the global outlook june 2010 trevor williams chief economist wholesale markets

THE GLOBAL OUTLOOK

JUNE 2010

TREVOR WILLIAMS CHIEF ECONOMISTWHOLESALE MARKETS

LLOYDS BANKING GROUP 2

CONSIDERABLE FISCAL SUPPORT HAS BEEN PROVIDED TO HEAD OFF GLOBAL RECESSION …

-10

-8

-6

-4

-2

0

2

1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010 2014

Fiscal balance, % of GDP

World

Emerging and developing economies

Advanced economies

Forecast


NOW, PRESSURE TO TACKLE FISCAL DEFICITS IS GROWING

Source: Thomson Datastream, OECD

Germany

US

Netherlands

FrancePORTUGALPoland

SPAIN

GREECEIceland

Belgium ITALY

Slovakia

Australia

Norway

Japan

Sweden

Switzerland

IRELANDUK

-10

-5

0

15

0 20 40 60 80 100 120 140 160 180 200

Public debt % GDP

Pub

lic b

orro

win

g %

GD

P

* OECD 2010 estimates

Manageable, but deteriorating

Cause for concern

Fiscally prudent Path of fiscal rectitude (no one on it!)

Korea

-

-

5

10


…WITH SMALL ECONOMIES IN THE EURO FACING HEADWINDS

Source: Lloyds TSB Corporate Markets

Spread over 10yr Bunds

2005 2006 2007 2008 2009 2010-1

0

1

2

3

4

5

6

7

Greece

Spain

Portugal

Ireland


EQUITIES ARE UNDER SELLING PRESSURE…


2007 2008 2009 2010

Global equity indices, Jan 2007 = 100

40

50

60

70

80

90

100

110

120

130

FTSE 100

DOW JONES

DAX 30

NIKKEI 225


BONDS ARE ATTRACTING SAFE-HAVEN FLOWS…


10yr Gov't bond yields, %

2007 2008 2009 20102.00

2.50

3.00

3.50

4.00

4.50

5.00

5.50

6.00

UK

USGermany


BUT MONETARY LOOSENING HAS BEEN AGGRESSIVE…

Source: Thomson Datastream

Official interest rates, %

20042005 20062007200820090

1

2

3

4

5

6UK Bank Rate

US Fed funds rate

ECB repo rate

2010

3m Libor, %

2007 2008 2009 20100

1

2

3

4

5

6

7

UK £

US $

Euro


‘UNCONVENTIONAL’ MONETARY MEASURES ADOPTED…

2007 2008 2009 201050

100

150

200

250

300

350

US Federal Reserve ($2.3tn)

Bank of England (£252bn)

ECB (€2.1tn)

Bank of Japan (Y121tn)

Index of Central Bank's balance sheets, Jan 2007 = 100

Source: ltsb corporate markets


INFLATION BACKDROP IS BENIGN

Source: OECD

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

Jun-03 Apr-04 Feb-05 Dec-05 Oct-06 Aug-07 Jun-08 Apr-09 Feb-10

Core CPI Inflation, annual rate, %

Advanced economies

Emerging economies

World


EMERGING MARKET INFLATION NOT GOING TO BE A CONCERN FOR SOME YEARS

0

2

4

6

8

10

12

14

16

18

2002 2004 2006 2008 2010 2012

% increase in year, CPI inflation

Forecast

Latin America

Eastern Europe

Middle East*

Asia

Africa

* IMF forecast


ACCOMMODATIVE SUPPORT CAN REMAIN IN PLACE

Source: Datastream, Lloyds TSB Corporate Markets

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

6.0

6.5

3.06

9.06

3.07

9.07

3.08

9.08

3.09

9.09

3.10

9.10

3.11

9.11

Short term interest rates, %

US

Euro

Forecasts

UK

12.1

1


…SO WE STILL EXPECT GLOBAL RECOVERY TO PICK UP SPEED IN 2010 AND BEYOND…


GDP %Yr 2008 2009 2010 2011

World 3.1 -0.9 3.9 4.4

Developed economies (G10) 0.4 -3.3 2.2 2.6US 0.5 -2.4 3.4 3.4UK 0.5 -4.9 0.7 2.2Japan -0.7 -5.2 1.5 1.6Eurozone 0.6 -4.0 1.0 1.7

Emerging economies (E10) 6.3 2.7 6.8 7.0- China 8.9 8.7 9.5 8.7- Brazil 5.1 -0.2 5.5 5.3- India 7.5 6.5 7.5 9.1- Russia 5.6 -8.5 4.7 5.2


…IN A RANGE OF ECONOMIES…


-4

-2

0

2

4

6

8

10

1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010 2014

World

Emerging and developing economies

Advanced economies

% increase in year

F'cast


…SO GLOBAL ECONOMY TO FACE LONG TERM SHIFT…

Countries 2007 Rank 2010 Rank 2015 Rank 2025 Rank 2035 RankUS 13.827 1 14.019 1 16.280 1 21.976 2 29.551 2China 7.151 2 9.285 2 14.205 2 30.168 1 53.680 1Japan 4.440 3 4.224 3 4.614 4 5.089 4 5.406 5India 3.083 4 3.798 4 5.729 3 11.421 3 21.111 3Germany 2.858 5 2.786 5 3.084 5 3.557 6 3.837 7France 2.089 6 2.063 7 2.278 9 2.700 9 3.169 12UK 2.064 7 1.994 8 2.308 8 2.878 8 3.524 10Russia 2.037 8 2.081 6 2.627 6 3.845 5 5.502 4Italy 1.793 9 1.695 10 1.823 10 2.019 14 2.092 15Brazil 1.776 10 1.965 9 2.451 7 3.334 7 4.616 6Mexico 1.464 11 1.451 11 1.810 11 2.575 10 3.704 9Spain 1.380 12 1.329 12 1.428 13 1.643 16 1.748 17South Korea 1.204 13 1.297 13 1.605 12 2.283 11 2.992 13Canada 1.171 14 1.179 14 1.426 14 1.855 15 2.293 14Turkey 0.947 15 0.963 15 1.315 15 2.216 12 3.464 11Indonesia 0.805 16 0.943 16 1.268 16 2.132 13 3.705 8Australia 0.702 17 0.751 17 0.893 17 1.171 18 1.446 18Netherlands 0.647 18 0.641 19 0.718 19 0.860 20 0.994 20Poland 0.591 19 0.650 18 0.815 18 1.230 17 1.848 16South Africa 0.452 20 0.473 20 0.586 20 0.908 19 1.391 19

Global GDP trends, to 2035 Trillions $

PPP


GLOBAL CURRENT ACCOUNT IMBALANCES TO DIMINISH

-3

-2

-1

0

1

2

3

2001 2003 2005 2007 2009 2012

Oil exporters German & Japan Other Asia USEuropean excludingGermany

% share of global GDPF'cast

Source: IFSL


BIG FLOWS OF CASH ARE BEING GENERATED, A LOT FINDS ITS WAY TO EUROPE

Official foreign exchange reserves held in SWFs

SWF investment into EU countries

Total: $7,520bnSource: IFSL

UK49%

Germany

15%France

12%

Netherlands 6%

Italy

4%

Others

14%

% share, completed investment transactions by SWFs, 1995 - Jun 2009, total $187bn

Asian reserves not in Sovereign

Wealth Funds

Rest of world

Sovereign Wealth Funds

% share, end-2009

17%

47%

36%


ASSETS UNDER MANAGEMENT TO GROW

0 5 10 15 20 25 30

Pension funds

Mutual Funds

Insurance funds

Sovereign wealthfunds

Private equity

Hedge funds

$ trillion, end-2009Source: IFSL


SWF ASSETS UNDER MANAGEMENT BY CATEGORY

-

1,000

2,000

3,000

4,000

5,000

6,000

1999 2001 2003 2005 2007 2009 2012

Commodity Non-commodity

$bn Forecast

Source: IFSL


SWFS MARKET SHARE BY COUNTRY AND REGION

Source: IFSL

end-2009

By country $bn stake (%)China 928.0 24.0United Arab Emirates 677.0 18.0Norway 445.0 12.0Saudi Arabia 436.0 11.0Singapore 370.0 10.0Kuwait 203.0 5.0Russia 168.0 4.0Others 573.0 15.0By regionMiddle East 1,620 43Asia 1,350 36Europe 670 18Americas 90 2Other 70 2Total 3,800


Disorderly reversal of unprecedented policy measures- Leave it too late: inflationary risk, asset price bubble- Move too early: threaten the incipient recovery

Credit conditions fail to improve sufficiently

Rise in oil commodity prices squeezes western real incomes

Major economies fail to rebalance (particularly China and the US)

Rising tide of protectionism

Spread of contagion from Greece to other sovereigns

SUBSTANTIAL MID-TERM RISKS REMAIN BUT WE REMAIN CONFIDENT THE CORNER HAS BEEN TURNED


IMPORTANT NOTICE

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LLOYDS CORPORATE MARKETSLloyds TSB Corporate Markets is a trading name of Lloyds TSB Bank plc, which is part of the Lloyds Banking Group. Lloyds TSB Bank plc is authorised and regulated by the Financial Services Authority and a signatory to the Banking Codes. Lloyds TSB Bank plc: Registered Office: 25 Gresham Street, London EC2V 7HN. Registered in England and Wales. Registered No. 2065.

BANK OF SCOTLANDBank of Scotland Treasury is a division of Bank of Scotland plc, which is part of the Lloyds Banking Group. Bank of Scotland plc is authorised and regulated by The Financial Services Authority and a signatory to the Banking Codes. Bank of Scotland plc: Registered Office: The Mound Edinburgh EH1 1YZ. Registered in Scotland. Registered No. SC 327000.

the global outlook june 2010 trevor williams chief economist wholesale markets

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