by consumers and in
business investment projects.
Monetary policy makes room for "credit easing"

Zero inflation. After falling heavily over the three preceding months (October to December), consumer prices
recovered slightly in January (+0.3% m/m). This increase was caused by the first rise in energy
prices since July (+1.7% m/m) as well as a slight recovery in prices excluding food and energy
(+0.2% m/m). However, this rise has not prevented the inflation rate from falling further, to its
lowest level since 1955 (to 0.0% from 0.1%). Given the statistical base effect (sharp price rises
between March and July 2008) and the moderating influence of the recession on prices (limited
corporate pricing power) and wages (weak wage negotiating power), the decline in inflation is set
to continue over the next few months. The inflation rate is likely to be clearly negative in the
second and third quarters of this year.
Consumer prices
7%
Headline index (y/y, %)
6% Core index (ex. food and energy) (y/y, %)
5%
4%
3%
2%
1%
0%
-1%
90 92 94 96 98 00 02 04 06 08
Source: BLS
Interest rates no longer At its latest meeting the Fed's Federal Open Market Committee (FOMC) decided to maintain its
sufficient to support target range for fed funds at 0 to 0.25% and will now focus its monetary policy actions on
credit markets. supporting credit markets, an approach referred to as "credit easing". These measures mainly
consist in directly injecting liquidity into key credit markets (commercial paper, consumer and
small business loans) and purchasing longer-term securities, such as agency debt and securities
backed by mortgage loans. These measures will continue to be implemented over the coming
months and further actions cannot be excluded. For example, the FOMC is still considering the
possibility of purchasing long-term Treasury bonds.
Long-term interest There was little change in key money market spreads from mid-January to mid-February, with 3-
rates increase. month Libor-Fed funds and Libor-OIS spreads both holding close to 100 bp. Although these levels
are still high, they are well below where they were last fall. Yields on government bonds are up

from a low of 2.10% at the end of last year to over 2.80% at mid-February. This trend, which
threatens to undermine the Federal Reserve's efforts to support the credit market (mortgage rates
have risen a bit) could tip the balance and convince the Fed to start purchasing Treasuries.
10-year government bond yields

5.50
10-year Treasury bill, yield (%)
5.00
4.50
4.00
3.50
3.00
2.50
2.00
J F MA MJ J A S ON D J F MA MJ J A S O N D J F
2007 2008 2009
Source: Reuters
Jean-Marc Lucas
jean-marc.lucas@bnpparibas.com

United States : Economic Forecasts

Carry-
2006 2007 2008 2009(1) 2010(1) over for
2009*
Components of Growth (y/y)
Total GDP 2.8 2.0 1.3 -2.7 0.3 -0.6
Domestic Demand ex Stocks 2.6 1.8 0.0 -2.9 0.4 -1.2
Private Consumption 3.0 2.8 0.3 -1.3 1.9 -1.1
Public Spending 1.7 2.1 2.9 1.2 1.3 1.3
Fixed Investment 2.0 -3.1 -4.8 -16.1 -8.8 -4.9
Stocks (cont. to Growth) 0.0 -0.4 -0.2 -0.1 0.3 -
Exports 9.1 8.4 6.5 -7.5 -2.6 -3.0
Imports 6.0 2.2 -3.3 -7.8 0.5 -4.1
Inflation & Labour (y/y)

Consumer Prices 3.2 2.9 3.8 -0.5 2.1
Consumer Prices, ex. F + E 2.5 2.3 2.3 1.1 0.8
Monthly Wages 3.1 3.4 3.0 2.4 2.1
Unemployment Rate (%) 4.6 4.6 5.7 8.3 9.6
Employment 1.8 1.1 -0.4 -2.5 -1.3
Activity & Savings
Industrial Production (y/y) 2.2 1.7 -1.8 -8.6 -1.7
Savings Ratio (%) 0.7 0.6 1.7 2.1 1.6
External Trade
Trade Balance, USD bn -753 -700 -680 -620 -640
Current Account, USD bn -788 -731 -690 -640 -640
% of GDP -6.0 -5.3 -4.8 -4.5 -4.4
Source: BNP Paribas, Economic Research Department (1) BNP Paribas Forecasts * Assuming 0 growth from Q1 2009
United States: Quarterly Profile

Q4-08 Q1-09(1) Q2-09(1) Q3-09(1) Q4-09(1) Q1-10(1)
GDP q/q annualised -3.8 -5.5 -3.3 -0.6 -0.1 0.7
GDP y/y -0.2 -1.8 -3.3 -3.3 -2.4 -0.8
Private Consumption y/y -1.3 -2.1 -2.4 -0.9 0.5 1.7
Fixed Investment y/y -8.5 -11.9 -16.3 -18.9 -17.3 -14.3
Exports y/y -0.6 -3.6 -9.0 -10.7 -6.4 -5.6
Imports y/y -7.0 -8.9 -8.6 -8.6 -5.0 -2.5
Industrial Production y/y -6.1 -8.7 -10.1 -8.9 -6.6 -4.1
CPI y/y 1.5 -0.2 -0.9 -1.7 0.9 2.1
Source: BNP Paribas, Economic Research Department q/q quarter-on-quarter change y/y year-on-year change (1) BNP Paribas Forecasts
United States: Financial Variables

2006 2007 2008(1) 2009(1) 2010(1)
Financial Variables
General Government Budget. USD bn -248 -162 -455 -1600 -1200
% of GDP -1.9 -1.2 -3.2 -11.2 -7.4
2006 2007 2008 2009(1) 2010(1)

Interest & FX Rates(2)
Fed Funds 5.25 4.25 0.14 0.25 0.25
3-month Rate (%) 5.36 4.82 1.43 1.10 1.00
10-year Bond Yield (%) 4.70 4.04 2.22 3.25 4.50
EUR/USD 1.32 1.46 1.40 1.24 1.35
USD/JPY 119 111 91 100 108
Source: BNP Paribas, Economic Research Department (1) BNP Paribas Forecasts (2) End of Period

Japan February-March 2009
Japan
The crisis hitting Japan gathered momentum at the end of 2009, highlighting the persistent
weaknesses of an economy that depends to a large extent on its external trade. The recovery will
be no more than gradual, as neither the monetary authorities nor the government have any
substantial room for manoeuvre to support activity.
Fukyo
The recession worsened at the end of last year
GDP plummeted in Q4 GDP cratered in the fourth quarter of 2008. According to its initial estimate, it fell 3.3% q/q (down
08. 12.7% in annualised terms), its most severe contraction since the first oil shock, dropping for the
third quarter in a row, declining 0.9% in Q2 and 0.6% in Q3. It contracted 0.7% on a year-on-year
basis, its first slump since 1998 when it fell 1%. All surveys and data suggest activity will not pick
up rapidly. As the growth carry-over in Q4 08 was already negative for this year (- 3%), GDP
should tumble 6% in 2009, its steepest contraction since the series began in 1955. It should
rebound to a slight extent in 2010, gaining around 0.5%.
GDP: small or large fukyo?

11
-1
-3
-5
71 75 79 83 87 91 95 99 03 07
Sources: ESRI and Cabinet Office
The industrial sector As was widely expected, industrial output plummeted in Q4, nose-diving nearly 12% q/q. In full
has been hit head-on year 2008, industrial output fell 3.2%. The transport material and electronic spare parts sectors
by the global recorded the sharpest declines. This deterioration is primarily accounted for by the contraction in
slowdown. demand in the United States, Europe and Japan By contrast, involuntary building of inventories
curbed the decline in GDP in the fourth quarter, by making a positive contribution to growth of 0.4
percentage point. In the manufacturing sector, inventories grew 3.6% q/q in Q4, their most robust
growth since June 1991. In the first quarter, destocking should weigh on activity.
Outlook should In the near term, prospects for the industrial sector are not improving. According to the METI,
improve only very industrial production should continue to contract at a rapid pace in January as well as February,
gradually. dipping 9.1% and 4.7% m/m, respectively, and could drop by close to 20% q/q in Q1, if it remains
flat in March. Moreover, leading indicators and surveys, both national and international, are hardly
promising for the next few months. The Japanese manufacturing PMI fell further in January,
dropping from 30.8 to 29.6. After remaining under the 50 mark, which separates phases of
expansion and contraction in activity, since March 2008, it has sunk to a new all-time low. In the
medium term, industrial production will likely pick up gradually from the second half onwards, once
the adjustment in inventories has ended.

The upturn has not lasted long for households

Household Private consumption fell in the fourth quarter, down 0.4% q/q, and lowering growth by 0.2
consumption will not percentage point. In 2008, it grew 0.6% (+0.8% in 2007). Its growth carry-over for 2009 was
hold up to the already negative in Q4 08, at -0.4%. We expect private consumption to decline 1.4% this year, its
deterioration in labour worst fall since the start of the series in 1981. It is unlikely to rebound rapidly. The deterioration of
market conditions. the labour market, combined with the Nikkeis slump that are hurting household confidence (down
to 26.7 in December, its lowest reading since 1982), should dent household spending.
Drop in retail sales

50 4
3
45
2
40 1
0
35 -1
-2
30
s Household confidence r -3
Retail sales (y/y, %)
25 -4
03 04 05 06 07 08 09
Sources: METI and Cabinet Office
Despite the inevitable In December 180,000 jobs have been shed, primarily in industry and transport. The
decrease in the labour unemployment rate rose from 3.9% to 4.4%, its highest level since January 2006, despite the
force, unemployment is decline in the labour force (-45k). The job offers to applicants ratio fell further, dropping from 0.76
on the rise. in November to 0.72 in December, its lowest level since November 2003. All in all, the
unemployment rate could be close, even above, 5% until year-end.
Business investment Business investment, shrinking for the fourth quarter in a row plummeted 5.3% q/q in Q4 08, its
should contract sharpest fall since Q4 2001. It cut growth by 0.8 percentage point in Q4. It dropped 3.9% in 2008,
noticeably in 2009. its steepest decline since 2002. Its growth carry-over for 2009 was already negative in Q4 08 at -
6.1%. We expect a meltdown in investment this year (-16.4%), after four years of uninterrupted
growth. This is because core private machinery orders1 nose-dived 16.7% q/q in Q4. Moreover,
assuming they remain flat throughout the first quarter, they would already have dropped 7.1% in
Q1. Given the contraction in global demand, the uncertainty weighing on prospects of a recovery
and the excess capacity accumulated in the last few years, in particular in the manufacturing
sector, companies are bound to reduce or even cancel their investment programmes for the
foreseeable future.
Exports are hurt by the Exports plummeted 13.9% q/q, their steepest decline since the beginning of the series in 1985.
worldwide crisis. According to customs data, exports shipped to Asia, down 22.9%, and Europe, down 25.9%,
contracted the most. The automobile (-24% q/q) and electronics (-22.7% q/q) sectors were the
worst affected. Exports are likely drop by more than 23% in 2009. Furthermore, imports, for their
part, grew to a slight extent in the fourth quarter, climbing 2.9% q/q and 1.1% in 2008. This year,
they should contract sharply, reflecting the slump in domestic demand. All in all, Japan can be
expected to post in 2009 its first trade deficit since 1980.
1 Core private machinery orders, i.e. excluding orders for ships and from electric power companies, are a reliable leading indicator of private
investment.

Meltdown in exports (y/y, 3-month moving average)

60
40
20
-20
US
-40 Asia
Japan
-60
86 88 90 92 94 96 98 00 02 04 06 08
Source: Ministry of Finance
The impact of the Since October, Prime Minister Taro Asos government has launched two stimulus plans. Their
measures presented by aggregate amount totals JPY 6,600 billion, or 1.4% of GDP, and all additional expenditure has
the new government been decided between October and January. They mainly consist in extending certain tax
will be no more than provisions, due to expire in March 2009 in order to 1/ restore confidence in the financial markets:
muted on growth. temporary easing of prudential rules on banks shareholders equity, purchases of banks
preference shares, extension of tax exemptions on investments in equities for 3 years; and 2/
shore up household consumption: reimbursement of income tax, regardless of the level of
increase, increase in tax exemptions on mortgage loans, cut in motorway toll fees. Furthermore,
under the plan, the government will give its guarantee to loans to small businesses, via the
extension beyond 30 March 2009 of a special purpose vehicle set up to recapitalise regional
financial companies, which will extend loans to credit associations and cooperative credit
companies, the main financial intermediaries for small businesses, and pay further subsidies to
regions and municipalities, to the tune of JPY 1,000 billion and JPY 600 billion, respectively. All in
all, the budget deficit should exceed 7% this year.
The spectre of deflation In December, inflation ex unprocessed food fell to 0.2% from 1% in November, back to its level of
has reappeared. late 2007. Its deceleration is primarily accounted for by the drop in prices of petroleum products,
down 17.4% y/y in December after falling 3.8% y/y in November. Ex food and energy, prices
remained flat in year-on-year terms. Their slowdown will likely persist and the year-on-year
change in the national index could slip back under zero as early as January, down to -0.1%, its
first drop since September 2007. It should even average -1% in 2009.
As monetary orthodox The central bank had already revised its growth and inflation projections downwards, before the
policies are no longerpublication of Q4 GDP data. It forecast a 2% decline in fiscal year 2009 (running from April 2009
efficient to March 2010) and 1.5% growth in 2010; while predicting inflation would fall 1.1% in 2009 and
0.4% in 2010.
the BoJ has decided After cutting its overnight call rate by 20 basis points to 0.10% in December, the BoJ has chosen
new quantitative to implement unconventional policies. It is now carrying out firm purchases of commercial paper
monetary easing (its credit line totals JPY 3,000 billion), in order to help companies manage the changeover of the
measures. end of the fiscal year in terms of their cash flow. It is studying the possibility of buying other
private-sector securities, such as corporate bonds. Moreover, a joint operation with the
government aimed at curbing the yens appreciation (the monetary authorities last intervened in
the foreign exchange market in 2005) and the resumption of the programme of purchases of
equities from financial institutions to shore up the stock market are also realistic options. Lastly,
should the risk of a spiral deflationary become threatening once again, the central bank could
support the governments counter-cyclical fiscal policy by carrying out substantial purchases of
long-term JGBs.

Yen appreciating The yen has continued to appreciate since the economic and financial crisis worsened. At the end
further. of last year, it climbed to its highest level in 13 and a half years, against the dollar and the euro, at
87 and 114, respectively. The repatriation of Japanese funds and the unwinding of carry trade
positions primarily account for this trend, even as the Japanese banking system seems to have
been relatively spared by the crisis affecting the global financial system. In the absence of a swift
cyclical upturn and a rise in inflation expectations, the yen will likely further appreciate. It is not
expected to start weakening until mid-year (USD/JPY at 100, by end 2009).
..
Exchange rate
170 40
80
155 r
USD/ JPY inverted sca le
l ) 120
140
160
125 200
240
110
280
95
320
s JPY trade-weighed exchange rate
80 360
70 74 78 82 86 90 94 98 02 06
Sources: Bank of Japan and Reuters Ecowin
Strains in the money Long-term interest rates nose-dived between mid-October and late December, with the
market persist. announcement of the initial quantitative measures decided by the BoJ. The yield on the 10-year
JGB fell below .20% at the end of 2008, its lowest level since 2003, before coming back towards
1.30% in mid-February. Short-term interest rates, in turn, eased. In particular, rats on 3-month
Treasury Notes fell by around 50 basis points between mid-October and mid-February, down to
0.25%, while the 3-month Tibor also dropped but by only around 15 bp, down to around 0.70%,
underscoring the persistence of strains in the interbank market.
Caroline Newhouse-Cohen
caroline.newhouse-cohen@bnpparibas.com

Japan: Economic Forecasts

2006 2007 2008 2009(1) 2010(1) Carry-over
for 2009*
Total GDP 2.0 2.4 -0.7 -5.8 0.6 -3.0
Private Consumption 1.5 0.7 0.5 -1.4 0.0 -0.4
Private Housing Investment 0.5 -9.3 -6.9 2.0 -1.5 5.8
Private Capital Investment 2.3 5.8 -3.7 -16.4 -2.2 -6.1
Public Consumption 0.4 2.0 0.8 -0.1 0.0 -0.2
Public Fixed Investment -5.7 -7.0 -6.5 1.3 1.4 -0.2
Stocks (Cont. to Growth) 0.4 0.3 -0.2 -0.9 -2.0 -
Exports 9.7 8.4 1.7 -23.9 2.5 -10.6
Imports 4.2 1.5 1.1 -13.4 -4.1 2.2
Consumer Prices (excluding fresh food) 0.1 0.0 1.4 -1.0 0.4
Monthly Wages 0.2 -0.7 0.6 -0.6 0.0
Employment 1.5 0.9 0.0 -0.4 -0.4
Activity 4.5 2.8 -3.1 -15.0 3.5

Industrial Production (y/y) 3.3 3.0 2.5 2.3 2.6
Savings Ratio (%)
External Trade
Trade Balance, JPY trn 9.5 12.5 2.1 -6.6 -2.2
Current Account, JPY trn 19.8 25.0 16.3 15.8 14.4
% of GDP 3.9 4.8 3.2 3.5 3.2
Source: BNP Paribas, Economic Research Department (1) BNP Paribas Forecasts *Assuming 0% growth from Q1 2009
Japan: Quarterly profiles

Q4 08(1) Q1 09(1) Q2 09(1) Q3 09(1) Q4 09(1) Q1 10(1)
GDP, q/q -3.3 -2.9 -0.4 0.5 -0.1 0.1
GDP, y/y -4.6 -7.6 -7.1 -6.1 -2.9 0.2
Private consumption, y/y. -0.2 -1.3 -0.9 -1.5 -1.4 -1.0
GFCF, y/y -11.1 -15.3 -179 -17.6 -14.7 -10.0
Private housing investment ,y/y 12.7 4.5 6.0 2.0 -3.5 -0.5
Public Consumption, y/y -0.1 -0.1 -0.1 -0.1 -0.1 -0.1
Public fixed investment, y/y -5.3 1.3 1.3 1.3 1.3 1.3
Exports, y/y -12.8 -25.5 -31.4 -28.4 -8.5 -4.0
Imports, y/y 2.9 -8.8 -13.4 -14.8 -17.2 -8.0
Industrial production, y/y -14.4 -25.5 -31.4 -28.4 12.7 6.0
CPI (core), y/y. 0.2 -0.3 -2.0 -2.0 -0.1 0.5
Source : BNP Paribas, Economic Research Department, q/q : quarter-on-quarter change; y/y : year-on-year change (1) BNP Paribas Forecasts
Japan: Financial Variables

2006 2007 2008(1) 2009(1) 2010(1)
Financial Variables
Money Supply (M2 + CD) (y/y) 1.1 1.6 2.1 1.5 1.5
General Government Budget, JPY trn -21.4 -23.2 -35.4 -38.6 -41.2
General Government Budget, % of GDP -4.5 -4.5 -6.9 -7.8 -8.5
Interest & FX Rates(2) 2006 2007 2008 2009(1) 2010(1)

O/N call Rate (%) 0.25 0.50 0.10 0.10 0.10
3-month Rate (%) 0.57 0.85 0.75 0.75 0.65
10-year Benchmark (%) 1.69 1.50 1.20 1.30 1.90
USD/JPY 119 111 91 100 108
EUR/JPY 157 163 127 124 146

Eurozone February-March 2009
Eurozone
The Eurozone is facing an unprecedented downturn. GDP fell by 1.5% in Q4 08, the worst
performance on record, after contracting in the previous two quarters. Perspectives for 2009 are
rather poor, with business surveys in early 2009 pointing to further contraction in activity.
Accommodating fiscal and monetary policy should limit the downward momentum.
Significant downturn in 2009

Ugly fourth quarter 2008
GDP fell significantly in The eurozone has been hit by a severe downturn. The flash estimate of Q4 GDP growth provides
Q4 08. a clear illustration of the severe recession sweeping the region. After contracting by 0.2% q/q in
the previous two quarters, GDP fell by 1.5% q/q in Q4, the worst performance on record, while the
y/y growth rate turned negative for the first time since early 1990s. In 2008, GDP rose by 0.7%, a
marked deceleration with respect to the previous year (+2.6%).
Private consumption, The GDP breakdown will be released on 5 March. However, available surveys and hard data for
investment and export Q4 08, suggest that the weakness was broad based. Private consumption might have contracted
should have dragged in Q4 as the volume of retail sales dropped by 0.9% q/q in Q4, the worst performance since the
down growth. creation of the EMU, while new car registrations fell by more than 8% over the same period.
Moreover, consumer confidence continued to erode over recent months, reaching a new low in
January. Investment surely contracted as well. The uncertainty surrounding the global economy
undermined business confidence. As demand is falling, firms do not need to expand their
production capacity. Along this line, the European Commission survey reported that capacity
utilization in the manufacturing industry was 75% in January, the lowest rate on record. Foreign
orders have decreased drastically in recent months, a clear sign of the slowdown in global
demand. As a result exports might have contracted in Q4.
GDP contracted sharply in Q4 and survey data Fewer capacity constraints are curbing investment
suggests this trend could last for several quarters
2.0 1.50 7 85
1.5 1.25 6 84
1.0 1.00 83
5
0.5 0.75 83
4
0.0 0.50 82
3 81
-0.5 0.25
-1.0 0.00 2 80
1 79
-1.5 -0.25
78
-2.0 -0.50 0
78
-2.5
-3.0 Economic sentiment (standardized)
Composite PMI: activity (standardized)
-0.75
-1.00
-1
-2
s GFCF y/y %
r
77
Cap. utilisation 76
-3.5 GDP (q/q %, r.h.s) -1.25
-3 75
-4.0 -1.50 96 97 98 99 00 01 02 03 04 05 06 07 08 09
98 99 00 01 02 03 04 05 06 07 08 09
Source: Eurostat Sources: Eurostat and European Commission
Several quarters of contracting activity

The manufacturing The manufacturing sector has been the most affected by the financial turmoil. After contracting in
sector is hit harder the previous four months, industrial production fell again in December, by 2.6% m/m, the worst
than services. performance in almost 20 years. Output in the most cyclical sectors, such as intermediate and
capital goods, fell significantly, reflecting the relatively high exposure of investment to the credit
crisis. Production of durable (mainly) and non-durable consumer goods also dropped markedly, a

clear sign of soft household demand. Activity in the services sector should also have fallen, albeit
at a slower pace. Admittedly, the services PMI plunged significantly over the recent months, but to
a lower degree than the manufacturing PMI.
A contracting activity in Business survey deteriorated further in early 2009. The Composite PMI for activity, a good leading
Q1 09. indicator of GDP growth, fell to a new all-time-low in February (flash estimate). The European
Commissions Economic Sentiment Indicator continued to decline in February, albeit at a slower
pace than in previous months. These are signs that the recovery is not imminent.
Poor investment Despite some improvement in lending conditions (see below), we do not expect investment to
perspectives. recover in the near future. Business confidence is at its lowest level on record and given the
uncertainty, firms are scaling back their investment and hiring plans.
Deteriorating labour Labour conditions deteriorated significantly over the recent months. In Q3 08, employment fell by
market conditions will 0.1 q/q, after rising by 0.2% and 0.3% over the previous two quarters. The yearly comparison
limit consumption. reflected the slowdown in job creation, with employment growth decelerated to 0.7% in Q3 from
1.3% in the previous quarter. Survey data reported that this trend will likely continue in the months
ahead. Both the PMI and European Commission survey of employment intention fell further in
January. At 8% in December, the unemployment rate is set to increase markedly over next
months and to end the year above 10%. Under these conditions, in the near term consumers are
unlikely to boost spending in spite of fiscal stimulus, falling inflation and improved lending
conditions. Lastly, a non-negligible negative wealth effect should weigh on consumer plans. In
January, the Eurostoxx 50 was down by more than 41%y/y.
Significant GDP For the moment, the major support for growth will come from public spending, given the weakness
contraction in 2009. of both foreign and private domestic demand. In 2009, we expect GDP to fall by around 3%.
Ongoing Disinflation
Inflation is heading Inflation continues to soften, reaching 1.1% in January, from 1.6% in December, a low point in
south. almost ten years; moreover this trend is likely continue in the near future. In particular, core
inflation should moderate over next months. Sluggish demand, surging unemployment and lagged
effects of past drops in commodity prices will push core inflation down. On this line, survey data
reported that firms selling price expectations are at their lowest levels on record. From 1.8% in
December 2008, core inflation should then end this year slightly above 1%. The decline of
headline inflation should be more marked. Indeed, favourable energy and food related base
effects and lower commodity prices could drag down inflation significantly. In 2009 we expect
inflation to average 0.4% and 1.3% next year.
Headline and core inflation Energy and oil prices

%
Headline inflation
3.5 17.5 40
15.0
30
2.5 12.5
10.0 20
1.5 7.5
10
Core inflation 5.0
0.5 2.5 0
0.0
-10
Headline Core Differential -2.5
2.0 -5.0 -20
-7.5 s
1.0 -10.0
-12.5
Enegy inflation (y/y %)
Oil price in Euro. Diff. 12 months r -30
-40
0.0 00 01 02 03 04 05 06 07 08 09
Source: Eurostat Sources: Eurostat and Reuters EcoWin Pro

Accommodating The intensification of financial turmoil in the aftermath of the collapse of Lehman Brothers in mid-
monetary policy is September almost froze the money market. The ECB has taken several measures to cope with
easing tensions in the the liquidity problems: cutting policy rates (by 225 bp since October 2008); allotting unlimited
money and credit funds at a fixed rate (the refi rate) for all refinancing operations, broadening the list of assets
markets. eligible as collateral and providing unlimited liquidity in dollars to Eurosystem counterparts without
direct access to the Fed. As a consequence the ECB balance sheet has almost doubled since the
start of the crisis in August 2007. Thanks to the ECBs liquidity injections and policy rate cuts,
tensions in the money market have eased considerably. Euribor rates declined significantly. This
is important as in many countries mortgages are linked to Euribor rates. The latest ECB bank
lending survey reported that banks expected credit conditions to non-financial firms and
households to ease substantially in Q1 2009, although remaining rather tight by historical
standards. Despite these improvements, money market conditions are still a far cry from those
that prevailed before the financial crisis. The cost of liquidity at 3 months is still high, as measured
by the spread between the 3-month Euribor and the 3-month Eonia swap. Moreover, the
structural lenders (money market funds) are still absent.
ECB assets Euribor and refi rates

%
2000
5.5
Other 5.0
FCF 4.5
1500 MRO 4.0
3.5
LTO
3.0
Euribor 1-week Euribor
1000
2.5 1-month Euribor
3-month Euribor
2.0 Refi rate
1.5
500
1.0
J M M J S N J M M J S N J M M J S N J
2006 2007 2008 2009
0
Source: ECB. MRO=Main Refinancing operation; LTO= Long-term Source: Reuters EcoWin Pro
refinancing operation; FCF= Funds in foreign currency to residents
The refi rate at 1% by The state of the economy and easing inflation call for further monetary policy easing. We expect
mid 2009. the ECB to cut the refi rate by 50 bp in March, with further rate cuts bringing it to 1% by mid 2009.
For the moment, the Bank seems reluctant to bring its policy rates close to zero, as it considers
the risk of deflation to be still very low. Yet deflation risks are rising as growth prospects
deteriorate. Inflation might already turn negative this summer, initially mainly due to base effects
related to energy prices. With the balance of risk of inflation largely on the downside, the ECB
might cut further, as the costs of insufficient easing are much higher than lowering rates too far.
Expansionary policies Fiscal rescue packages adopted by governments combined with expansionary monetary policy
could limit the current should limit the downward momentum. A weaker euro and low inflation should also help pull the
downturn. economy out of recession. GDP should swing back into growth toward the end of this year and
throughout 2010, although it will probably remain below potential. Expansionary fiscal policies
have undoubtedly put greater pressures on the fiscal positions of countries with high public debt
ratios or hit by a particularly sharp contraction in activity. As a result, sovereign debt spreads have
widened considerably (see box).

Box: Widening in eurozone sovereign bond yield spreads

Eurozone sovereign debt spreads, which were extremely low following the adoption of the euro, widened considerably since
September 2008. Moreover, the Credit Default Swap (CDS) premia for insuring against default on government bonds also
rose significantly.
After the intensification of financial turbulences in September 2008, investors, reflecting a flight to quality, increased their
demand for government debt relative to risky assets such as stocks. The yield on three-month government bonds fell
significantly, while the yield on ten-year government bonds decreased too, albeit less spectacularly.
Yield spread between 10-year government bonds Five-year CDS premia
and German bunds
3.5 400
Italy Irland
3.0 350 Greece
Spain
Portugal
France 300
2.5 Greece
Italy
Germany
Portugal 250 Spain
2.0 Irland France
200
1.5
150
1.0 100
0.5 50
0.0 0
A S O N D J F M A M J J A S O N D J F
-0.5 2007 2008 2009
A MJ J A S ONDJ F MA MJ J A S OND J F
2007 2008 2009
Sources: Reuters EcoWin Pro and BNP Paribas Source: Reuters
Investors, however, started also to discriminate among countries reflecting different assessments of country-specific risks
related to fiscal and macroeconomic outlook and to long-run fiscal sustainability. Expansionary fiscal policies to counter
deteriorating economic prospects are driving up deficits and debts. According to the latest European Commission estimates,
public deficit is forecast at -11% in Ireland, more than 6% in Spain, 4.6% in Portugal and around 4% in Greece. General
government debt should increase markedly, too. In Spain, for instance, the Debt/GDP ratio is forecast to reach 60% in 2011
from 34% in 2007.
Moreover governments are also supporting risks related to the banking sector as they have provided direct financial support
to banks through capital injections, or indirectly through public guarantees. As a result, the perception of risks switched
somewhat form the banking sector to the government sector, with the government CDS premia rising significantly, while bank
CDS premia easing somewhat. Sovereign debt has begun competing with state-guaranteed bank debt.
Wider spreads on government bonds, rating downgrades for Spain (AA+), Portugal (A+) and Greece (A-, i.e. just one notch
above the minimum rating required by the ECB for securities used in refinancing transactions), and the credit watch for
Ireland (AAA) have re-kindled the debate about the future of EMU.
We cannot rule out the possibility of a euro zone government facing difficulties in refinancing. However, while the Maastricht
Treaty does not provide for any budgetary and financial support mechanisms, it only prohibits direct loans from the ECB to
governments. The central bank could therefore purchase securities on the secondary market, thereby supporting demand for
the issuer in question. Furthermore, should a state find itself effectively unable to refinance itself in the markets, aid could be
granted by other governments. However, to limit moral hazard risk, it should be subject to very strict terms. Lastly, a
withdrawal from the euro would add to the budgetary impasse for the country concerned, creating a high likelihood of a bank
run and a forex crisis. This would result in a further increase in both short-term and long-term interest rates. The eurozone is
unlikely to fall apart. However, possible refinancing difficulties and bailout packages arranged by the ECB and by eurozone
members constitute additional factors for weakening the single currency against the dollar. The euro/dollar exchange rate
could fall to 1.20 by mid-2009.
Clemente De Lucia
clemente.delucia@bnpparibas.com

Euro zone: Economic Forecasts

2006 2007 2008(1) 2009(1) 2010(1) Carry-over
2009 *
GDP 2.9 2.6 0.7 -2.8 0.2 -1.3*
Domestic Demand ex Stocks 2.7 2.3 0.7 -1.7 0.3
Private Consumption 1.9 1.6 0.3 -0.4 0.3
Public Consumption 2.0 2.3 1.9 1.9 1.6
GFCF 5.5 4.4 0.9 -8.4 -1.1
Stocks (contribution to growth) 0.0 0.0 -0.1 -0.3 0.0
Exports(2) 8.1 6.0 2.2 -9.0 0.6
Imports(2) 7.7 5.3 2.2 -7.5 0.8

Consumer Prices (HICP) 2.2 2.1 3.3 0.4 1.3
Core HICP (ex Food + Energy) 1.4 1.9 1.8 1.5 0.7
Producer prices 5.1 2.8 6.8 0.4 -0.1
Compensation per employee 2.2 2.3 3.4 2.1 1.3
Unit Labour Costs 0.9 1.5 3.5 3.2 0.4
Employment 1.6 1.8 1.0 -1.7 -0.7
Activity
Industrial Production (y/y) 4.0 3.5 -0.2 -11.4 0.5
External Trade
Trade Balance, EUR bn -14 16 -33.0 -40.0 -75.0
Current account, EUR bn -1 38 -49.0 -65.0 -100.0
% of GDP 0.0 0.4 -0.5 -0.7 -1.1
Source: BNP Paribas, Economic Research Department (1) BNP Paribas Forecasts (2) incl. intra Euro zone trade * Assuming 0 growth in Q1 2009
onward.
Euro zone: Quarterly Profile

Q4-08(1) Q1-09(1) Q2-09(1) Q3-09(1) Q4-09(1) Q1-10(1)
GDP, (q/q) -1.5 -1.0 -0.5 -0.4 -0.1 0.1
GDP, (y/y) -1.2 -2.8 -3.1 -3.3 -1.9 -0.9
Private Consumption, (y/y) -0.4 -0.5 -0.4 -0.4 -0.3 0.0
GFCF, (y/y) -3.7 -7.4 -8.9 -10.1 -7.3 -4.9
Exports, (y/y) -2.5 -7.9 -9.7 -11.0 -7.3 -3.0
Imports, (y/y) -1.6 -6.1 -7.6 -10.0 -6.3 -2.5
Consumer Price Index, (y/y) 2.3 0.9 0.1 -0.3 0.9 1.6
Industrial production, (y/y) -8.3 -12.5 -12.9 -12.4 -8.0 -3.4
Unemployment Rate (%) 7.9 8.4 9.1 9.7 10.1 10.5
Source: BNP Paribas, Economic Research Department q/q : quarter-on-quarter change; y/y : year-on-year change (1) BNP Paribas Forecasts
Euro zone: Financial Forecasts

2006 2007 2008(1) 2009(1) 2010(1)
Financial Variables
General government Budget, EUR bn -114 -55 -157.9 -444.2 -496.9

General government Budget, % of GDP -1.3 -0.6 -1.7 -4.9 -5.4
Refinancing Rate (%) 3.50 4.00 2.50 1.00 1.00
3-month Rate (%) 3.73 4.68 2.89 1.35 1.50
10-year Bond Yield (%) (3) 3.96 4.32 2.95 3.35 4.15
EUR/USD 1.32 1.46 1.40 1.24 1.35
EUR/GBP 0.67 0.73 0.96 0.87 0.76
EUR/JPY 157 163 127 124 146
Source: BNP Paribas, Economic Research Department (1) BNP Paribas Forecasts (2) End of Period (3) German Bund

Germany February-March 2009
Germany
Germany's economy slowed significantly toward the end of 2008, with GDP rising only 1% for the
year, after 2.6% growth in 2007. Judging from survey data that points to a rapid deterioration of
economic conditions, the recession is likely to continue throughout at least the first half of 2009.
Overall, we expect German GDP to shrink over 3% this year, despite the launching of a second
stimulus plan, which calls for the spending of 50 billion euros in 2009 and 2010.
Can't we just skip this year?

Recession deepens in Q4 2008
Q4 was a disaster. National accounts figures for the fourth quarter of 2008 have confirmed that the recession got
worse at the end of last year, with industrial output plunging 6.8% q/q. According to the Federal
statistical office, GDP fell 2.1% q/q in Q4, its sharpest decline since reunification and after slipping
0.5% q/q in both Q2 and Q3. The German economy has been slowing very sharply, with growth
plunging from 0.8% yoy in Q3 to -1.7% in Q4. GDP for the year grew only 1%, after 2.6% growth
in 2007. We are expecting GDP to shrink over 3% this year, since there is already a carry-over
effect of -2% for 2009. However, the pace of contraction is likely to slow.
GDP
%
5
4
3
2
1
0
-1
GDP q/q
-2 GDP y/y
-3
92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08
Source: Bundesbank
Survey data is Germany's economy has therefore slowed substantially toward the end of the year. Judging from
somewhat positive. recent economic data and in particular the IFO and ZEW surveys of business and investor
confidence, further contraction may be expected over the coming months, although probably not
as sharp as that seen in Q4 2008.
The worst is perhaps At 82.6 in February 2009, the IFO index of business confidence has indeed fallen to the lowest
behind us. level reached since Germany's reunification, but it roughly stopped to deteriorate for the second
consecutive month. As for the ZEW index, which measures the confidence of investors and
financial experts in the economic outlook, it rose in February for the fourth straight month, and
even surged from -31 to -5.8. Although this is still well below the index's historical average of 26.5
it is much higher than last July's trough of -63.9. In contrast, the sub-index of Current Conditions
slipped again in February, to -86.2.

Manufacturing sector falls victim to shrinking global demand

An alarming collapse in We expect manufacturing to once again feel the pinch of weakening global demand. The
manufacturing orders. purchasing managers index for this sector fell from 32.7 in December to 32.0 in January.
Furthermore, there was a veritable collapse in orders for manufactured goods, which plunged over
23% yoy in December. Domestic orders were down by over 18% yoy in December, while foreign
orders nose-dived almost 27%. Although over the past few weeks the euro has climbed back to its
level of late 2006 (when annual export growth exceeded 10% by volume), this will clearly do little
to cushion the impact of slowing global demand.
Industrial output likely Sharp drops in industrial output, as well as manufactured exports are therefore inevitable over the
to keep falling. coming months. More specifically, survey data of manufacturing orders, which could certainly get
worse, suggest that we could see a severe and stubbornly long manufacturing recession.
Manufacturing sector in recession

%
20
15
10
5
0
-5
-10
-15 Production y/y
Orders (3-MA y/y)
-20
-25
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09
Sources: Bundesbank and IFO
With exports, the country's main growth engine, now sputtering, German GDP is likely to keep
shrinking over the first half of the year, mainly due to the drop-off in exports and investment.
Things may stabilize somewhat in the second half of next year.
Consumers are also getting gloomy

Household Under these conditions the outlook for consumer spending, which already fell by 0.3% in 2008, is
consumption finally still fundamentally weak. Private consumption slightly decreased in the fourth quarter (-0.1% q/q),
buckles... after rebounding in Q3. Retail sales (including automobiles) fell 0.8% q/q in Q4, after a slight
decline of 0.2% in Q3.
... despite easing of The recent easing of inflation, which may be attributed to favourable base effects and plunging oil
inflation, prices, is clearly no longer sufficient to make up for the impact of rising unemployment on
consumer purchasing power. And yet according to official figures, headline inflation declined from
1.4% in December to 0.9% in January. This is the lowest level since March 2004 and a half a
percentage point less than the previous month and over two points less than the peak reached
last July.

... weak job market is After a long period of surprising strength, the labour market began to weaken toward the end of
now main concern. last year, with unemployment rising in December for the first time since 2006 (34 months). The
Federal Employment Agency estimates that as many as four million people may be without jobs in
2009. According to the agency's preliminary figures, the number of job seekers grew by 40,000 in
February, bringing the cumulative total to 138,000 since October 2008. The official unemployment
rate climbed a 10th of a point, to 7.9% of the labour force, for the third consecutive month. Given
the current weakening of economic conditions and hiring intentions, we expect this trend to
continue.
Labour market weakness

% %
13
Job vacancies/unemployed (inverted scale) r 0
12 s Unemployment rate 2
4
6
11
8
10 10
12
9
14
16
8
18
7 20
98 99 00 01 02 03 04 05 06 07 08 09
Sources: Bundesbank, Bundesanstalt and BNPP
A second rescue package for Germany's economy

Germany's coalition government agreed to a second fiscal stimulus plan in January. This 50-billion
euro package to be spent over 2009 and 2010 came just two months after the announcement of a
first series of measures to support the economy, which involved spending 32 billion euros over
two years. This first package was judged far too modest considering that Germany is the euro-
area's largest economy and has considerable scope for policy measures since it had practically no
budget deficit at the end of 20081. There were also doubts about the plan's effectiveness in
stimulating the economy. In particular, there seemed to be little chance that all of the KfW credits
made available would be used, given the weak outlook for demand reflected in business survey
data. All in all, the first plan is generally estimated to add less than half of a percentage point to
GDP growth. The second stimulus package seems to strike a better balance between supporting
business investment and household disposal income.
Caroline Newhouse-Cohen
caroline.newhouse-cohen@bnpparibas.com
1This week, the Federal Statistics Office announced that public finances were almost balanced in 2008, for the second straight year, with only a -1.6
billion euro deficit in 2008, or 0.1% of GDP. It should be noted that this was achieved despite the fact that the budget deficit had reached an
historical high of 4% of GDP in 2003, and at the cost of a contractionary policy (raising the VAT sales tax rate by 3 points and cutting social
spending and public-sector investment) which may explain why Chancellor Merkel has been reluctant to abandon her policy of fiscal discipline.

Germany : Economic Forecasts

2006 2007 2008 2009(1) 2010(1) Carry-over
for 2009*
Components of Growth (y/y), SA and WDA
GDP 3.2 2.6 1.0 -3.3 0.6 -2.0
Domestic Demand 2.3 1.2 1.5 -0.4 1.2 0.3
Private Consumption 1.2 -0.3 -0.3 0.0 0.8 -0.1
Public Consumption 0.6 2.2 2.0 2.3 2.8 0.3
Fixed Investment 8.5 4.6 3.6 -7.6 1.4 -2.2
Stocks (contribution to growth) -0.1 0.1 0.5 0.7 -0.1
Exports 13.1 7.7 2.3 -12.5 0.1 -5.7
Imports 12.2 5.2 3.6 -7.2 1.5 -1.1

HICP 1.8 2,3 2,8 0,2 1,0
Core HICP 0.7 1,9 1,3 1,3 0,6
Unemployment Rate (%) 10.8 9,0 7,8 8,4 9,7
Employment 0.6 1,7 1,5 -0,7 -1,6
Activity and Savings

Industrial Production (y/y) 5.9 5,9 0,5 -8,7 0,0
Savings Ratio (%) 10.5 10,9 11,5 11,9 12,1
External Trade
Trade Balance, EUR bn 159.4 196,4 176,4 155,5 144,1
Current Account, EUR bn 141.5 180,8 162,5 154,6 143,2
% of GDP 6.1 7,6 6,7 6,4 5,8
Sources : Bundesbank and BNP Paribas, Economic Research Department (1) BNP Paribas Forecasts *Assuming 0 growth from Q1 2009
Germany : Quarterly Profile (Calendar and seasonally adjusted)

Q4-08 Q1-09(1) Q2-09(1) Q3-09(1) Q4-09(1) Q1-10(1)
GDP, q/q -2.1 -1.2 -0.2 -0.2 0.0 0.2
GDP, y/y -1.7 -4.2 -3.9 -3.6 -1.6 -0.3
Private Consumption, y/y -0.6 -0.7 -0.1 0.2 0.5 0.4
Fixed Investment, y/y -0.5 -8.8 -7.7 -8.2 -5.6 0.0
Exports, y/y -5.6 -12.4 -13.9 -14.8 -8.6 -3.5
Imports, y/y 1.5 -5.5 -6.3 -10.1 -6.9 -2.4
HICP, y/y 1.7 0.9 0.1 -0.4 0.5 0.9
Core HICP, y/y 1.3 1.3 1.6 1.3 0.9 0.6
Unemployment Rate (%) 7.6 7.8 8.1 8.6 9.1 9.5
Source : BNP Paribas, Economic Research Department q/q : quarter-on-quarter change y/y : year-on-year (1) BNP Paribas Forecasts
Germany : Financial Variables

2006 2007 2008 2009(1) 2010(1)
Financial Variables
General Government Budget, EUR bn -37 -4 -3 -98 -137
% of GDP -1,6 -0,2 -0,1 -3,9 -5,3
2006 2007 2008 2009(1) 2010(1)
Interest Rates(2)
3-month Rate (%) 3.73 4.68 2.89 1.35 1.50
10-Year Bund Yield (%) 3.96 4.32 2.95 3.35 4.15
(*) spots on December 8.

France February-March 2009
France
After a momentous fall in GDP at the end of 2008, activity is set to contract by more than 2% in
2009 before recovering very modestly through 2010. This year will also be marked by a sharp
slowdown in inflation, which will briefly turn negative in the coming months. The fall in the
unemployment rate over the past three years could be wiped out and the fiscal deficit could reach
levels not seen since the creation of the euro.
Annus horribilis
The French economy will suffer a severe recession this year
GDP contracted by As was widely expected, notably in light of industrial production data, the economy contracted by
1.2% q/q in Q4 2008. a momentous amount in Q4 2008, -1.2% q/q. GDP growth for last year as a whole was 0.7%, from
+2.1% en 2007, the weakest performance since 1993.
Contributions to quarterly growth

percentage points
0.9
0.6
0.3
-0.0
-0.3
-0.6
-0.9
Private consumption Public cons.
-1.2 Investment Stock changes
Net ext. Demand GDP
-1.5
III IV I II III IV
2007 2008
Sources: INSEE and BNPP calculations
Household demand is The breakdown of the national accounts show that demand components developed rather more
holding up. positively at the end of 2008 than had been expected, particularly with regard to household
consumption: although household spending on manufactured products fell by 0.5% q/q in Q4, total
spending by this group rose 0.5% in volume terms, in line with the sharp drop in inflation at the
end of 2008. Total investment, which showed a very modest decline in Q3 (-0.2% q/q), began to
contract rapidly again at the end of 2008 (-1.1% q/q). Meanwhile, with foreign trade having frozen
up, exports fell momentously in Q4 (-3.7% q/q). Imports also fell, by 2.2% q/q. Foreign trade
therefore made a severely negative contribution to growth at the end of 2008 (-0.3 points). Lastly,
while survey data throughout the quarter had shown growing concern among industrial companies
over perceived very excessive inventories, it appears that inventory changes made a negative
contribution to growth, i.e. -0.9 percentage point.
The recession will be The recession will continue this year. As the quarters progress, the decline in activity should
prolonged by the fact it moderate with regard to the fall seen in Q4 2008, inasmuch as there has already been massive
is affecting many inventory adjustment. On the other hand, the downturn is likely to be to be long-lasting, in France
countries at the same as well as in other euro-zone countries. Indeed, the declining domestic demand among our trading
time. partners will weigh on French activity and investment plans, and vice versa, in a negative
feedback loop that will take a long time to run its course. This, in addition to the significant carry-

over effects heralded by the Q4 2008 slowdown1, leads us to think that GDP could fall 2.4% on
average in 2009, making it the deepest recession seen in France since the end of the Second
World War.
The inventory The outlook for the industrial sector in the first few months of 2009 is quite dependent on activity in
adjustment carried out the automobile sector. Output in this sector was slashed by almost a third at the end of 2008 (-
at the end of 2008 will 32.5% q/q in Q4), an adjustment achieved in large part via widespread, temporary closures of
allow the pace of production lines. These measures of course reached their peak during the festive period
contraction to (production was down 44.6% y/y in December). Figures in the national accounts point to a sharp
moderate going adjustment of stocks, and the reopening of factories in January could therefore prompt a rebound
forward. in 2009. The scale of this potential rise is particularly difficult to estimate, however, in large part
because the sector continues to suffer from excess capacity, and output will need to be held at
very low levels for several months to come.
The service sector, among others, has experienced a much more gradual slowdown in activity,
albeit one that is set to continue. The most recent survey data confirm that business climate was
still deteriorating at the start of 2009. After levelling off in January, the synthetic index in
manufacturing calculated by INSEE fell to a new record low in February. This indicator, as those
from the purchasing managers survey, both in services and industry, strongly suggests there will
be a further marked contraction in activity in the months to come.
Households walk a precarious path between unemployment and inflation

Since the spring of With that as a backdrop, employment fell at an accelerating pace in the fourth quarter: almost
2008 the French 89,000 jobs were eliminated in chiefly market sectors, following losses of 47,000 in Q3 and 28,000
economy has in Q2. The figures are likely to worsen further in the months to come. As the slowdown in activity
destroyed more jobs affects the labour market with a certain lag, job losses might peak in the first half of 2009 and drop
than it has created. back thereafter, to hit an end-of-year total for 2009 of just over 400,000. Under these conditions
the unemployment rate, which Eurostat calculated to be 8.1% in December, will continue to rise
throughout the year, reaching around 9.5% at the end of 2009 (matching its recent peak from the
beginning of 2006).
Actual and expected unemployment rate

percentage points balance of opinions
2.0 90
Unemployment prospects
1.5 r
1.0 60
0.5
30
0.0
-0.5
0
-1.0
-1.5 s -30
-2.0 Unemployment rate
(12m change)
-2.5 -60
91 93 95 97 99 01 03 05 07 09
Sources: INSEE (survey of households) and Eurostat
Rising unemployment The slowdown in household consumption moderated last year (+1.3% after +2.5% in 2007) but
will likely cut spending is likely to remain extremely weak this year, albeit without contracting as sharply as
households spending other demand components. One reason is that inflation has continued to slow down at an
power sooner or later, extremely rapid pace since its peak in the summer. This factor probably enabled households to
despite fiscal recapture some of the purchasing power lost in previous quarters at the end of the year, despite
1 If every quarter of 2009 puts in zero growth, the average annual GDP rate for 2009 would be -1.0%, since the level of economic activity in Q4 2008 was 1.0% less
than the average rate for 2008. That is the carry-over for 2009 at Q4 2008.

measures the slowdown in their nominal income. Households will also benefit from an increase of some
welfare benefits2, as well as from fiscal measures targeting them (see below). All the same, these
factors will only partly dampen the impact of decreasing employment on household income.
as well as the Inflation fell to 0.7%, in January, according to preliminary data published by INSEE. This trend is
slowdown in inflation. set to continue during the first half, thanks to strong base effects from energy. Inflation should turn
negative in the summer of 2008, before rebounding in the second half of the year. The average
inflation rate for 2009 should be almost zero, however. In addition to the marked drop-off in energy
prices, weak demand and capacity underutilisation will increasingly dampen underlying inflation,
which could be less than 0.5% by the end of the year.
Headline and underlying inflation

y/y %
4.9
4.2
Headline CPI
3.5 Core CPI
2.8
2.1
1.4
0.7
-0.0
-0.7
-1.4
91 93 95 97 99 01 03 05 07 09
Sources: INSEE and BNPP forecasts
Manoeuvring on public finances

Negotiations with The government has bolstered its economic stimulus package, launched in December and valued
social partners will at EUR 26 billion, with several new measures targeting the automobile industry (a 5-year, EUR 6
begin soon over billion loan, as well as incentives for consumers who scrap old vehicles) and a promise to take
measures to support measures in the coming months to support households (in addition to the new RSA income
households. support payments, comparable to the US earned income tax credit and the British working
families tax credit). A large part of these measures will be financed by profits made from loans
granted to banks in the autumn. Meanwhile, the government has announced it will eliminate the
local business tax in 2010 without saying how it will recompense local authorities for their
consequent shortfall in income.
Increased public The government expects the increase in public infrastructure investment to be just over EUR 10
spending on billion. There will also be measures to support subsidised housing. Spending by the government
infrastructure. and major state-owned companies will increase and there will be measures to help local
authorities finance their investments, as well as funds made available for subsidised housing. The
government, meanwhile, also plans to bring forward major equipment and infrastructure renewal
programmes initially planned for future years. Based on the programmes announced3,
investments by the government and major state-owned companies should primarily support the
public works and construction sectors, as well as capital goods industries (those to which public
funding naturally gravitates).
There is a significant operational risk to these measures, which has prompted the government to
create a ministry in charge of economic stimulus. In practice, the government and major
companies involved are likely to encounter big problems as they rush ahead with investment
programmes scheduled for next year or beyond, spending their funds much more quickly than
2 By way of an automatic increase based on the sharp rise in inflation in 2008.

3 These include road and rail improvements, renovation of public buildings, construction of universities, and defence and security equipment.

planned. In the governments case, the plans represent a 16% increase in capital expenditure
planned for 2009. For these reasons the impact of these measures could be weaker than
announced, and take longer to emerge4.
The second main thrust of the measures announced in December involves supporting companies
cash flow situation, and their financing in general (with measures totalling more than EUR 11
billion). The headline measure will see the government repaying its debts to companies, mainly in
terms of taxes: this will cover research tax credits; payment by instalments or deferral of company
tax; defence sector suppliers; and above all, VAT repayments (which accounts for more than a
third of the total). These measures should result this year in bringing forward almost EUR 10
billion repayments.
The recession will have The measures announced thus far should cost the budget in the order of 1% of GDP this year, a
a major impact on cost that may have to be recalculated in the wake of decisions over measures to support
public finances. households. The government is preparing to revise its growth forecasts but the European
Commission recently predicted a 1.8% fall in GDP for France in 2009, which would increase the
fiscal deficit to 5.4%. The Commission has not criticised the implementation of measures it itself
recommended, but nonetheless plans to open an excessive deficit procedure against France. The
intention, among others, is to underline that public finances must be consolidated. in the future.
Public finances: growth and balance

% %
4.5 2
0
2.5
-2
0.5
-4
-1.5
s Growth (E.C. history & forecasts)
-6
BNPP
Budget deficit (E.C history & forecasts)
BNPP
r
-3.5 -8
99 00 01 02 03 04 05 06 07 08 09
Sources: European Commission and BNPP forecasts
Frdrique Cerisier
frederique.cerisier@bnpparibas.com
4 This also applies to the measures increasing budgets for the construction of subsidised housing, the aim of which is to have 100,000 homes built in two years.

France: Economic Forecasts
2006 2007 2008(1) 2009(1) 2010(1) Carry-over

for 2009*
GDP breakdown (y/y)
Total GDP 2.4 2.1 0.7 -2.4 0.0 -1.0
Domestic Demand ex stocks 2.7 2.7 1.2 -0.6 -0.7 0.0
Private Consumption 2.5 2.4 1.3 0.6 1.2 0.4
Overall fixed Investment 5.1 5.0 0.4 -6.2 -2.1 -1.6
Stocks (cont. to growth) -0.1 0.1 -0.1 -0.9 0.0
Exports 5.6 3.2 1.1 -7.5 -4.0 -2.8
Imports 6.5 5.9 2.0 -4.0 1.4 -1.3

Consumer Prices 1.7 1.5 2.8 0.0 1.3
Underlying CPI 1.1 1.5 2.0 0.9 0.3
Monthly wages 2.9 2.7 3.0 2.6 2.4
Unemployment Rate (%)** 9.2 8.3 7.8 9.4 10.5
Private NF payrolls 1.0 1.8 0.5 -2.3 -1.4
Activity and Savings

Industrial production, y/y 1.0 1.4 -2.6 -7.7 -1.2
Savings Ratio (%) 15.0 15.7 15.6 16.2 15.7
External Trade
Trade Balance, EUR bn -27 -40 -58 -60 -67
Current Account, EUR bn -12 -20 -41 -47 -57
% of GDP -0.7 -1.0 -2.1 -2.4 -2.9
Sources: BNP Paribas, Economic Research Department (1) BNP Paribas Forecasts *Assuming 0 growth from Q1 2009 **Eurostat definition
France: Quarterly profile

T4-08 T1-09(1) T2-09(1) T3-09(1) T4-09(1) T1-10(1)
GDP, q/q -1.2 -0.8 -0.7 -0.3 -0.2 0.0
GDP, y/y -1.0 -2.1 -2.5 -2.9 -1.9 -1.1
Private consumption, y/y 0.6 0.6 0.6 0.7 0.5 0.8
Overall fixed investment, y/y -2.7 -5.5 -5.9 -7.1 -6.3 -4.5
Exports, y/y -2.7 -6.7 -7.3 -9.6 -6.5 -4.4
Imports, y/y 0.3 -3.2 -4.0 -5.6 -3.3 -1.3
Consumer Price Index, y/y 1.8 0.5 -0.6 -0.8 0.4 1.2
Unemployment Rate* 8.0 8.4 8.9 10.0 10.3 10.4
Sources: BNP Paribas, Economic Research Department q/q : quarter-on-quarter change; y/y : year-on-year change (1) BNP Paribas Forecasts
*Eurostat harmonised definition
France: Financial Forecasts

2006 2007 2008(1) 2009(1) 2010(1)
Financial Variables
Central Government Balance, EUR bn -38 -41 -56 -98 -98
% of GDP -2.2 -2.2 -2.9 -5.1 -5.1
General Government Balance, EUR bn -45 -50 -66 -115 -122
% of GDP -2.5 -2.7 -3.4 -6.0 -6.3
Interest Rates(2)
3-month Rate (%) 3.73 4.68 2.89 1.35 1.50
10-Year Benchmark (%) 3.99 4.44 3.41 3.60 4.45
Spread versus Bund (bp) 3 11 46 25 30
Sources: BNP Paribas. Economic Research Department (1) BNP Paribas Forecasts (2) End of Period

Italy February-March 2009
Italy
The economy has entered its worst contraction since World War Two. Beyond the fall of real
output which could go down by 3% in 2009 Italy may also experience the first reduction of
nominal GDP in more than seventy years. A sharp downturn of business investment will
exacerbate the long lasting decline of industrial production, while stagnating household
expenditure will follow from enduring uncertainties and the limited weight of unemployment
benefits.
A gloomy recession
Q4 2008: the hugest contraction of GDP since 1980
In 2008 real GDP In Q4 2008, real GDP shrank by 1.8% q/q and by 2.6% y/y, the worst result since 1980. Besides,
decreased by 0.9%, the past quarterly data have been revised downward. Both in Q2 and in Q3, GDP fell by 0.6% q/q,
first annual contraction from previous estimates of respectively -0.4% and -0.5%. In 2008 GDP contracted by 0.9%,
in fifteen years. recording the first annual decrease in the last fifteen years. The breakdown of Q4 GDP data is not
yet available. Latest figures suggest that the downturn was widespread among domestic demand
and foreign sector. Inventory changes are estimated to have negatively contributed to the overall
growth.
Real GDP and industrial production

4 105
3
100
2
1 95
0 90
-1
s GDP (y/y %)
r 85
-2 Industrial production (sa)
-3 80
91 93 95 97 99 01 03 05 07 09
Source: Istat
The long lasting decline of the industrial production

In Q4 2008, industrial After contracting by 1.2% q/q in Q2 2008 and by 2.5% in Q3, industrial production fell even more
production fell by 7.5% sharply in the last quarter (-7.5%). In 2008 as a whole activity contracted by 4.3%, the worst figure
q/q. in eighteen years. The industrial sector is facing a long lasting downturn. In the last ten years
production increased only in 2000 (+4.3%) and in 2006 (+2.4%). From 2000 to 2008, Italy has built
up a 15% gap compared to the Euro area. The present downturn is resulting more severe and
widespread than preceding recessions. During 2008, the economic crisis has hit every
manufacturing sector. The worst performance was recorded in the sector of transportations
(-31.5% y/y in December) which covers 1% of total value added. Production is expected to further
decrease in coming months. In November, industrial orders marked the fourth consecutive drop
(-6.3% m/m) as demand plunged in domestic as well as in foreign markets (respectively -5.6% and
-7.5%). The PMI manufacturing index, despite recovering in January (36.1 from the record low of
34.9 in November), remains well below 50. According to ISAE estimates, in Q1 2009 industrial
production would fall by 3.8% q/q.

Households reckon with weakening disposable income

In 2008, real hourly Households deal with the feeble evolution of real disposable income. In 2008, real hourly wages
wages remained remained virtually stationary. The acceleration of nominal wages (+3.5%) was almost totally offset
stationary, restraining by a sharp increase in consumer prices (+3.3%). Labour market conditions have strongly
private consumption. deteriorated. The unemployment rate is forecast to jump above 8% in 2009. In January, the
number of hours authorized under the Wage Supplementation Fund was more than trebled in the
ordinary scheme by comparison with January 2008. The increasing uncertainty over the length
and the depth of the crisis has continued to weaken consumer confidence, which remains at an
historical low level.
Lower inflation and In coming quarters, household real disposable income will benefit from the sharp reduction in
decreasing interest inflation. In January, the harmonised consumer price index rose by 1.5% y/y, well below the
rates will give some seventeen years peak reached in August 2008 (+4.2%). In 2009 inflation is forecast to slow below
relieves to households. 1%, while hourly wages are expected to increase by about 2.5% in nominal terms. So, real hourly
wages would record the best performance in nine years. Consumers will also find some relieves
from the decrease of interest rates. In December, the interest rate on outstanding amounts of
loans to households for house purchase was 5.6%, from 6% in October.
Real hourly wages (2001=100; 2009: forecast)

105
104
103
102
101
100
99
98
01 02 03 04 05 06 07 08 09*
Source: Istat and BNL Economic Research calculations
A dark scenario for business investments

Business confidence After decreasing by 1.9% in Q3 2008, business investments should have recorded a sharper
and capacity utilisation contraction in Q4. Economic and financial conditions have further deteriorated. According to Bank
rate fell to the lowest of Italy estimates, operating profits declined in the twelve months ending in September 2008. The
level in history. deterioration of domestic and foreign demand has weakened business confidence, which fell to
the all time lowest level in January. Capacity utilisation rate significantly decreased from 75.4% to
69.9%.Companies are also suffering the global economic stagnation which is abruptly halting
international trade. In November, exports towards EU countries plummeted by 16.3% y/y. Exports
fell toward Germany (-10.8% y/y), France (-15.4%), the United Kingdom (-19.5%) and Spain
(-27.1%).
Much worse than a mere recession

In 2009 Italy is likely to As elsewhere in Europe, the outlook for Italy has become bleaker than expected. After a period of
experience negative limited pass-through, the fallout of the global financial crisis begins now to be fully felt through
nominal growth for the growth/trade and confidence channels. Poor performance of GDP in Q4 2008 implies a negative
first time since 1932. carry over of -1.8% onto the growth of real GDP in 2009. On top of that, due to downward
pressures coming both from outside and the inside the countrys economy, in 2009 inflation is
going to result too low to compensate for the sharp fall of real GDP. So, in 2009 Italy is likely to
experience negative nominal growth for the first time since 1932. Previous post-World War Two

recessions in 1975 and in 1993 were certainly less troublesome, as the fall of real GDP was
relatively contained and no deflationary risks were present. Now, in Italy and other countries,
things are made much worse than in the past by the combination of three factors: global financial
crisis; contraction in real GDP, deflationary risks. Because of its novelty, dealing with this kind of
perfect storm will be fairly tough.
Nominal and real GDP growth during post World War

Two recessions (% y/y; 2009: forecasts)
18
14.5 Nominal GDP
Real GDP
13
3.0
3
-1.5
-2
-2.1 -0.9 -2.9
-7
1975 1993 2009*
Sources: ISTAT and BNL Economic Research calculations
Real GDP may fall by Real output is projected to decrease in 2009 by nearly three percentage points. Inflation is
nearly 3%. expected to slip slightly below 1%, on the ground of both declining global prices for oil and food
and the increasing weakness of internal demand. Among other components, gross fixed capital
formation is going to experience a huge contraction due to the adverse effect on business
confidence of bleak demand prospects at home and in many foreign markets (EU and US,
particularly). Export performances are likely to worsen significantly, except for the foreign sales of
goods to markets less affected by the crisis such as North Africa and Middle East: in 2008 exports
to OPEC countries increased by 30%. Private consumption will stagnate, as income effects of
recession combine with an increase of the propensity to save.
Cautious response to Unlike other major advanced countries, Italy has been fairly cautious in launching a very
the crisis by the aggressive fiscal response to counter the effects of crisis and recession. Italian large public debt
government and the increasing spreads of BTPs over German Bunds may have prevented policy makers to do
more. After a first package costing around % of GDP issued in November 2008, some further
measures have been decided at the beginning of February 2009, mainly offering incentives to
purchase new cars and furniture with limited requirements for additional public finance.
and households. Beyond the government, a fairly wary response to the crisis is given by households whose
cautious spending behaviour reflects the relatively weak public system of unemployment benefits
and other active labour market policies which are allotted in Italy only 1.3% of the GDP vis--vis
1.9% in the EU-27 and 3% in Germany. The limited weight of public safety nets represents one of
the historical reasons why the households debt still represents only 49% of the disposable income
which is around half the euro-area average and one third the level recorded in the US and the UK.
In the medium-run, a wide and durable recovery of private consumption will ask for further steps in
the structural reform of the Italian welfare system
Giovanni Ajassa
giovanni.ajassa@bnlmail.com
Paolo Ciocca
paolo.ciocca@bnlmail.com

Italy : Economic Forecasts

2006 2007 2008(1) 2009(1) 2010(1) Carry-over
for 2009*
Total GDP 1.9 1.4 -0.9 -2.9 0.2 -1.8
Domestic Demand ex Stocks 1.4 1.3 -0.4 -1.3 0.4 -0.2
Private Consumption 1.1 1.5 -0.4 -0.1 0.4 -0.4
Fixed Investment 2.7 0.8 -2.0 -7.2 -0.3 -1.1
Stocks (Cont. to Growth) 0.5 0.0 -0.8 -0.7 0.0 -
Exports 6.5 4.5 -1.7 -7.8 1.8 -0.7
Imports 6.1 4.0 -2.7 -4.7 2.5 -2.2
Consumer Prices (CPI) 2.2 2.0 3.5 0.7 1.8
Core CPI (ex Food + Energy) 1.6 1.8 2.2 1.4 1.6
Hourly Wages 2.8 2.3 3.5 2.5 2.5
Employment 1.9 1.0 0.2 -1.0 0.0
Activity
Industrial Production (y/y) 2.4 -0.2 -4.3 -4.0 0.5
Savings Ratio (%) 11.5 11.2 11.8 12.0 12.0
External Trade
Trade Balance, EUR bn -11.5 -4.0 -6.0 -4.0 -4.0
Current Account, EUR bn -38.5 -37.4 -49.0 -32.0 -32.0
% of GDP -2.6 -2.4 -3.1 -2.1 -2.0
Source: BNP Paribas, Economic Research Department (1) BNP Paribas Forecasts * Assuming 0 growth after Q4 2008.
Italy: Quarterly Profile

Q4-08 Q1-09(1) Q2-09(1) Q3-09(1) Q4-09(1) Q1-10(1)
GDP, y/y -2.6 -3.7 -3.6 -3.1 -1.1 -0.3
GDP, q/q -1.8 -0.7 -0.5 -0.1 0.2 0.1
CPI, y/y 2.9 1.2 0.5 0.4 0.7 1.6
Source: BNP Paribas, Economic Research Department q/q quarter-on-quarter change, y/y year-on-year change (1) BNP Paribas
Forecasts.
Italy: Financial Variables

2006 2007 2008(1) 2009(1) 2010(1)
Financial Variables
Primary Budget, EUR bn 18.6 52.5 36.0 10.8 28.3
% of GDP 1.3 3.4 2.3 0.7 1.8
General Government Budget, EUR bn -50.0 -24.1 -43.9 -66.4 -59.8
% of GDP -3.4 -1.6 -2.8 -4.3 -3.8
2006 2007 2008 2009(1) 2010(1)

Interest & FX Rates(2)
3-month Rate (%) 3.73 4.68 2,89 1,35 1,50
10-year Benchmark (%) 4.22 4.66 4,28 4,50 4,65
Spread over the Bund (bp) 26 33 133 115 50
Source: BNP Paribas, Economic Research Department (1) BNP Paribas Forecasts (2) End of period

Spain February-March 2009
Spain
Spain officially slid into recession in the fourth quarter of 2008. The countrys main growth driver
until now a combination of private debt and construction is now playing in the opposite
direction. The consequences of the crisis, which looks set to be severe and lasting, are now
visible: a sharp downturn in economic activity, soaring unemployment, deteriorating public
finances, widening yield spreads on government bonds, etc. Reflecting this deterioration Standard
& Poors downgraded Spains sovereign rating from AAA to AA+ in mid-January.
The die is cast

By no means just a technical recession
GDP contracted for the After dropping by 0.3% q/q in Q3 2008, Spains GDP contracted by 1% in Q4. Spain has therefore
second quarter running officially entered a technical recession (contraction in GDP for at least two consecutive quarters).
in Q4 2008. Rising unemployment and a slowdown in lending weighed on imports and private consumption.
Against a backdrop of recession in Spain and a very pronounced slowdown in the world economy,
businesses have for the main part abandoned their projects, which has contributed to the strong
decline in investment. More generally, economic activity is expected to contract even more sharply
in the first half of 2009. On an annual basis, GDP is expected to contract by 3.3% in 2009
compared with growth of 1.1% in 2008 and 3.7% in 2007.
GDP contracted sharply in Q4 2008

% %
2.0 7
6
1.5
5
1.0
4
0.5 3
0.0 2
-0.5 s t/t
y/y r
1
0
-1.0
-1
-1.5 -2
00 01 02 03 04 05 06 07 08
Source: INE
Record decline in economic activity

Activity is expected to The economic downturn that began at the beginning of 2008 has steadily worsened as the months
continue to contract have gone by. The industrial production index fell for the eighth consecutive month in December.
sharply, despite a These mediocre results reflect in particular the difficulties faced by the automobile sector. The fall
slight upturn in some in new car sales which plummeted by 41.6% in January has forced carmakers to cut
survey data. production drastically. Purchasing managers surveys still point to a sharp decline in industrial
production over the coming months. Manufacturing PMI is still at a record low, and has remained
below the 50 threshold that marks the line between economic growth and contraction since
December 2007. After dropping to a record low in November, new orders (a good leading
indicator) have picked up slightly but nonetheless remain at levels consistent with a strong
contraction in activity. For its part, the services PMI showed no signs of improvement. The
services sector has also been hurt by the bursting of the real estate bubble, which has particularly
affected real estate agents and the major property developers.

Market conditions are The real estate market continues to be at the heart of the crisis in Spain. The demand for housing
conducive to a bursting keeps falling, as the poorer households experience financial difficulties while the others are
of the real estate waiting for prices to fall further. New mortgage loans continue to decline and the number of real
bubble. estate transactions fell by 20% in 2008. The supply of mortgage credit has also shrunk
significantly as banks tighten their lending conditions and reduce their exposure to the real estate
sector. Lastly, there are still over one million unsold housing units, a colossal figure. Accordingly,
the decline of home prices that began in the second quarter of 2008 continues. Even if prices drop
considerably in 2009 and 2010 the market is likely to take a long time to recover.
An extremely severe The downturn in the real estate market has naturally raised serious difficulties for the construction
crisis in the sector. Several major Spanish property developers have defaulted (Martin-Fadesa, Habitat,
construction sector. Tremon, etc.) or owe their survival solely to the creditor banks taking a share of their equity
(Inmobiliaria Colonial, Metrovacesa, etc.). The severity of the downturn is reflected in the
continuing slump in building permits and house starts. The European Commissions construction
sector confidence index has also deteriorated steadily since November 2007 (-38 in January).
Despite a slight rebound, the new orders components are still trending down. Given this backdrop,
investment in construction is expected to fall very sharply in 2009 and 2010, by respectively 18.6%
and 12.7%.
Fall in house prices

y/y %
25
20
15
10
Housings
5 Old housings
New housings
0
-5
00 01 02 03 04 05 06 07 08
Source: Ministry of Housing
Household consumption has plummeted

Private consumption is Private consumption fell back once again in Q4 2008 in line with the ongoing decline in retail
likely to continue to fall sales. Soaring unemployment and tighter lending conditions are the main factors weighing on
sharply. household demand. This trend is set to continue given the difficulties facing the Spanish banks
(rapid rise in default rates and high exposure to the real estate market) and the future rise in the
unemployment rate (lagged variable of activity). This seems to be confirmed by the most recent
leading indicators, which show no sign of any improvement in the coming months. The household
confidence index published by the European Commission remains at a record low of -44 and
household expectations, both with regard to the general economic situation and to employment,
are consistent with a further marked decline in private consumption. All in all, we expect to see a
sharp fall in consumer spending in 2009 (-3.8% compared with +0.5% in 2008).
Unemployment soars in all sectors

The number of jobless The economic downturn has resulted in surging unemployment. Spains jobless figure now stands
tops 3.3 million. at more than 3.3 million, corresponding to an increase of almost 50% over one year. The
unemployment rate (14.4% in December according to OECD figures) is now the highest in the
euro zone. In January, the services and manufacturing sector for the first time took over from the
construction sector in terms of destruction of jobs. The latest data shows a very strong increase in
unemployment in the services sector, linked mainly to the difficulties encountered by real estate
agents and property developers, and in industry (see above). This confirms that the crisis has

spread to all sectors of the economy. Unemployment is likely to surge to almost 17.0% in 2009
and to almost 20.0% in 2010.
Trend in number of jobless by sector

y/y %
120
100 Industry
Services
80 Construction
60
40
20
-20
00 01 02 03 04 05 06 07 08 09
Source: INE
A pronounced decline in inflation

Prices could start In January, inflation as measured by the harmonised consumer price index dropped back to 0.8%,
falling in the spring of after 1.5% in December and a peak of 5.3% in July. The disinflationary trend observed since the
2009. end of the summer is largely due to favourable base effects (combined with the impact of lower oil
prices) and is likely to continue over the coming months. Prices could even begin to fall as from
the spring of 2009. On a yearly average, prices are expected to remain stable in 2009 compared
with a rise of 4.1% in 2008. Underlying inflation (excluding energy and fresh produce) will diminish
more slowly given the measure that automatically index wages to past inflation. However, the
sharp economic slowdown could bring underlying inflation down to 0.6% in 2010 after 1.6% in
2009.
A drastic deterioration in public finances

The deterioration in Spains public finances had swung from a surplus in 2007 to a deficit of 3.4% in 2008. Since the
public finances is last elections, the government has adopted economic stimulus measures totalling almost EUR 50
pushing up refinancing billion (4.6% of GDP) focusing in particular on aiding those households and sectors experiencing
costs. the greatest difficulty (construction and automobile). Combined with the impact of automatic
stabilisers, these measures could raise the fiscal deficit from -3.4% in 2008 to above 6.5% in
2009. The current pressure on public finances has pushed spreads between Spanish and German
government bonds wider (around 125bp). This will push up refinancing costs for Spain, which is
planning to issue debt amounting to close to EUR 70 billion in 2009. Standard and Poors has
downgraded Spain's sovereign rating from AAA to AA+.
Philippe Sabuco
philippe.sabuco@bnpparibas.com

Spain : Economic Forecasts

2006 2007 2008(1) 2009(1) 2010(1) Carry-over
for 2009*
Total GDP 3.9 3.7 1.1 -3.3 -1.1 -0.8
Domestic Demand ex Stocks 4.9 4.2 0.2 -5.0 -1.7 -1.8
Private Consumption 3.9 3.5 0.1 -3.8 -1.1 -1.5
- Construction 5.9 3.8 -5.3 -18.6 -12.7 -5.7
Stocks (Cont. to Growth) 0.2 -0.1 0.0 0.0 0.0 -
Exports 6.7 4.9 1.9 -8.9 -0.2 -7.1
Imports 10.3 6.2 -2.5 -13.0 -2.3 -9.7
Consumer Prices (HICP)) 3.6 2.8 4.1 0.0 1.2
Core HICP (ex Food & Energy) 2.8 2.5 2.4 1.6 0.6
Compensation per employee 6.7 7.1 5.1 1.0 0.1
Employment 3.7 3.0 -0.2 -3.7 -1.9
Activity
Industrial Production (y/y) 3.9 1.9 -6.9 -15.3 -7.7
Savings Ratio (%) 10.3 10.2 12.1 13.6 10.9
External Trade
Trade Balance, EUR bn -89.7 -99.0 -95.5 -65.3 -67.7
Current Account, EUR bn -87.7 -105.9 -103.4 -72.2 -70.1
% of GDP -9.0 -10.1 -9.4 -6.6 -6.4
Source: BNP Paribas, Economic Research Department (1) BNP Paribas Forecasts * Assuming 0 growth from Q1 2009
Spain: Quarterly Profile

Q4 08 Q1 09(1) Q2 09(1) Q3 09(1) Q4 09(1) Q1 10(1)
GDP, y/y -0.7 -2.3 -3.4 -4.0 -3.5 -2.6
GDP, q/q -1.0 -1.2 -1.0 -0.8 -0.6 -0.2
HICP, y/y 2.5 0.6 -0.2 -0.9 0.4 1.3
Core HICP (ex Food & Energy), y/y 2.5 1.9 1.9 1.5 1.1 0.9
Source: BNP Paribas, Economic Research Department q/q quarter-on-quarter change y/y year-on-year change (1) BNP Paribas
Forecasts
Spain: Financial Variables

2006 2007 2008(1) 2009(1) 2010(1)
Financial Variables
General Government Budget (EUR bn) 17.7 22.0 -37.3 -73.1 -77.1
General Government Budget (% of GDP) 1.8 2.2 -3.4 -6.7 -7.0
Primary Budget (EUR bn) 33.4 34.0 -23.0 -56.6 -58.3
Primary Budget (% of GDP) 3.4 3.4 -2.1 -5.2 -5.3

3-month Rate (%) 3.73 4.68 2.89 1.35 1.50
10-year Benchmark (%) 4.01 4.41 3.82 4.05 4.35
Spread over the Bund (bp) 6 8 87 70 20
Source: BNP Paribas. Economic Research Department (1) BNP Paribas Forecasts (2) End of Period

United Kingdom February-March 2008
United Kingdom
GDP contracted in Q4 2008 by 1.5% q/q, and there are no indications of an imminent turnaround.
The UK authorities have responded to the financial crisis with a comprehensive package of
measures to improve the functioning of financial markets and to keep up demand. As Bank Rate is
approaching zero, the BoE is expected to resort to unconventional monetary policies. The
considerable policy stimulus given combined with lower commodity prices should provide
considerable stimulus to the economy.
Combating recession with an almost empty purse

A deep recession
GDP contracted in Q4 Fallen in a negative spiral of loss in confidence and the cutting back in lending and spending, the
2008 by 1.5%, and there UK has entered a deep recession. GDP contracted in Q4 2008 by 1.5% q/q, and there are no
are no indications of an indications of an imminent turnaround. Business and household sentiment indicators dropped
imminent turnaround. sharply to record low levels in particular the aftermath of the bankruptcy of Lehman Brothers.
Money growth and Following the turmoil in the financial markets, banks in Britain and elsewhere have been seeking
credit growth have to restructure their balance sheets through recapitalisations, selling assets, and cutting back on
sharply fallen. lending. According to the last Credit Conditions Survey, UK banks reduced the available credit for
households and companies in Q4, while further declines in credit availability were expected for Q1
2009. Money growth and credit growth have sharply fallen. If one corrects for interbank activity,
the annual growth rate has declined from around 15% in mid-2006 to less than 4% in Q4 2008.
Slowing credit expansion undermines GDP growth
16 8
14
12 6
10
8 4
4 2
Nominal GDP (%, y/y, RHS)
Broad Money (%, y/y)
2
Credit (%, y/y)
0 0
02 03 04 05 06 07 08
Sources: Bank of England, National Statistics
The tightening of In the UK, the tightening of lending conditions precipitated the downturn of the housing market. In
lending conditions the year to January 2009, house prices fell by 17%, while mortgage approvals are only one third of
precipitated the the level they were at the end of 2006. In February, the RICS reported for the third consecutive
downturn of the month an increase in new buyer enquiries, which is normally an indicator of transaction activity.
housing market. Potential buyers were especially attracted by the lower prices and many believed that the market
was close to its bottom. Despite these hopeful signals, normal conditions in the housing market
are unlikely to be quickly restored. Availability of mortgage finance is still limited, while the
deterioration of the labour market also deters potential buyers. Fears for unemployment have
substantially increased as labour market conditions have worsened. In the three months to
December, the unemployment rate rose to 6.3% compared with 5.2% a year earlier.
Consumers are Households have been reining in their spending. In February, consumer confidence, as measured
reluctant to commit to by the European Commission survey, remained close to a record low reached in the previous
large purchases or buy month, largely due to increased employment fears. Consumers are increasingly reluctant to

on credit. Car sales commit to large purchases or buy on credit. Nevertheless, in January, retail sales strengthened
have plummeted. moderately, for the second consecutive month. This perceived strength is largely due to heavy
discounting, which is likely to weaken in the coming months, once retailers have offloaded their
stocks. Moreover, car sales have sharply fallen. In January, new car registrations were 30% lower
than a year earlier. According to the European Commissions quarterly consumer survey,
intentions to buy a car in the coming 12 months were close to a historic low in January.
The manufacturing The decline in domestic and overseas demand has especially affected the manufacturing sector.
sector is especially In December, production was 2.2% lower than in the preceding month and even 10.2% lower on a
affected, partly due to year earlier. A large part can be attributed to the substantial destocking that is going on in the
the ongoing sector. Many companies were cutting production further back than the fall in orders to lower
destocking. inventories, by for example extending the shutdown of business during the Christmas period. In
early 2009, the situation has further deteriorated. According to the CBI survey, order books
continued to thin, while stock adequacy remained well above its long-term level. Furthermore,
firms expect to cut prices in the coming three months, probably to liquidate stocks more rapidly.
These aggregates might hide some important differences between industries. In particular, the car
industry and construction-related firms have experienced collapses in orders. However, the BoEs
regional agents noted that food processing and aerospace had not seen such a sharp change in
demand.
CIPS survey points to output contraction
70
60
50
40 Manufacturing
Services
30
00 01 02 03 04 05 06 07 08 09
Source: CIPS/Markit
Services activity The latest news from the services sector was not much better. Activity shrank by 1% in Q4 2008.
shrank by 1% in Q4. The sharpest decline was reported in the distribution, hotel and catering sector (-2.3%), mainly
due to the distribution sector. This corresponds with the gloomy surveys from retail sector.
Business services declined by a modest 0.6%. This was much better than expected on the basis
of widespread reports of falling expenditure on professional services, such as financial services.
Only some counter-cyclical services such as those related to insolvencies reported growth in
recent months.
Inflation has started to The only bright spot in the current recession is inflation. CPI inflation edged down to 3% in
ease. January from 3.1% in the previous month, reaching its lowest rate for nine months. This was
largely related to the fall in oil prices, which has not been completely offset by the depreciation of
sterling.
Saving the economy

The Chancellor The UK authorities have responded to the financial crisis with a comprehensive package of
presented a GBP 20 measures to improve the functioning of financial markets and to keep up demand. By the end of
billion stimulus November, Chancellor Alister Darling presented a GBP 20 billion stimulus package. The most
package in November. eye-catching measures were the temporary 2.5 point cut in the VAT rate from 1 December 2008
and the bringing forward of government investment projects.
A second bailout As bank lending remained insufficient after the recapitalisation of the banking sector in October,

package for the the government presented a new bail-out plan for the financial sector in January. A new guarantee
financial sector was scheme for asset backed securities the Asset Protection Scheme (APS) -- was announced. To
presented in January. provide certainty about the value of past investments, the government will insure toxic assets
against losses beyond a certain limit. This should improve banks access to the wholesale funding
markets. The second bail-out plan also paved the way for unconventional monetary policy by
authorising the BoE to buy up to GBP 50 billion of high quality corporate debt and similar assets,
to be financed with government securities (Asset Purchase Facility).
The government has To support medium and small enterprises, the Working Capital Scheme will be set up to
set up guarantees for guarantee 50% of the risk on existing and new working capital portfolios worth up to GBP 20
lending to SMEs and billion. In addition, the Enterprise Finance Guarantee will provide GBP 1 billion of guarantees to
the car sector. support GBP 1.3 billion of bank lending on loans of up to GBP 1 million for a period of up to 10
years aimed for companies with an annual turnover of up to GBP 25 million. A special package
was unveiled for the UK-based car industry aimed at promoting lending of GBP 2.3 billion.
BoE survey points to slowing growth in labour costs
5
Manufacturing
4 Services
0
00 01 02 03 04 05 06 07 08 09
Source: Bank of England

Agents scores range from -5 to +5
Bank Rate is In addition to improving lending conditions, the BoE lowered in February Bank Rate to 1%, the
approaching zero. lowest level in the Banks 315-year history. However, the impact of the monetary easing has been
impaired by the malfunctioning of credit markets. In addition, the effectiveness of rate cuts also
diminishes as Bank Rate approaches zero. The Monetary Policy Committee (MPC) fears that
cutting rates to zero could even have adverse effect on the economy as it would lead to a fall in
banks profits, which might cause them to restrict their lending further.
The BoE is likely to In its latest Inflation Report, the MPC concludes that more monetary easing might be required to
resort to alternative prevent inflation from falling well below its 2% target in the medium term. This remark opens the
ways of monetary way for a 50 bp rate cut in March. However, as rates are approaching zero, the BoE is likely to
easing. resort to alternative ways of monetary easing. The BoE could control the quantity of central bank
money directly by additional purchases of government securities. Alternatively, it might use less
conventional types of policy such as the purchases of private sector assets. This policy would not
only stimulate the economy by providing more liquidity, but also improve the functioning of the
markets of these securities. This would encourage the flow of credit to companies. The Bank of
England has already the authority to make such purchases up to GBP 50 billion, via the Asset
Purchase Facility, financed by the issuance of Treasury Bills. In the minutes, of its meeting on 4-5
February, the Committee agreed that the Governor would write again to the Chancellor to seek
permission to conduct these purchases financed by the creation of central bank money (printing
money).

Stimulus should get economy out of recession

In the short-term, the In the short-term, the UKs strategy is aimed at stimulating demand by encouraging household
government is and enterprises to borrow again. In addition, the government is stepping up spending to prevent
encouraging household the current downturn from turning into a slump. Even though, in the long-term the national savings
and enterprises to rate will need to be raised, pursuing such a policy at this juncture would push the economy in an
borrow again. even deeper recession. As a result, national savings might even further decline (Keynesian
paradox of thrift). The longer term objective is to rebalancing the economy away from
consumption to exports and investment.
The policy stimulus The enormous policy stimulus given Bank Rate cuts, fiscal policy easing, and measures to
given combined with support the banking system combined with lower commodity prices should provide considerable
lower commodity stimulus to the economy. Other countries are implementing similar stimulus packages. Moreover,
prices should provide a major factor in the recession is the considerable destocking that is taking place. As a result,
considerable stimulus production has fallen more sharply than demand. This process is likely to continue in the first half
to the economy. of 2009. However, once completed, production has to pick up, albeit at a lower rate than before
the crisis.
Rapid monetary easing has weakened pound
1.00 -0.5
EURGBP 0.0
Spread 3-mth Libor-Euribor (RHS)
0.90
0.5
0.80 1.0
1.5
0.70
2.0
0.60 2.5
06 07 08 09
Source: GlobalInsight
Nevertheless, the Nevertheless, the balance of risks on growth remains on the downside. First, the deepening of the
balance of risks on crisis has seen a revival of protectionism. Although understandable from a national perspective,
growth remains on the this is a major threat for global recovery by losing the benefits of globalisation. Second, a
downside. substantial stimulus should come from the weakening of sterling. The weakening of sterling is
caused by the perception that the UK economy is among the worse affected by the financial crisis
and the rapid deterioration of the fiscal position. The deepening of the recession elsewhere might
partly correct this perception. We expect the pound to appreciate slowly in the coming quarters.
The EUR/GBP exchange rate could reach 0.87 by the end of the year.
Inflation is expected to Inflation is expected to ease further in the coming months. Around the middle of the year, the
ease further in the inflation rate could even fall below 1%, the lower bound of tolerance band for the BoEs inflation
coming months, but target. The price pressures coming from the sharp depreciation of sterling are likely to be offset by
could rise again in 2010 downward pressures related to the widening margin of spare capacity. In particular, wage
as a result of the settlements are expected to be remarkably lower this year. A BoE survey showed that the average
reversal of the VAT cut. wage increase could be around 1.9%, about half of the result of last years survey. More than a
third of employers expected to apply a wage freeze. Inflation could rise again in 2010, largely as
result of the reversal of the 2.5% VAT cut.
Raymond Van der Putten
raymond.vanderputten@bnpparibas.com

United Kingdom: Economic Forecasts

2006 2007 2008 2009(1) 2010(1) Carry-over
for 2009*
Total GDP 2.9 3.0 0.7 -3.4 0.5 -1.5
Private Consumption 2.0 3.0 1.6 -2.5 -0.3 -0.7
Final Domestic Demand 2.8 3.6 0.7 -3.0 -0.2 -1.7
Exports 10.7 -4.5 -0.1 -1.5 1.7 -4.2
Imports 9.8 -1.9 -0.5 -1.7 -0.2 -4.6

Retail Price Index (RPI) 3.2 4.3 4.0 -2.7 0.9
RPI excluding mortgage interest payments (RPIX) 2.9 3.2 4.3 1.6 1.1
Consumer Price Index (HICP) 2.3 2.3 3.6 1.0 0.9
Core CPI 1.3 1.7 1.9 1.1 0.8
Average Earnings Excluding bonus 3.7 3.6 3.7 2.3 2.0
Employment 0.8 0.7 0.6 -3.0 -1.0
Unemployment Rate (ILO concept) 5.4 5.4 5.7 8.5 9.6
Activity and Savings (y/y)

Industrial Production 0.3 0.5 -1.5 -5.1 -1.8
Services output 3.7 3.7 1.3 -2.5 1.3
Household Savings Ratio (%) 4.2 1.8 0.6 1.5 3.3
External Trade
Trade Balance, GBP bn -76.3 -89.3 -93.1 -83.0 -74.7
Current Account, GBP bn -45.0 -39.5 -40.1 -33.9 -28.2
% of GDP -3.4 -2.8 -2.7 -2.3 -1.9
Source: BNP Paribas, Economic Research Department (1) BNP Paribas Forecasts * Assuming 0 growth from Q1 2009 onwards
United Kingdom: Quarterly Profile

Q4-08 Q1-09 (1) Q2-09 (1) Q3-09 (1) Q4-09 (1) Q1-10 (1)
GDP, q/q -1.5 -1.3 -0.7 -0.3 -0.1 0.2
GDP, y/y -1.9 -3.5 -4.1 -3.8 -2.3 -0.8
Private Consumption, y/y -0.2 -2.2 -2.5 -2.9 -2.5 -1.3
GFCF, y/y -9.7 -10.5 -12.3 -11.6 -9.2 -6.8
Exports, y/y -5.3 -2.0 -1.7 -1.8 -0.4 1.1
Imports, y/y -7.1 -1.2 -0.8 -2.4 -2.3 -1.5
HICP, y/y 3.9 2.6 1.3 -0.1 0.4 0.9
Unemployment (ILO concept) 6.3 7.2 8.2 9.0 9.6 9.8
Source: BNP Paribas, Economic Research Department q/q : quarter-on-quarter ; y/y : year-on-year change (1) BNP Paribas Forecasts
United Kingdom: Financial Variables

2006 2007 2008 (1) 2009 (1) 20101)
Financial Variables
Deficit GBP bn 34.2 37.9 67.1 132.8 143.6
% of GDP -2.6 -2.7 -4.6 -9.1 -9.8
Interest & FX Rates(2) 2006 2007 2008 2009 (1) 2010 (1)
Base Rate (%) 5.00 5.50 2.00 0.00 0.00
3-Month Rate (%) 5.32 5.99 2.77 1.00 1.00
10-Year Benchmark Yield (%) 4.74 4.59 3.02 3.65 4.45
Spread over Bund (bp) 78 27 7 30 30
EUR/GBP 0.67 0.73 0.96 4.15 4.45
GBP/USD 1.96 1.98 1.46 80 30
Source: BNP Paribas, Economic Research Department (1) BNP Paribas Forecasts (2) End of period

Financial Forecasts February-March 2009
Financial Forecasts
Interest rates
Level at Forecasts (end of period)
02/25/2009 Q2 09 Q3 09 Q4 09
United States Fed Funds 0.00 - 0.25 0.00 - 0.25 0.00 - 0.25 0.00 0.25
(Fed's target rate)
3-month USD Libor 1.25 1.15 1.10 1.10
10-year T-Notes 2.84 3.00 3.10 3.25
Euro zone Refinancing rate 2.00 1.00 1.00 1.00
3-month Euribor 1.85 1.65 1.45 1.35
10-year Bund 2.99 3.10 3.00 3.35
10-year OAT 3.57 3.50 3.40 3.60
10-year BTP 4.53 4.45 4.35 4.50
United Kingdom Base rate 1.00 0.00 0.00 0.00

3-month GBP Libor 2.06 1.00 1.00 1.00
10-year Gilt * 3.45 3.50 3.40 3.65
Japan Overnight call rate 0.10 0.10 0.10 0.10

3-month JPY Libor 0.64 0.75 0.75 0.75
10-year JGB 1.30 1.25 1.20 1.30
Exchange rates
Level at Forecasts (end of period)
02/25/09 Q2 09 Q3 09 Q4 09
USD USD / JPY 97 90 95 100
GBP / USD 1.42 1.26 1.36 1.43
USD / CAD 1.26 1.24 1.15 1.10
EUR EUR / USD 1.27 1.20 1.22 1.24
EUR / GBP 0.89 0.95 0.90 0.87
EUR / CHF 1.48 1.45 1.48 1.52

Interest and Exchange Rates February-Mars 2009
Recent data on interest and exchange rates

2006 2007 2007 2007 2008 2008 2008 2008 2008 2008 2009
Q3 Q4 Q1 Q2 Q3 Q4 NOV DEC JAN
INTEREST RATES (*)
United States
Discount rate 5.96/6.25 5.86/4.75 5.94/5.25 5.03/4.75 3.68/2.50 2.33/2.25 2.25/2.25 1.30/0.50 1.25/1.25 0.86/0.50 0.50/0.50
Federal Funds 4.96/5.17 5.05/4.25 5.18/4.75 4.53/4.25 3.22/2.25 2.08/2.00 2.00/2.00 1.05/0.25 1.00/1.00 0.61/0.25 0.25/0.25
Prime rate 7.96/8.25 8.05/7.25 8.19/7.75 7.53/7.25 6.24/5.25 5.08/5.00 5.00/5.00 4.05/3.25 4.00/4.00 3.61/3.25 3.25/3.25
3-month Bills 4.84/5.00 4.46/3.39 4.43/3.80 3.49/3.25 2.09/1.33 1.65/1.71 1.49/0.87 0.30/0.13 0.18/0.03 0.04/0.13 0.12/0.24
3-month Libor $ 5.20/5.36 5.30/4.70 5.44/5.23 5.03/4.70 3.29/2.69 2.75/2.78 2.91/4.05 2.77/1.43 2.28/2.22 1.83/1.43 1.21/1.18
2-year T-notes 4.82/4.80 4.35/3.09 4.39/3.98 3.50/3.06 2.02/1.59 2.41/2.62 2.35/1.97 1.22/0.77 1.21/1.00 0.82/0.77 0.80/0.95
10-year T-notes 4.79/4.70 4.63/4.07 4.73/4.59 4.26/4.03 3.65/3.41 3.87/3.97 3.85/3.83 3.23/2.22 3.51/2.92 2.40/2.22 2.49/2.85
30-year T-bond 4.88/4.81 4.84/4.48 4.95/4.84 4.62/4.48 4.41/4.29 4.57/4.52 4.45/4.31 3.67/2.68 4.01/3.44 2.86/2.68 3.13/3.61
Germany
Eonia 2.83/3.69 3.87/3.92 4.05/4.16 3.95/3.92 4.05/4.16 4.00/4.27 4.25/4.17 3.14/2.35 3.15/2.97 2.46/2.35 1.84/1.27
Marginal rate 3.76/4.50 4.84/5.00 5.00/5.00 5.00/5.00 5.00/5.00 5.00/5.00 5.23/5.25 3.88/3.00 3.93/3.75 3.23/3.00 3.00/3.00
repo rate 2.76/3.50 3.84/4.00 4.00/4.00 4.00/4.00 4.00/4.00 4.00/4.00 4.23/4.25 3.37/2.50 3.43/3.25 2.73/2.50 2.32/2.00
Deposit rate 1.76/2.50 2.84/3.00 3.00/3.00 3.00/3.00 3.00/3.00 3.00/3.00 3.23/3.25 2.79/2.00 2.93/2.75 2.23/2.00 1.64/1.00
3-month Euribor 3.08/3.73 4.28/4.68 4.49/4.79 4.72/4.68 4.48/4.73 4.86/4.95 4.98/5.28 4.24/2.89 4.24/3.85 3.29/2.89 2.46/2.09
5-year BOBL 3.59/3.90 4.20/4.14 4.34/4.19 4.12/4.14 3.72/3.65 4.32/4.75 4.40/4.21 3.54/3.29 3.44/3.44 3.29/3.29 3.15/3.15
10-year Bund 3.78/3.92 4.23/4.35 4.36/4.34 4.22/4.32 3.94/3.90 4.27/4.61 4.28/4.00 3.54/2.95 3.57/3.25 3.08/2.95 3.08/3.28
30-year Bund 4.00/4.04 4.44/4.60 4.56/4.59 4.53/4.60 4.48/4.54 4.69/4.86 4.70/4.59 4.06/3.53 4.15/3.73 3.57/3.53 3.83/3.86
United Kingdom
Base rate 4.65/5.00 5.51/5.50 5.74/5.75 5.68/5.50 5.35/5.25 5.03/5.00 5.00/5.00 3.33/2.00 3.23/3.00 2.13/2.00 1.61/1.50
3-month interbanking 4.70/5.03 5.63/5.41 5.87/5.73 5.63/5.41 5.19/5.05 5.06/5.23 5.15/4.85 2.78/1.36 2.41/1.90 1.54/1.36 1.11/1.03
3-month Libor 4.85/5.32 6.00/5.99 6.35/6.30 6.35/5.99 5.72/6.01 5.89/5.95 5.84/6.30 4.64/2.77 4.45/3.91 3.20/2.77 2.32/2.17
15-year Gilt 4.45/4.67 4.94/4.60 5.09/4.99 4.79/4.60 4.59/4.59 4.98/5.25 4.86/4.72 4.55/3.90 4.69/4.44 4.14/3.90 4.22/4.44
Japan
Discount rate 0.24/0.40 0.70/0.75 0.75/0.75 0.75/0.75 0.75/0.75 0.75/0.75 0.75/0.75 0.56/0.30 0.50/0.50 0.42/0.30 0.30/0.30
3-month Libor yen 0.30/0.57 0.79/0.90 0.89/1.03 0.96/0.90 0.92/0.91 0.92/0.93 0.90/1.02 0.96/0.83 0.91/0.94 0.92/0.83 0.73/0.67
10-year JGBs 1.75/1.69 1.68/1.51 1.72/1.68 1.57/1.50 1.39/1.28 1.62/1.61 1.52/1.47 1.44/1.18 1.47/1.40 1.32/1.18 1.25/1.30
France
10-year OAT 3.79/3.95 4.30/4.44 4.44/4.44 4.32/4.44 4.08/4.11 4.47/4.82 4.49/4.36 3.90/3.41 3.96/3.68 3.53/3.41 3.60/3.81
Spread OAT/Bund 0.02/0.03 0.07/0.11 0.09/0.10 0.11/0.11 0.14/0.21 0.20/0.21 0.21/0.36 0.36/0.47 0.39/0.43 0.45/0.47 0.51/0.54
EXCHANGE RATES (**)
EUR/USD 1,256 1,371 1,374 1,449 1,498 1,562 1,505 1,318 1,273 1,345 1,324
EUR/GBP 0,682 0,685 0,680 0,708 0,757 0,793 0,795 0,839 0,831 0,904 0,918
EUR/CHF 1,573 1,643 1,647 1,660 1,601 1,611 1,612 1,525 1,516 1,539 1,493
EUR/DKK 7,459 7,451 7,445 7,456 7,453 7,460 7,459 7,451 7,448 7,450 7,452
EUR/NOK 8,050 8,018 7,918 7,878 7,958 7,940 8,060 8,933 8,809 9,423 9,216
EUR/SEK 9,253 9,252 9,264 9,290 9,400 9,352 9,474 10,234 10,128 10,754 10,726
EUR/JPY 146,0 161,2 161,9 163,8 157,8 163,4 161,8 126,7 123,3 122,5 119,7
USD/CAD 1,134 1,074 1,046 0,981 1,004 1,010 1,041 1,210 1,219 1,233 1,224
AUD/USD 0,753 0,839 0,848 0,889 0,905 0,944 0,888 0,673 0,656 0,673 0,677
GBP/USD 1,844 2,001 2,021 2,044 1,978 1,972 1,893 1,571 1,529 1,487 1,449
USD/JPY 116,3 117,8 117,8 113,1 105,4 104,6 107,5 96,2 96,9 91,3 90,2
(*) average and end of period

(**) average on the period

February-March 2009
Economic Research Department economic-research.bnpparibas.com
Philippe d'ARVISENET 33 1.43.16.95.58 philippe.darvisenet@bnpparibas.com

Chief Economist
OECD COUNTRIES
Philippe d'ARVISENET
Eric VERGNAUD 33 1.42.98.49.80 eric.vergnaud@bnpparibas.com

Head of OECD Countries
Structural issues, Single European Financial Market
Caroline NEWHOUSE-COHEN 33 1.43.16.95.50 caroline.newhouse-cohen@bnpparibas.com

Country economics
UNITED STATES, CANADA

Jean-Marc LUCAS 33.1.43.16.95.53 jean-marc.lucas@bnpparibas.com
JAPAN, AUSTRALIA, NEW ZEALAND

Caroline NEWHOUSE-COHEN 33 1.43.16.95.50 caroline.newhouse-cohen@bnpparibas.com
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Frdrique CERISIER 33.1.43.16.95.52 frederique.cerisier@bnpparibas.com
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SPAIN, PORTUGAL, GREECE

Philippe SABUCO 33.1.43.16.95.54 philippe.sabuco@bnpparibas.com
UNITED KINGDOM, NORDIC COUNTRIES, BENELUX, PENSIONS,

LONG TERM FORECASTS
Raymond VAN DER PUTTEN 33 1.42.98.53.99 raymond.vanderputten@bnpparibas.com
BANKING ECONOMICS
Laurent QUIGNON 33 1.42.98.56.54 laurent.quignon@bnpparibas.com
Head
Cline CHOULET 33 1.57.43.02.91 celine.choulet@bnpparibas.com

Philippe SABUCO 33.1.43.16.95.54 philippe.sabuco@bnpparibas.com
COUNTRY RISK
Guy LONGUEVILLE
Head 33 1.43.16.95.40 guy.longueville@bnpparibas.com
Franois FAURE 33 1.42.98.79.82 francois.faure@bnpparibas.com

Capital flows to emerging markets,Turkey
ASIA
Delphine CAVALIER 33 1.43.16.95.41 delphine.cavalier@bnpparibas.com
Christine PELTIER 33.1.42.98.56.27 christine.peltier@bnpparibas.com
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Valrie PERRACINO 33 1 42.98.74.26 valerie.perracino@bnpparibas.com
AFRICA
Stphane ALBY 33 1.42.98.02.04 stephane.alby@bnpparibas.com
Jean-Loc GUIEZE 33 1.42.98.43.86 jeanloic.guieze@bnpparibas.com
EASTERN EUROPE
Central Europe, Baltic countries, Balkan countries
Alexandre VINCENT 33 1.43.16.95.44 alexandre.vincent@bnpparibas.com
RUSSIA, FORMER SOVIET REPUBLICS

Anna DORBEC 33 1.42.98.48.45 anna.dorbec@bnpparibas.com
MIDDLE EAST SCORING

Pascal DEVAUX 33 1.43.16.95.51 pascal.devaux@bnpparibas.com

February-March 2009
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February March 2009

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February - March 2009

Interest and foreign exchange rate 47

Economic Research Department 48

Completed 26 February 2009

1 | Economic Research Department

dip to USD 245.9 bn in 2009.

2 | Economic Research Department

3 | Economic Research Department

Which factors could lead to economies pulling out of recession?

4 | Economic Research Department

Real GDP annual growth Industrial production

Exports of goods Emerging markets: spread EMBI+

5 | Economic Research Department

Euro zone: debt as % of GDP in 2007

Chart 8 Source: European Commission

6 | Economic Research Department

Government to the rescue

7 | Economic Research Department

Non-farm payroll and unemployment

Labour market goes from bad to worse

8 | Economic Research Department

Property and credit markets still weak

Almost $800 billion worth of fiscal stimulus

9 | Economic Research Department

Economic stimulus spending

Financial Stabilization Plan

stake in Citigroup could rise to 40%.

10 | Economic Research Department

Monetary policy makes room for "credit easing"

11 | Economic Research Department

10-year government bond yields

12 | Economic Research Department

United States : Economic Forecasts

Inflation & Labour (y/y)

United States: Quarterly Profile

United States: Financial Variables

2006 2007 2008 2009(1) 2010(1)

13 | Economic Research Department

GDP: small or large fukyo?

14 | Economic Research Department

The upturn has not lasted long for households

Drop in retail sales

15 | Economic Research Department

Meltdown in exports (y/y, 3-month moving average)

16 | Economic Research Department

17 | Economic Research Department

Japan: Economic Forecasts

Activity 4.5 2.8 -3.1 -15.0 3.5

Japan: Quarterly profiles

Japan: Financial Variables

Interest & FX Rates(2) 2006 2007 2008 2009(1) 2010(1)

18 | Economic Research Department

Significant downturn in 2009

Several quarters of contracting activity

19 | Economic Research Department

Headline and core inflation Energy and oil prices

Source: Eurostat Sources: Eurostat and Reuters EcoWin Pro

20 | Economic Research Department

ECB assets Euribor and refi rates

21 | Economic Research Department

Box: Widening in eurozone sovereign bond yield spreads

22 | Economic Research Department

Euro zone: Economic Forecasts

Inflation & Labour (y/y)