TWO Risks to world Market

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Beyond our expectationsOf a‘happy slOWdown’in 2007．we offer ourfirst guess at the g1obaleconomic picture in2008．We expect global growth in 2008to be higher than in 2007．not least dueto a possible improvement in the U．S．．Our forecasts also suggest that thetrend growth rate is onthe rise in manyparts of Europe(especially Germanyand the UK)，as wen as in significantparts of Asia(particularly China andIndia)．We also see few signs that thisstrong growth is generating higherinflation．

The two most relevant risks tomarkets are，first，an upside surprise toinflation；and second，the continuingthreat of prOtectionism in the West，which is especially important for theBRICs．

Happy Slowdown’UnfoldsAgainSt a Background OfRiSing Trend Growth inEurope and(Parts of) Asia

Our latest fotecasts for real GDPgrOWth in 2007，as well as our firstlook at 2008，appear in table I．Weexpect grOWth in 2008 to be slightlyhigher than in 2007，not least due toa possible improvement in the U．S．．Taken together，our forecasts for 2007and 2008 clearly pOint tO a‘happyslowdown’in so far as the slOWdOWnstarts to retreat in 2008．

Our forecasts also suggest that thetrend growth rate，the rate at which aneconomy can grow without generatinginflation is on the rise in many parts ofEurope(especially Germany and theUK)，as well as in significant parts ofAsia(partiCUlarly China and India)．The efficiency of growth is increasingin China，helped by improvedprofrtaabiIit、．Similar developments areoccurring m many parts Ot Europe，where (in a development overlOOkedby many)immigration also acts as aboost to potential growth(see table II)．

We see few signs that this strongeconomic　growth is generating higherinflation，which provides furthereVidence Of the current favourableenvironment．

This favourable climate continuesto suggest to us a very benign outlookfor many financial markets，includingthe major stock markets，as well as

emerging market debt and equities．And．unlike many Of our competitors。we see no significant evidence of a‘bubble’．Equity prices are underpinnedby relatively high Equity Risk Premiumand modest valuations．and whiledebt spreads are tight，the changingdynamics of the world economy andthe strong fundamentals suggest thatmarkets are not being too cavalier．

Our equity strategists will beofiering their views on this OptimisticscenariO for stocks in coming days，and we will discuss the details of oureconomic forecasts in considerablymore detail in the weeks ahead．

There are．of coarse．widespreadand considerable risks to thisoptimistic scenario．Among them,twoare perhaps especially relevant formarkets：

First．if innation were to surpriseon the upside，then we wonld envisagea different interest rate outloOk．Higherinterest rates would represent a biggerchallenge for many markets，especiallyif they were perceiVed to be prOlOngedincreases(see table Ⅲ)．

Second．the threat Of protectiOnismremains，with a growing tide Ofopinion in the West supporting theneed for policies to help those less ableto compete with the rapidly developingeconomies．StiCh a threat WOUld be particularly importantforthe BRICs．

Despite the persistence of these two risks，we judgethem tO be relatively small．As for other widely discussedconcerns，we believe they are unlikely to be especiallyrelevant fbr markets．and that the worst．case scenariosthat are commonly discussed are unlikely tO develop．

IntrOdUcing Our 2008 ForeCaSts

AlthOUgh there is still plenty of uncertainty abOut hOW2007 will turn out，we take the Opportunity at the startof our fiscal year to look beyond the 1 2．month hOrizon．Below are our first thoughts on the out look for 2008．Ourregional economists will be offering more detail in thedays ahead．We briefly summarise their views below．

GlObally，we expect GDP growth tO be higher in 2008(at 4．3％)than in 2007 (4．1％)．This is due largely to ourexpectation that the‘hapPY slOWdown’we anticipate in2007 will play out withOut difficulty,and that US growthwill strengthen．

In the G3．the outlook for 2008 is fairly solid．Weexpect Japan's domestic―demand．1ed recovery tO regainsteam，with GDP growth reaching 2．8％，up from 2．2％in 2007．This would give Japan one of its best yearssinee the start of the decade．In the Eurozone．we expectabove-trend growth of 2．4％．even better than me 2．1％in 2007．This WOUld also give Euroland one of its bestyears of the decade．The US will remain the weakest partof the G3：we anticipate that growth will remain belowtrend，although it shOUld accelerate to 2．5％from 2．0％in 2007．

We expect the BRICs to post another strong year’with growth across the four countries steady at 8．5％．After slOWing in 2007(to‘just’9．8％)，Chinese growthlooks set to reach 10％again．India will also post rObustgrowth，though we expect a slight slOWing，to 7．8％from8．O％．In Russia we anticipate a larger slowdown，to 6．0％from 7．0％。Brazil 100ks likely to continue its recentupward trajectory,with growth rising to 3．7％from 3．5％．

Elsewhere in emerging markets，we see Asiaex-Japan moving up to 8．4％from 8-2％in 2007：LatinAmerica slipping tO 4．0％from 4．4％，and Central andEastern Europe remaining basically steady at 4．8％．

InflatiOn lOOks likely to remain well．controlled nearlyeverywhere．GlObally we expect it tO remain steady at2．7％．In the G7 it will edge up(to 1．7％froom 1．6％)butwill remain below the levels of recent years．