>GLOBAL SCENARIOS (DANSKE MARKETS)

A positive feedback loop

Global recovery theme to continue in coming quarters
- Lean inventories and record stimulus provide a powerful cocktail for growth

Leading indicators expected to continue to surprise to the upside
- The improvement likely to be visible in all regions, although strongest in US and Asia

G3 expected to get out of recession territory in Q3
- Growth rates to be strongest in US and Asia, but Euroland will benefit from higher exports as well

Underlying inflation to remain subdued due to high unemployment and excess capacity
- but a commodity driven rise in CPI could create jitters in certain markets

Central banks likely to keep rates unchanged for a long time
- Exit strategies to come in focus during 2009H2

INTRODUCTION

A positive feedback loop

■ The global recovery in 2009 is likely to be stronger than expected by consensus. We continue to expect the global recession to end in Q3 2009 and see this as one of the dominant drivers for financial markets in coming quarters.

■ A combination of very lean inventories and a recovery in demand from massive record stimulus packages will provide a major boost to world production – and trade – in the coming quarters.

■ The recovery will be strongest in the US and Asia but the rest of the world will see recovery through stronger exports on top of a realignment of production with demand as inventories are reduced.

■ Global housing markets were a major negative force in 2008. However we are starting to see signs of improvement in many countries and we believe the huge drag from housing will start to fade in 2009 and into 2010.

■ The negative feedback loop in late 2008 of falling production, rising unemployment, falling asset prices, weak housing markets and lower spending will (for now) be turned into a positive feedback loop in which rising production and higher asset prices lead to improved business and consumer sentiment – and thus in turn higher spending and a further rise in production.

■ Challenges may arise again in 2010 with as production is back in line with demand and as the effect from the economic stimulus fades. It is important that the recovery in 2009 is followed by renewed job growth which can take over as the main demand driver in 2010. We are moderately optimistic that this will be the case and look for growth around potential growth in 2010.

■ The world economy will for some time be very vulnerable to new shocks as the structural headwinds from deleveraging and falling house prices will continue to be a downward force on growth in many regions. Rising public debt levels means fiscal policy will have to be tightened at some point in the future. A key risk in 2010 could come from a renewed rise in the oil price. Renewed tensions in financial markets is also a risk to the recovery.

■ With a huge output gap globally we don’t see inflation as a major problem for now. However, there is the risk of a commodity-driven rise in inflation by end-09. As fears are evolving that the quantitative easing by central banks will ultimately lead to inflation, jitters could arise in certain
markets at any sign of inflation.

■ Central bank exit strategies will get more in focus as the global economy recovers. However, we expect the Fed to keep rates low for a long time in order to subsidize leverage in a time when deleveraging is one of the threats to the recovery. ECB will be more concerned about low rates but
growth is weaker in Euroland. We expect both the Fed and ECB to start raising rates in H2 10 barring any new negative shocks to the global economy.

To see full report: GLOBAL SCENARIOS