Absa Investments ECONOMIC OUTLOOK

1. Absa Investments ECONOMIC OUTLOOK Craig Pheiffer General Manager: Investments Absa Asset Management Private Clients

2. Easing up on the easing ... H2 Last year Now Economic data not weak enough to warrant QE3 - becoming a lot less likely. Operation Twist Close call but recovering GDP and worse than expected inflation may prevent further QE. Asset purchase programme Mild recession but expect data to improve over the year. Inflation concerns. Cut Refi rate, Two LTRO’s

3. ... but Japan bucking the trend • Robust recovery expected following earthquake & tsunami despite the recent weak Tankan survey and manufacturing. • Expect further monetary policy easing on the back of expectations that inflation will undershoot the BoJ’s 1% inflation goal i.e. additional government bond purchases. • Some BoJ Policy Board reshuffling.

4. A soft landing in China still the base case • Recent investor disappointment likely attributable to: • The fact that the economy is “landing” - soft or hard it’s negative for investor sentiment. • Disappointment at the lack of an aggressive stimulus policy. • Large adjustments in some sectors despite “soft landing” outlook. • Corporate earnings adjusting more sharply than real economic activity during downturns in the economy. Source: Barclays Capital Global Economics Weekly(05 April 2012)

5. Slowdown consistent with soft landing Source: Barclays Capital Global Economics Weekly(05 April 2012)

6. The 2012 economy is not worse than 2008 • Comparing 2008 to 2012: • Both driven by weaker external demand and tighter domestic policy. • Individual company examples of “this time it’s worse” but no credible evidence at industrial or macroeconomic levels. • Production of steel and electricity, freight, cargo have moderated but still positive and better than 2008. • No stories of unemployment problems (2009: 15-20m migrant workers likely affected. • Leading indicators, industrial production consistent with soft landing scenario. Source: Barclays Capital Global Economics Weekly(05 April 2012)

7. It’s a story of two parts ... • Policy dichotomy between property & non-property sectors: • Property sector - housing purchase restrictions to continue and this may slow residential investment further. • Macroeconomic policy - Easing should support growth of the economy. • Dichotomies observed in some areas, such as investment goods and within different categories of investment/ consumption goods - All credible information but misleading to extrapolate conclusions around the broader health of the economy from this limited information. • BASE CASE is still for a SOFT LANDING but growth risks still to the downside. Source: Barclays Capital Global Economics Weekly(05 April 2012)

8. ... and it’s not all bad. Source: Barclays Capital Global Economics Weekly(05 April 2012)

9. Key risks to the Chinese economy • Four key growth risks: • Housing market adjustment -Any significant correction in the housing sector could have significant macroeconomic consequences. • Policymakers behind the curve - A potential concern of investors but government has a good history: sometimes slow to respond to inflation but rarely slow to respond to growth risks (or underestimate them). • “Hard landings” in some areas - General investment goods already suffering. Corporate profits could fall further. • Political uncertainty - No serious problems expected during transition but could increase the risk premium for investors. Source: Barclays Capital Global Economics Weekly(05 April 2012)

10. The EU - still expecting a mild recession • Recent economic data disappointing but in line with overall picture of a mild recession during H1 2012. • Low domestic demand (retail sales, car sales) contributing negatively to GDP growth. Mixed across countries. • Households struggling with rising unemployment and sticky inflation (energy prices) - impacting domestic demand. • Spain - Demanding budget presented on 3 April. Debt:GDP ratio expected to peak at 85% next year. • Germany - More optimistic with near-balanced budget in 2013. Source: Barclays Capital Global Economics Weekly(05 April 2012)

11. Slowing inflation to slow growth slide • Consumer price inflation (%): 2004-2012 EU and UK inflation above 2% target with Japanese inflation well below 1% target. UK US EU JP Inflation target for the UK and the Euro area

12. Inflation Outlook • Consumer price inflation outlook (%): 2011 - 2013 Source: Barclays Capital Global Economics Weekly(05 April 2012)

13. Growth Outlook Source: Barclays Capital Global Economics Weekly(05 April 2012)

14. In Summary • Easy monetary policy to be with us for some time but limited/no additional relaxation out of the US, UK and EU. Further easing in Japan. China not ready to lower rates yet but will provide additional liquidity and perhaps fiscal stimulus. • Slowing inflation should continue to put a brake on declining growth. • US economic recovery expected to continue with a mild recession in the EU and a “soft landing” in China. Accelerating growth in Japan with modest growth in the UK. Developed economies to grow at a faster 1,5% pace in 2012 (1,3% in 2011) with Developing economies growing at a slower 5,7% pace (6,4%). • Greek problems appear settled for now with Spain hogging the headlines - ECB better placed to deal with other problem countries. Source: Barclays Capital Global Economics Weekly

15. SA : Consumption still trumping Production • Real Retail Sales (%): 2004-2012 • Manufacturing (%): 2004-2012 Jan: 3.9% y/y Feb: 4.1% y/y • Mining production (%): 2004-2012 The consumer has been propping up the domestic economy but even in the historically low interest rate environment, households are being stretched. Feb: -14.5% y/y

16. South African outlook Source: Barclays Capital Global Economics Weekly(05 Apr 2012) The SARB expects GDP to average 3.0% in 2012 and 3,9% in 2013.

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