Key fi lal ket driver 2 - US poli Key questions US moderate growth to continue e Will the economic outlook deteriorate? Will QE3 become necessary? US real GDP and its components, quarter-over-quarter e How will the election outcome change fiscal policy deliberations? annualized In 2 e Can politicians find an agreement to avoid sharp fiscal contraction in early 2013 ("fiscal cliff")? = 2 qiq annualized UBS CIO CIO View (Probability: 65%*) No QE3, political gridlock and some fiscal tightening io T3 A ; ; ‘TA ot ¢ The economy stays on a moderate growth path, coupled with stable core PCE inflation close to the Fed's 2% iW. ty Nat = target of 2%. UBS forecasts real GDP growth of 1.5% in 2Q 2012 (consensus: 2.1%) and 2.3% in 3Q 2012 0% iE il HAE r i ie (consensus: 2.4%), with some downside risk due to rising uncertainty. The Fed has decided to extend so ‘o —_ mn | eo called "Operation Twist" until the end of the year. More near-term monetary easing is still possible, but it By, aly is currently not our central scenario. 8% | ¢ In the elections, Republicans will likely lose seats in the House overall, but retain a majority; we also rr | expect them to win a narrow majority in the Senate. Obama will likely retain the White House. Such an a 2006 O1 2007 Ot 2008 O1 2009 Ot 2010 OT 2011 OT 2012 electoral outcome would confirm the existing gridlock between Republicans and Democrats. im Consumption Commercial real estate investment ¢ Against the backdrop of ongoing political gridlock, we expect only moderate fiscal tightening of about mabey { esncliues ee ane 0.9% of GDP in 2013. The government will likely let unemployment benefits and the payroll tax cut expire, ™°e""™" Real OP ferevannial zee but postpone income tax hikes and sequestration spending. Source: Thomsen Datastream, UBS CIO, as of 20 June 2012 A Positive scenario (Probability: 10%*) No QE3, Democratic sweep and more fiscal tightening e Propelled by ultra-expansive monetary policy and improved confidence, cyclical fo