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Global economic outlook — Summary Key questions e Can emerging markets (EM) continue to offset developed market (DM) weakness to buoy global growth? © What are the risks of near-term faltering of the US economic recovery? e When is the European economy likely to return to sustainable economic expansion? CIO View (Probability: 60%*) ¢ Global economic activity remains moderate; the growth impulse stems largely (some 80%) from the EM region. As expected, China started to ease monetary policy. The country is better placed than other EM and particularly DM countries to counter growth weakness with further monetary and fiscal stimuli. Thus, we expect EM growth to stabilize soon and pick up in 2H 2012. e US economic indicators have on balance been disappointing recently, especially data related to business fixed investment and employment growth. Thus, we lowered our 2Q 2012 real GDP growth forecast to an annualized rate of 1.5% from 2%. We still expect growth slightly above 2% in 2H 2012. We think that the risk that the Fed will take measures in addition to the extension of "Operation Twist" is still significant. e Large parts of Western Europe are in recession or stagnation. We expect the economies of the Eurozone and the UK to show mild improvement in 2H 2012. Still, economic activity is likely to remain very sluggish despite support from lower oil prices and less rigorous fiscal austerity. The Bank of England may support the UK economy by increasing its amount of bond purchases soon. The probability that the ECB will take further action to support the economy has risen significantly. A Positive scenario (Probability: 15%*) e The Eurozone crisis abates. Financial market conditions recover, mitigating the drag from fiscal austerity. © Growth in Western Europe is marginally positive (Eurozone stagnates) in 2012 and the US economy grows moderately above trend. Negative scenario (Probability: 25%*) e There are three key downside risks to the global economy: 1. a significant escalation of the Eurozone debt crisis; 2. a sharp fiscal contraction in the US, and 3. a sharp deceleration of the Chinese economy. Each one of these risks could precipitate a significant downturn of the global economy. Key dates 2 July USA: ISM manufacturing PMI for June 5 July Eurozone: ECB press conference 24 July Eurozone: purchasing managers indices (PMI), July estimates 22-25 July = China: HSBC flash manufacturing purchasing managers index (Jul) 36 UBS Global growth expected at just under 3% in 2012 Real GDP growth in % Inflation in % 2011 2012F = 2013F 2011 2012F =. 2013F Americas US 17 21 2.6 3.1 2.1 17 Canada 24 Zrik 24 BS. ea Bad Brazil 27 2.0 48 65) 5.2 65 Asia/Pacific Japan -0.7 2:5 2.0 -0.3 6.2: 05 Australia 2.1 3.7 35 3.4 16 25 China 9.2: 82 85 5.4 3.0 40 India 65 6.0 7.0 7.8 69 7O Europe Eurozone ales: -0.4 0.4 27 Wins! 2.0 Germany Sul 1.0 1.1 25 1.7 TS France es 0.3 0.4 ell Ze Lok Italy 05 -1.8 0.2 29 3.4 a9 Spain 07 -1.6 -1.3 Sul see) L9 UK 07 0.2 (3! 45 2.8 1.9 Switzerland Zl 13 thank 0.2 0.4 1.4 Russia 43 3.8 a7 85 4g 69 World owe 28 333 3.3) 30 3.0 For further information please contact CIO economist Dirk Faltin, dirk.faltin@ubs.com Source: UBS CIO, as of 28 June 2012 In developing the ClO economic forecasts, ClO economists worked in collaboration with economists employed by UBS Investment Research. Forecasts and estimates are current only as of the date of this publication and may change without notice. Global economic momentum is deteriorating (UBS GDP tracker) % 6.3% 3.1% 1.0% -2Jan Jan Jan Jan Van, f Jan Jan Jan Jan -4 05 06 07 08 og 10 11 12 13 -6 ——Global DM ——EM* Source: Bloomberg, UBS CIO, as of 22 June 2012 * DM= developed markets, EM = emerging markets Note: Past performance is not an indication of future returns. **Scenario probabilities are based on qualitative assessment. Please see important disclaimer and disclosures at the end of the document. HOUSE_OVERSIGHT_024142