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Global Economics Research
Europe Including UK

UBS Investment Research European Weekly Economic Focus
Next on the watch list: Spain All the focus has been on Italy over the last few weeks, but in this piece we look at why we are growing increasingly concerned about the Spanish situation. There are essentially three reasons for our worries: the slippage of the deficit, the possibility of adeep recession, and the acknowledgement of the banking crisis that will likely eventually result in a surge of liabilities being transferred to the Government balance sheet. The markets attitude towards Spain is quite sanguine compared to Italy at the moment, but we think that this could potentially change in the coming months, if not weeks. Next week in Europe Advance GDP data for the Euro zone,Germany, France and the Netherlands is due on Tuesday. Germany may expand by 0.2% QoQ (from 0.1%) and France by 0.4% QoQ (from 0.0%), which is a growth of 2.2% YoY and 1.6% YoY, respectively. We expect the euro zone economy as a whole to expand 0.3% QoQ from a 0.2% growth last quarter. The Dutch economy is likely to expand 0.2% QoQ and 2.5% YoY. The November German ZEW survey is due for release onTuesday; the Current Situation and Economic Sentiment indices are likely to fall to 25.0 (from 38.4) and -50.0 (from -48.3), respectively. In the UK, inflation data for October is due Tuesday. We expect CPI and RPI inflation to fall marginally to 5.1% YoY (from 5.2%) and 5.4% YoY (from 5.6%) previously. UK labour data for September is due Wednesday. And the all-important BoE inflation report is duefor release on Wednesday as well. October retail sales are likely to fall; we expect growth in retail sales ex auto to fall to -0.5% YoY (from 0.4%) and retail sales including fuel to drop to -0.4% YoY from 0.6%. This data is due Thursday.

London

11 November 2011
www.ubs.com/economics

Stephane Deo
Economist stephane.deo@ubs.com +44-20-7568 8924

Martin Lueck
Economistmartin.lueck@ubs.com +49-69-1369 8280

Reto Huenerwadel
Economist reto.huenerwadel@ubs.com +41-44-239 6178

Matteo Cominetta
Associate Analyst matteo.cominetta@ubs.com +44-20-7567 4652

Jennifer Miller
Associate Economist jennifer-l.miller@ubs.com +44-20-7568 6585

Chart of the week: this week’s piece is about our worries on the Spanish economy. The chart below, however, provides a positive message:Spain is on the point of resolving its large external imbalance. Indeed, the current account this quarter has been brought below 2% – a sustainable level.
Current account balance
5%

% of GDP

0% 90 92 94 96 98 00 02 04 06 08 10 12

-5%

-10%

-15%

Source: Haver, UBS

This report has been prepared by UBS Limited ANALYST CERTIFICATION AND REQUIRED DISCLOSURES BEGIN ON PAGE 12. European Weekly Economic Focus 11 November 2011

Next on the watch list: Spain
All the focus has been on Italy over the last few weeks, but in this piece we look at why we are growing increasingly concerned about the Spanish situation. There are essentially three reasons for our worries: the slippage of the deficit, the possibility of a deep recession, and the acknowledgement of the bankingcrisis that will likely eventually result in a surge of liabilities being transferred to the Government balance sheet. The markets attitude towards Spain is quite sanguine compared to Italy at the moment, but we think that this could potentially change in the coming months, if not weeks.

The market disagrees
For the time being, the market has given Spain the benefit of the doubt. True, Spanishspreads have widened significantly recently (chart 1), and they are now at their highest since the launch of the euro. CDS have followed suit (remember when Spanish CDS were trading below Germany a few years ago?). But compared to Italy (Chart 2), the market clearly gives Spain the benefit of the doubt.
Chart 1: Spanish spreads at a 15-year high…
700 600 500 400 300 200 100 0 -100 90 92 93 95 97...
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