Global Economic Supply & Demand ***

After a flat spell over much of Half 1 '11, global industrial production did rebound moderately
over the second half of the year to wind up about 5.5% above year end 2010. Reflecting a
recovery of the global operating rate, industrial commodities prices have turned up in 2012.
Measured yr/yr, global industrial output growth has decelerated from the powerful 12% level
set in the initial recovery phase in early 2010 down to the 5.5% level and the trend of
decelerating growth likely continued into early this year. By my estimates, the slowdown of
output growth in 2011 was not sufficient to create substantial economic slack. Thus if global
industrial output growth were to re-accelerate over the course of this year, the supply / demand
situation could tighten considerably, which could send industrial commodities prices sharply
higher as well government bond yields.

Global purchasing manager data indicate a sharp acceleration of output in early 2012, including
for new orders. There is a positive skew to the data reflecting stronger manufacturing and
services output for the US which counts heavily in the measure. But Brazil, India and Russia
also showed stronger coupled with moderate growth for China and Japan. the EU remained
weak, but not weak enough to throw the world off a moderate growth course. More QE programs
by central banks showed up in the second half of 2011 including large liquidity building loan
programs from the ECB.

In my view, the QE programs do build business as well as stock market confidence, and the
absence of further significant monetary easing as the year progresses could adversely affect
the performance of individual economies to varying degrees, although one has to be careful not
to jump the gun here. For example, in the US, banks are lending again. The trend is moving in
the right direction, but is not yet strong enough to warrant saying further QE is unnecessary to
support growth. In the EU, it is far from clear how rapidly banks can adjust to the huge flow
of liquidity and move toward a modicum of normality given the evident restraints in place.

The trend of the oil price will play a major role for global growth this year. the current sharp
uptrend appears hardly sustainable without fresh indications that there will be substantial
supply problems.

Global stock markets have been very positively attuned to strong global economic growth
momentum. With potential overheating in store should strong growth eventuate and sustain,
this might be a year when investors should actually cheer a considerably more moderate
course.
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*** I use the CPB Netherlands economic data freely and strongly suggest you keep an eye on it
as well (scroll down for industrial output and tour the site).