The current economic environment

1. The current economic environment Prof. Dr. Andreas Dombret Member of the Board Deutsche Bundesbank – June 11, 2010 –

2. The world economy in June 2010 – where do we stand? • Economic recovery stronger than expected. • Upward revisions of GDP forecasts. • Pace of recovery uneven both globally and within Eurozone. • Strong in EMEs, the US and Japan; more subdued in the euro area. • Recovery in Germany intact, with strong impulses from exports. • Rising sovereign debt as major downside risk. • Uncertainty on financial markets due to Greek debt crisis. • Consolidation: major task of economic policy. TMA Europe Conference

3. Good news: Upward trend in global leading indicators • Upward trend of important global leading indicators continues. • Signals proceeding robust recovery of world economy: • Global PMI consistent with strong expansion in manufacturing as well as in other sectors. • German ifo world economic climate index on the rise; index component of expectations at comparably high level in recent months. • OECD composite leading indicator signaling expansion for world economy since November 2009. TMA Europe Conference

4. Good news: Upward revisions for global growth and trade projections Forecasts from OECD Economic Outlook May 2010 • OECD: global output +4.6% in 2010. • Forecasts revised upward; in particular for OECD members (from 1.9% to 2.7%). • World trade strengthened; trade growth robust. TMA Europe Conference

5. Good news: Robust Recovery Forecasts from OECD Economic Outlook May 2010 • Global economy now back on growth track. • Performed better than anticipated. • Recovery expected to continue… • … after most severe recession since WW II in 2009. TMA Europe Conference

6. Bad news: Recovery uneven across and within regions Forecasts from OECD Economic Outlook May 2010 • Output expanding at varying speeds: • Growth strong and close to pre-crisis levels in some EMEs in South and East Asia and Latin America; … • … recovery in some OECD member much weaker. • US on the verge of self-sustaining recovery; growth in Europe more subdued. TMA Europe Conference

7. USA: On the verge of self-sustaining recovery • Since mid-2009 strong pick-up in real GDP. • Temporary impulses from fiscal stimulus and slower pace of inventory decumulation. • Strengthening in private final demand (consumption as well as spending on equipment and software) points to self-sustaining recovery. • Continued decline in private non-residential construction; recovery in housing fragile. TMA Europe Conference

8. USA: Housing market tentatively stabilizing • Noticeable stabilization of house prices in 2009. However, also due to … • … Fed interventions on the mortgage market … • … as well as fiscal incentives to buy homes. • FHFA Purchase-Only Index declined in 2010Q1 by 3.2% yoy. S&P Case-Shiller Index up by 2.0% yoy. TMA Europe Conference

9. Japan: Recovery on its way • GDP expanded strongly in winter 2010, for fourth consecutive quarter. • Recovery mainly driven by substantial growth in exports; high demand particularly from Asian emerging countries. • Domestic demand rebounded recently as well; ongoing fiscal stimulus measures and recovery in trade feeding into profits and wages. • However, public finances increasingly strained, with gross debt forecasted to exceed 200% of GDP. TMA Europe Conference

10. Euro area: Recovery moderate as well as uneven • In Q1 only slight increase in GDP. • Growth mainly driven by inventories. • Noticeable rise of GDP in Italy (+0.5%); much smaller increases in Germany (+0.2%), France and Spain (both +0.1%). • New forecast of the Eurosystem (published yesterday): • GDP growth (average of published bandwidth): +1.0% in 2010, +1,2% in 2011. • Quarterly profile volatile. TMA Europe Conference

11. Euro area: Slow recovery of industrial production • Capacity utilization still well below long-term average. • But: Remarkable inflow of orders in particular from outside euro area; … • … industrial confidence recovered noticeably in early spring; now just below long-term average … • … hinting at further recovery of production. TMA Europe Conference

12. Euro area: Still no turnaround on labor market • Employment: Q4/2009 -0.3% qoq; Q3/2009 -0.5% qoq. • In April slight increase in standardized unemployment rate to 10.1% (highest level since August 1998). • Compared to previous year, significant increases in all large EMU member countries (ES, F, IT) except Germany. TMA Europe Conference

13. Germany: Intact recovery • Pace of recovery slowed in winter half-year. • GDP +0.2% in both Q4/2009 and Q1/2010. • In Q1 marked positive contribution from inventories, negative contributions from domestic demand and foreign trade (imports increased even more than exports). • Much stronger momentum expected for Q2. • Forecasts of GDP growth: mostly above euro area average in 2010 and 2011, making Germany temporarily the engine of growth. TMA Europe Conference

14. Germany: Strong industrial production more than compensates negative impact of cold weatherin Q1 • Further rise in industrial production in April. • Orders: Ongoing strong impulses; pick-up in demand regionally broad-based. • Stock of orders (according to ifo-Institute) still as low as during the last recession 2002/2003. • Outlook for 2010: Industrial output catching up with orders. TMA Europe Conference

15. Germany: Labor market surprisingly robust • Employment continued to increase in April; only slightly lower than a year ago. • In May registered unemployment declined significantly, unemployment rate now at 7.7%. • Past fears of looming backlash refuted by ongoing robustness. TMA Europe Conference

16. Euro area: Moderate rise in prices expected in 2010 Harmonised Consumer Price Index (Overall index / EMU-countries (incl. Germany)) 1) • Recently, inflation accelerated somewhat in euro area. • HICP-inflation: s.a. +0.1% in May mom; +0.2% in April mom. • In April, again marked rise in prices for energy and unprocessed food. • But core rate stabilised at low level. • Inflation expectations continue to be anchored in line with price stability. • Eurosystem forecasts for 2010 and 2011 (average of published bandwidth): +1.5% and +1.6%. 1) Changing Composition TMA Europe Conference

17. Germany: Consumer prices continue to rise moderately Consumer price index • After significant increases in the two preceding months, … • … consumer prices stopped rising further in May. • Price level: +1.2% compared to May 2009. TMA Europe Conference

18. What are the risks? • So far: Global economy returned to strong growth and recovery probable to continue. • Stronger than expected recovery in world trade as upside risk. • In some EMEs in South and East Asia and Latin America already some signs of overheating. • Failure to reign in rising sovereign debt in industrialised countries as major downside risk. • Up to now, no observable impact of Greek crisis on real economy outside of Greece. • Rising concerns about insufficient consolidation; possibly undermining process of normalization in financial system. TMA Europe Conference

19. Financial markets assessment • Overall, financial markets stabilizing in recent months with economic recovery gathering steam. • Premature to conclude financial conditions have normalized. • Banking system’s health generally improving; some banks remain vulnerable. • Bank lending activity remains weak. • Some supply-side effects within the euro area … • … but decline in Germany mostly due to lower demand – credit crunch only a risk scenario. TMA Europe Conference

20. Euro-area: Government bond markets strained • Continuous stress on government bond markets due to Greek debt crisis. • Initial decrease of EMU yield spreads over German Bunds after rescue package was agreed in early May largely evaporated. • Spread widening partly due to falling Bund yields (“safe haven flows”). • Financing conditions of corporations deteriorated somewhat in May, but spreads still below 5-year average. TMA Europe Conference

21. Interest rate spreads between EMU government bonds strongly dispersing • Individual spreads of EMU government bonds over German Bunds still on a high level. • Significant downward effects from stability measures; spreads rising again since mid-May. • Further increase of uncertainty, possibly due to doubts about success of fiscal consolidation efforts. TMA Europe Conference

22. Exchange rates: Euro strained • In May, Euro depreciated markedly against US-Dollar, Pound sterling and Yen. • Effective exchange rate (against 21 trading partners): since end of 2009 depreciation of about 10%. • However, compared to LT average: level of exchange rate actually less noteworthy than pace of change. TMA Europe Conference

23. Stock markets: Uncertainty about future stock price developments above five-year average • Strong fall in stock prices in May. In recent days stock markets recovered somewhat. • Global rise in uncertainty in EMU, US, Germany and JP; in Germany below trend. TMA Europe Conference

24. Summing up • All in all: global economic recovery progressed better than expected. • Recovery in Germany intact; should pick up again after weak winter half-year. • GDP growth expected to exceed that of the euro area at least in 2010. • At the same time, the outlook for activity unusually uncertain. • Deteriorating public budgets in advanced economies major downside risk. • Furthermore, the multi-speed nature of the global recovery likely to continue, and current account imbalances likely to widen again over the medium term. TMA Europe Conference