Highlights

Second-quarter GDP growth slows in U.S. and Japan… surges in Euro Zone

growth at seasonally-adjusted annualized rates

United States Japan Euro Area0

2

4

6

Q4-2009

Source: National Agencies through Datastream.

Domestic demand growth was robust in the United States

and Europe in Q2-10domestic demand, growth at seasonally adjusted annualized

rates

United States Japan Euro Area-2

-1

0

1

2

3

4

5Q4-2009 Q1-2010 Q2-2010

Source: World Bank, DEC Prospects Group.

OECD Developments

Second-quarter GDP growth slows in U.S. and Japan… surges in Euro Zone

growth at seasonally-adjusted annualized rates

United States Japan Euro Area0

2

4

6

Q4-2009

Source: National Agencies through Datastream.

Domestic demand growth

United States

Japan Euro Area

-2

-1

0

1

2

3

4

5

6Q4-2009Q1-2010Q2-2010

Foreign contribution to GDP

United States

Japan Euro Area

-4

-3

-2

-1

0

1

2

3

4

Domestic demand in U.S. and Europe… offset and amplified by external tradegrowth at seasonally-adjusted annualized rates contributions to growth a annualized rates

Source: World Bank, DEC Prospects Group.

Second-quarter surge in trade unlikely to be sustained

U.S real imports of goods and services; German real exports of goods and services

Q1 2008

Q2 2008

Q3 2008

Q4 2008

Q1 2009

Q2 2009

Q3-2009

Q4-2009

Q1 2010

Q2-2010

-40

-30

-20

-10

0

10

20

30

40

U.S. importsGerman exports

Source: Thomson/Datastream and DEC Prospects Group

U.S. retail up monthly in July & Augustbut momentum has faded as savings rise

retail ex autos and real-PCE, ch% (saar) [L]; personal saving rate (%) right

Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10-30

-25

-20

-15

-10

-5

0

5

10

4

5

6

7

8

Retail excluding autos (left scale)

Source: U.S. Department of Commerce.

U.S. factory output easing with I/S in better balance and orders down

manufacturing production, ch% (saar) [Left]; capital goods orders, ch% (saar) [Right]

Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10-25

-20

-15

-10

-5

0

5

10

15

-60

-40

-20

0

20

40

60

Capital goods orders, [right scale]

Source: Thomson/Datastream and DECPG calculations.

Mfgr production [left scale]

U.S. employment growth stagnant while hourly

earnings drop to 1.7% growth (y/y)

change in non-farm employment (‘000), [Left]; hourly earnings (ch%, year/year)

Jan-08 May-08 Sep-08 Jan-09 May-09 Sep-09 Jan-10 May-10-1000

-800

-600

-400

-200

0

200

400

600

1.5

2.0

2.5

3.0

3.5

4.0

Source: U.S. Department of Labor.

Hourly earnings, [right scale]

Change in employment [left scale]

Japan’s 2nd quarter growth falters on weaker net exports

and consumer spending

Q4-2009 Q1-2010 Q2-2010-2

0

2

4

6

3.4

5.0

1.5

Prv Consumption Gvt ConsumptionFixed Investment change in Stocks

Source: Japan Cabinet Office, MITI.

growth of real GDP, and contributions to growth in percentage points

Japan’s export volumes fall to negative ground on weaker Asian demand and stronger

yengoods export volumes, ch% (saar) [Left]; yen per U.S. dollar [right]

Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10-75

-50

-25

0

25

50

75

84

86

88

90

92

94

96

98

100Export volumes [left scale]

Yen per U.S. dollar [right scale]

Source: Thomson/Datastream and DECPG calculations.

Euro zone growth mixed across countries

GDP growth

IRL DEU SWE FIN BEL NLD FRA ITA PRT ESP NOR GRC-10

-5

0

5

10

15

Ger-many

Investor expectations of future economic conditions on downward path in Germany

Nov-09 Jan-10 Mar-10 May-10 Jul-10 Sep-10-10

0

10

20

30

40

50

60Industrial production, ch% (3m/3m saar)

Source: World Bank, DEC Prospects Group

Planned budget cuts in Europe (%GDP) in 2010-2015

Source: CESIFO

Country Budget cuts (% of GDP) Austria 0.90%

Belgium 5.30%

France 4.50%

Germany 3.00%

Greece 10.70%

Hungary 1.60%

Ireland 3.20%

Italy 1.60%

Netherlands 2.10%

Portugal 6.60%

Spain 8.20%

U.S. LIBOR easing on expectations of continued

loose policy on part of the Fed

Jan-

10

Jan-

10

Jan-

10

Feb-

10

Feb-

10

Mar

-10

Mar

-10

Apr-1

0

Apr-1

0

May

-10

May

-10

Jun-

10

Jun-

10

Jul-1

0

Jul-1

0

Jul-1

0

Aug-

10

Aug-

10

Sep-

100.25

0.40

0.55

0.70

0.85

1.00

1.15

1.30EURIBOR 6M

USD LIBOR 6M

Source: Thomson/Datastream.

Industrial Production

Industrial growth momentum slows down across regions (3mm, saar)

Nov-09

Dec-09

Jan-10 Feb-10

Mar-10

Apr-10 May-10

Jun-10 Jul-100.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

20.0BRCHIY

In contrast with other economies, industrial

production firms up in the US (3mm, saar)

Nov-09

Dec-09

Jan-10 Feb-10 Mar-10

Apr-10 May-10

Jun-10 Jul-10-10

-5

0

5

10

15

20

25

30

35

CHN

Global PMI for manufacturing output continues downslide

Dec-09

Jan-10 Feb-10 Mar-10

Apr-10 May-10

Jun-10 Jul-10 Aug-10

51

52

53

54

55

56

57

58

59

International Trade

World trade growth has recovered to pre-crisis levels

0

200

400

600

800

1000

1200

-60

-50

-40

-30

-20

-10

0

10

20

30

40Export volume $ billion (left scale)

US and Japan import demand gaining momentum

-80.0

-60.0

-40.0

-20.0

0.0

20.0

40.0

60.0

80.0

100.0

-80.0

-60.0

-40.0

-20.0

0.0

20.0

40.0

60.0

80.0

BRICsEuro AreaJapanUS

Import volume growth, saar, %, June 2008—August 2010

An unabated accumulation of trade distorting measures

G20 May G20 August0

100

200

300

400

500

600

700Measures that are discrimina-tory

Source: National Agencies through Datastream.

Commondity Prices

Daily oil prices

3653036538365463655636564365723658036588365983660636614366223663036640366483665636664366723668236690366983670636714367243673236740367483675636766367743678236790367983680836816368243683236840368503685836866368743688236892369003690836916369243693436942369503695836966369763698436992370003700837018370263703437042370503706037068370763708437092371023711037118371263713437144371523716037168371763718637194372023721037218372283723637244372523726037270372783728637294373023731237320373283733637344373543736237370373783738637396374043741237420374283743837446374543746237470374803748837496375043751237522375303753837546375543756437572375803758837596376063761437622376303763837648376563766437672376803769037698377063771437722377323774037748377563776437774377823779037798378063781637824378323784037848378583786637874378823789037900379083791637924379323794237950379583796637974379843799238000380083801638026380343804238050380583806838076380843809238100381103811838126381343814238152381603816838176381843819438202382103821838226382363824438252382603826838278382863829438302383103832038328383363834438352383623837038378383863839438404384123842038428384363844638454384623847038478384883849638504385123852038530385383854638554385623857238580385883859638604386143862238630386383864638656386643867238680386883869838706387143872238730387403874838756387643877238782387903879838806388143882438832388403884838856388663887438882388903889838908389163892438932389403895038958389663897438982389923900039008390163902439034390423905039058390663907639084390923910039108391183912639134391423915039160391683917639184391923920239210392183922639234392443925239260392683927639286392943930239310393183932839336393443935239360393703937839386393943940239412394203942839436394443945439462394703947839486394963950439512395203952839538395463955439562395703958039588395963960439612396223963039638396463965439664396723968039688396963970639714397223973039738397483975639764397723978039790397983980639814398223983239840398483985639864398743988239890398983990639916399243993239940399483995839966399743998239990400004000840016400244003240042400504005840066400744008440092401004010840116401264013440142401504015840168401764018440192402004021040218402264023440242402524026040268402764028440294403024031040318403264033640344403524036040368403784038640394404024041040420404280

20

40

60

80

100

120

140

160$/bbl

WB average

OPEC production and spare capacity

3652636557365863661736647366783670836739367703680036831368613689236923369513698237012370433707337104371353716537196372263725737288373163734737377374083743837469375003753037561375913762237653376813771237742377733780337834378653789537926379563798738018380473807838108381393816938200382313826138292383223835338384384123844338473385043853438565385963862638657386873871838749387773880838838388693889938930389613899139022390523908339114391423917339203392343926439295393263935639387394173944839479395083953939569396003963039661396923972239753397833981439845398733990439934399653999540026400574008740118401484017940210402384026940299403304036040391404224045240483405134054424

25

26

27

28

29

30

31

32

0

1

2

3

4

5

6

7

8

9

Spare capacity (right scale)

OPEC crude oil production (left scale)

OECD oil stocks

365263655736586366173664736678367083673936770368003683136861368923692336951369823701237043370733710437135371653719637226372573728837316373473737737408374383746937500375303756137591376223765337681377123774237773378033783437865378953792637956379873801838047380783810838139381693820038231382613829238322383533838438412384433847338504385343856538596386263865738687387183874938777388083883838869388993893038961389913902239052390833911439142391733920339234392643929539326393563938739417394483947939508395393956939600396303966139692397223975339783398143984539873399043993439965399954002640057400874011840148401794021040238402694029940330403604039140422404524048340513405442,300

2,400

2,500

2,600

2,700

2,800

million bbl

Agriculture Prices

38353

38384

38412

38443

38473

38504

38534

38565

38596

38626

38657

38687

38718

38749

38777

38808

38838

38869

38899

38930

38961

38991

39022

39052

39083

39114

39142

39173

39203

39234

39264

39295

39326

39356

39387

39417

39448

39479

39508

39539

39569

39600

39630

39661

39692

39722

39753

39783

39814

39845

39873

39904

39934

39965

39995

40026

40057

40087

40118

40148

40179

40210

40238

40269

40299

40330

40360

40391

40422

40452

40483

40513

40544

100

150

200

250

300

350

Food

Raw Materials

Beverages

2000=100

Nickel price and LME stocks

3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 4 4 4 4 4 4 00

2,000

4,000

6,000

8,000

10,000

0

10000

20000

30000

40000

50000

60000$/ton

Copper

Aluminum

Nickel [RHS]

$/ton

World Copper Consumption

39083

39114

39142

39173

39203

39234

39264

39295

39326

39356

39387

39417

39448

39479

39508

39539

39569

39600

39630

39661

39692

39722

39753

39783

39814

39845

39873

39904

39934

39965

39995

40026

40057

40087

40118

40148

40179

40210

40238

40269

40299

40330

40360

40391

40422

40452

40483

40513

40544

0

200

400

600

800

1,000

1,200

Other

China

'000 tons

International Finance

Capital flows to emerging markets slowed in August

$ billion 2008

Total H1 Total Jan-Aug H1 Jun Jul Aug YTD

Total 390 110 353 167 196 27 52 21 268 Bonds 65 36 115 56 86 6 23 9 118 Banks 257 43 129 63 54 10 13 10 77 Equity 68 32 109 48 56 11 15 3 74

Lat. America 90 37 137 55 64 11 11 6 80 Bonds 20 15 62 22 36 4 10 5 51

E. Europe 157 22 72 39 51 9 13 4 69 Bonds 35 13 33 23 31 2 9 1 41

Asia 98 44 122 62 66 6 24 10 99 Bonds 7 6 16 8 14 0.4 2.7 3 20

Others 45 7 22 11 15 1 3 1 20

2009 2010

Source: DECPG

Bank lending has failed to recover to pre-crisis levels

2005 2006 2007 2008 2009 2010e0

40

80

120

160

200

240

280

320

Bond issuance

Bank lending

$ billion

Source: Bloomberg and DECPG staff calculations.

0

200

400

600

800

1000

1200

Nov-09 Jan-10 Mar-10 May-10 Jul-10 Sep-10

Greece

Ireland

Spain

Portugal

5-yearsovereign CDS spreads (bps)

Sovereign debt of some European countries is under pressure again

Market Focus: EM Valuation

Equity Performance(Rebased)

Jan-00 Jul-01 Jan-03 Jul-04 Jan-06 Jul-07 Jan-09 Jul-100

50

100

150

200

250

300

MSCI EM

Source: MSCI

Relative equity valuation EM vs DM

Jan-00 Jul-01 Jan-03 Jul-04 Jan-06 Jul-07 Jan-09 Jul-10-0.7

-0.6

-0.5

-0.4

-0.3

-0.2

-0.1

0.0

0.1

0.2

0.3

Source: Bloomberg, MSCI, CCS Calculations

MexicoArgentina

PeruColombia

ChileBrazil

HungaryCzech Rep

PolandRussiaTurkeyEgypt

MoroccoSouth Africa

IndonesiaThailand

IndiaChina

PhilippinesMalaysia

-0.5 0 0.5 1

Emerging Market Correlations with S&P 500Mar/2010 - Sep/2010 Feb/2008 - Feb/2010 Jan/2001 - Mar/2007

Source: MSCI and CCS Calcu-

lations

Currencies and Inflation

Jan-10 Mar-10 May-10 Jul-10 Sep-101.180

1.220

1.260

1.300

1.340

1.380

1.420

1.46082.50

85.00

87.50

90.00

92.50

95.00

yen/USD

USD/Euro (inverse)

Euro picks up modestly…. Japan weakens yen at 15-year high vs USD

USD per Euro (inverse) [Left] and Yen per USD [right]

Source: Thomson/Datastream and DECPG calculations.

Mixed developments in real effective exchange rates

real effective exchange rates, indexes, January 2009 = 100

85

95

105

115

125 USAGer-manyJapanChinaRussiaBrazil

Source: IMF and DEC Prospects Group.

Headline CPI inflation broadly easingsave for India and China

”Headline” consumer price indexes, ch% (year-on-year)

-5

0

5

10

15

20 USA Germany Japan

China Russia BrazilIndustrial production, ch% (3m/3m, saar)

Source: IMF and DEC Prospects Group.

Focus: Developments in international grain

markets

Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10100

200

300

400

500 Wheat prices, weekly averages, US $/ton

150

180

210

240

270

300Wheat daily prices for 2010, CME Nearby

contract, US$/tonAnnouncement of the export ban by Russia (August 5)

Weather-related problems began unfolding

Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-100

200

400

600

800

1,000

Wheat, Maize, and Rice Prices, monthly averages, US$/ton

Wheat Rice Maize

Wheat Global Balance

2007 2008 2009 2010 2011P

Production 596.1 611.2 683.3 680.4 643Consumption 618.3 613.2 635.7 648.6 658Stocks 129.8 124.3 165.1 196 177.8Export 111.8 117.3 143.8 133.8 126Imports 114 113.8 136.9 132.8 122.8

Source: US Department of Agriculture (September 10, 2010 update).

Note: The years refer to marketing years (June-May), i.e., 2011 corresponds to June 2010-May 2011. The 2010 and 2011 figures are estimates and projections, respectively.

Energy and Fertilizer Nominal Price Indices, 2000=100

Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-100

200

400

600

800

1,000 Energy Fertilizer

50

Countries with the highest dependency on wheat imports relative to their GDP

Tanzania

Jordan

Senegal

Egypt

St. Vincent

Guinea-Bissau

Ethiopia

Gambia

Yemen

Mauritania

0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0%

Source: DECPG estimates

Price changes of key staples: April 08 - July 10

Country Commodity Percent change

Afghanistan Wheat 27%Nigeria Sorghum 20%Rwanda Beans 13%Mongolia Rice 10%Mali Millet 10%Nepal Rice 9%Burundi Beans -18%Zimbabwe Maize -21%

Zambia Maize -22%Tanzania Maize -25%Uganda Maize -25%Kenya Maize -43%

Source: Food Price Watch, September 2010, PREM 

Calories derived from wheat as a share of total calorie

intake

Azerbaijan

Tajikistan

Tunisia

Iran (Islamic Republic of)

Georgia

Syrian Arab Republic

- 0.10 0.20 0.30 0.40 0.50 0.60 0.70

Source: FAO

Wheat dependence on selected AFR countries

Country Own-production as % of domestic supplies

Wheat aid, WFP 2009 (tons)

Wheat aid as a share of wheat importsEthiopia 79% 627,624 104%

Burundi 47% 13,261 144%Zimbabwe 37% 109,226 56%Malawi 5% 21,140 22%Mozambique 0% 118,036 33%Mauritania 0% 21,666 7%Togo 0% 24,062 29%

Source: WFP and DECPG staff calculations