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ISI MACROECONOMIC REPORTS

by Dr. Ahmet N. MRE

August 2012

ECONOMIC OUTLOOK, PROSPECTS AND POLICY:


Globally and in Turkey

The Global Economy: General Outlook and Near-Term Prospects


The ongoing deterioration in the economic outlook of particularly the Mediterranean flank of the
Eurozone continued to shape the global economic outlook in the second quarter of 2012 and there
have also been some significant country-specific events that affected global risk perceptions. In
particular, the results of the general elections in Greece in May reduced the probability of an exit from
the monetary union and led to a partial recovery in risk perceptions. Meanwhile, the recent deepening
of interdependent problems regarding sovereign debt and the banking sector in Spain has limited the
improvement in risk appetite. Although the measures adopted and the supportive announcements by
leading central banks have enabled some improvement in global risk perceptions since June, problems
regarding the Eurozone continue to feature as a major risk for the global economy in the medium and
long term ahead.
The lack of stability in the global economy, coupled with the ongoing imbalances, is creating some
adverse impact on the global economic outlook. In fact, economic activity has lost momentum in the
last quarter, both in the US and in Chinatwo of the driving engines of the world economy.
Accordingly, growth forecasts for advanced and emerging countries have been modified downwards.
While inflationary risks have waned to a large extent, in line with the weak outlook for global
economic activity; concerns over growth and financial stability remain well-justified. Against this
background, central banks continue to implement expansionary monetary policies.
Chronic fragilities and imbalances regarding the global economy continue to keep investors' risk
appetite highly volatile. Four years after the outbreak of the global crisis, advanced economies are still
going through a deleveraging process. Acute economic problems in the Eurozone, uncertainties
regarding the US economy and China, as well as supply-side risks with regard to energy prices still
prevail. Together with the unusually low-cost liquidity facilities provided by central banks; these
uncertainties create substantial volatility in short-term capital flows destined to emerging economies.
Such an environment leads central banks of emerging economies to assign priority to measures aimed
at containing the adverse effects of excessive volatility in short-term capital flows.
All these factors highlight the importance of adopting a flexible monetary policy framework. Over the
past three months, the global recoverywhich at any rate was not very strong to begin withhas
exhibited signs of weakening further, according to the IMFs World Economic Outlook Update dated
July 16, 20121. Financial market and sovereign stress in the Eurozone periphery have been driven up,
close to end-2011 levels. Growth in a number of major emerging market economies has been lower
than forecast but these developments are expected to result in only a minor setback to the global
outlook, with global growth at 3.5 % in 2012 and 3.9 % in 2013, marginally lower than in the April
2012 edition of IMFs World Economic Outlook. The latest World Economic Outlook dated July 16
points to the ongoing uncertainty in the global economy, originating particularly from further
turbulence in the Eurozone.
While the instability in global financial markets had become inclined to ease in the early months of
the year, market tensions and sovereign stress in the Eurozone have tended to intensify once again in
1

International Monetary Fund: World Economic Outlook - New Setbacks, Further Policy Action Needed
July 16, 2012 (http://www.imf.org/external/pubs/ft/weo/2012/update/02/pdf/0712.pdf)

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recent months; with deep-seated weaknesses in Europe continuing to pose significant risks to the
global recovery.
Downside risks to this weaker global outlook continue to remain substantial. The most immediate risk
is still that of insufficient or delayed policy action, which would give way to further intensification of
the Eurozone crisis. While substantial efforts are being demonstrated by the ECB and by EU leaders,
further steps are necessary, notwithstanding challenging implementation hurdles, as underscored by a
recent deterioration in sovereign debt markets.
The situation in the Eurozone crisis economies will likely remain precarious for some time; at least
until all policy actions that would be needed for a resolution of the crisis have been taken. Other
downside risks relate to fiscal policy in other advanced economies. Specifically, in the short term, the
possibility of excessive fiscal tightening in the United States constitutes a significant risk, particularly
in view of the recent political gridlock. It is estimated that should policymakers fail to reach
consensus on extending some temporary tax cuts and reversing deep automatic spending cuts, the U.S.
structural fiscal deficit could decline by more than 4 percentage points of GDP in 2013. U.S. growth
would then stall next year, with significant adverse spill-over effects to the rest of the world.
Moreover, delays in raising the federal debt ceiling could increase risks of financial market
disruptions in the period ahead and bring about a loss in consumer and business confidence.
Another risk arises from insufficient progress in developing credible plans for medium-term fiscal
consolidation in the United States and Japan, even if the flight to safety in global bond markets
currently mitigates this risk. In the absence of policy action, medium-term public debt ratios would
continue to move along unsustainable trajectories. As the global recovery advances, a lack of progress
could trigger sharply higher sovereign borrowing costs in the United States and Japan as well as
turbulence in the global bond and currency markets.
Risks to growth in emerging market and developing economies seem primarily related to external
factors in the near term. The slowdown in emerging market growth since mid-2011 has been partly
the result of policy tightening in response to signs of overheating. But policies have been eased since,
and this easing should gain traction in the second half of 2012. Still, concerns remain that potential
growth in emerging market economies might be lower than expected.

U.S. Economy: A Temperate Pace of Recovery


During the course of July, U.S. economic data remained consistent with a moderate pace of economic
growth in the near term. U.S. real gross domestic product increased at an annual rate of 1.5 % in the
second quarter of 2012, (that is, from the first quarter to the second quarter), according to the
"advance" estimate released by the Bureau of Economic Analysis.
In the first quarter, real GDP in the US increased 2.0 % primarily reflecting positive contributions
from personal consumption expenditures (PCE), exports, non-residential fixed investment, private
inventory investment, and residential fixed investment that were partly offset by a negative
contribution from state and local government spending. Imports, which are a subtraction in the
calculation of GDP, increased. On the other hand, the deceleration in real GDP in the second quarter
primarily reflected an acceleration in imports, and decelerations in residential fixed investment and in
non-residential fixed investment that were partly offset by an upturn in private inventory investment, a
smaller decrease in federal government spending, and an acceleration in exports.
Real personal consumption expenditures increased 1.5 % in the second quarter, compared with an
increase of 2.4 % in the first. Output of durable goods decreased 1.0 %, in contrast to an increase of
11.5% in the first quarter. The production of non-durable goods increased 1.5 %, compared with an
increase of 1.6 % in the first three months of this year. Meanwhile the output of services grew 1.9
percent. Real non-residential fixed investment increased 5.3 % in the second quarter, compared with a
growth of 7.5 % in the first.
As regards the external sector of the economy, real exports of goods and services increased 5.3 % in
the second quarter, compared with an increase of 4.4 % that was recorded in the first. Real imports of
Dr. Ahmet N. IMRE

ahmedim52@hotmail.com

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goods and services increased 6.0 %, compared with an increase of 3.1 percent. Real federal
government consumption expenditures and gross investment decreased 0.4 % in the second quarter, in
contrast to a decrease of 4.2 % in the first. National defence spending decreased 0.4 %, compared
with a decrease of 7.1 percent.
The change in real private inventories added 0.32 percentage point to the second-quarter change in
real GDP after subtracting 0.39 percentage point from the first-quarter change.

Real GDP in the U.S. rose at a 1.9% annual rate, according to the third estimate for Q1'12. The second
quarter pace is expected to be lower than that, as the U.S. economy has not yet staged a noteworthy
recovery from the dip it experienced in 2010. Real personal spending accounts for about 70% of GDP
and figures for April and May suggested a 1.5% to 2.0% annual rate (compared to +2.5% in 1Q112).
Some of the slowdown reflects a pay off from a mild winter which boosted spending in 1Q112, while
some is likely the upshot of the earlier increase in gasoline prices. Gasoline prices have fallen,
boosting consumer purchasing power in the near term. Average weekly earnings are now outpacing
inflation. Bank credit to consumers, while still relatively tight, is gradually improving. Motor vehicle
sales picked up in June after falling in May. Replacement needs should provide support to vehicle
sales over the next several quarters. Still, a large percentage of homeowners with mortgages remain
below the surface (being in debt by more than the homes current market value), which will continue
to restrain spending to some extent.
Europe and the fiscal cliff remain the two key uncertainties and the major downside risks to the
growth outlook. Responding to these downside risks, the Federal Reserve extended the so-called
Operation Twist through the end of the year. Officials are poised to take further action and this may
make QE3 a close call for the Feds next policy meeting.

US Labour Market Beginning to Stabilize


The US added a better-than-expected 163,000 jobs in July, according to official figures released on
August 3, by the US Department of Labor. This provides an indication that the recent slowdown in the
worlds largest economy may have entered a stabilization phase.
The rise in non-farm payrolls beat expectations of 100,000 new jobs and compares with a
downwardly revised figure of 64,000 in June. The unemployment rate rose from 8.2 to 8.3 per cent.
Both the number of unemployed persons (12.8 million) and the unemployment rate (8.3 %) staged
only marginal changes in July and thus far in 2012. While the stronger number assuages fears that the
US could spiral into a recession, it also points to a somewhat faltering economy that stops short of
creating an adequate number of jobs that would generate a meaningful drop in the unemployment rate.
The numbers are hope-inspiring, to the extent that they bring to mind the possibility that the secondDr. Ahmet N. IMRE

ahmedim52@hotmail.com

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quarter slowdown in jobs growth may have been due to warm weather causing strong hiring in the
first quarter and is therefore of an only temporary nature and hence indicates that the U.S. economy is
growing fast enough to absorb the growth in population, but not fast enough to bring down the
unemployment rate. Monthly payrolls are the single most important indicator of the health of the U.S.
economy. If Julys improvement continues into August, it will complicate the US Feds decision on
whether to ease monetary policy further in the months ahead.
The rise in the unemployment rate reflects numbers from a more volatile survey of households
which showed a fall in jobs and a slightly smaller decline in the labour force whereas the payrolls
number comes from a survey of businesses.
There was another sign of feeble but continuing growth in the purchasing managers index for the
service sector, which rose from 52.1 to 52.6.
Overall jobs growth in the private sector totalled 172,000, offset by the loss of 9,000 jobs in the
government sector.
Jobs growth was spread broadly across industries, with 25,000 net new jobs in manufacturing, 49,000
in business services, 38,000 in education and healthcare and 27,000 in leisure and hospitality. The
main weak spots were finance and construction, with the building sector shedding another 1,000 jobs.
Such developments impacted favourably on consumer confidence which improved to 65.9 in July of
2012, from 62.7 a month earlier.

Monthly change in private-sector employment in the


United States from July 2011 to July 2012 (in 1,000)
300
250
200
150
100
50
0

Over the Month Change (in '000)

Source: U.S. Bureau of Labor Statistics (http://www.bls.gov/)

But Factory Activity Stagnates.


Activity in the US manufacturing sector remained relatively stagnant in July, amid a continuing global
slowdown, while the countrys private sector added fewer workers to the labour force than was the
case in the previous month. As a matter of fact, national factory activity scarcely rose in July, as a
slight increase in new orders was offset by a decline in employment which fell to a two-and-a-half
year trough. Overall, the Institute for Supply Managements manufacturing index2 inched up to 49.8
from 49.7 in June, falling short of market expectations for a level of 50.2.
2

ISM - Institute of Supply Management: July 2012 Manufacturing ISM Report On Business Released on
August 1, 2012(http://www.ism.ws/ismreport/mfgrob.cfm)
Dr. Ahmet N. IMRE

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Economists fear a slowdown in momentum over the medium term, given that the US manufacturing
sector had been regarded as the basis of a US economic recovery, having reversed decades of decline
and adding jobs since 2010.
The index of new orders rose to 48, up slightly from Junes 47.8 while ISMs gauge of employment
slid to its lowest level since December 2009 at 52 from 56.6. Exports continued to tumble and were
down at 46.5 from 47.5.
Inventories are thinning, but only by a small amount, while delivery times are shortening. In another
reflection of weak demand input prices, are contracting, as evidenced by a 13-point loss in the index
since February.
July hiring was led by the service sector, with 148,000 new positions. Goods-producing companies
added 15,000 jobs, of which 6,000 were in manufacturing.
Economists expect the non-farm payrolls survey, which includes government hiring and layoffs, to
show that the economy added a net 100,000 jobs in July, compared with 80,000 in June. It is expected
that the private sector will have contributed 210,000 positions, offset by public sector job cuts. The
unemployment rate is forecast to hold at 8.2 per cent.
Construction spending rose modestly in June as investment in new homes and in home improvement
offset losses from a dip in spending in public works projects by the federal government.
The US Commerce Department data showed that total construction spending increased 0.4 % during
the month, to an annual rate of US$842 billion, roughly in line with analysts expectations. This
followed a 1.6 % leap in May.
On a year-over-year basis, construction spending was 7 % higher, compared with 8.1 % the month
before.
A tentative recovery in the US housing market has boosted residential construction spending which
was up 1.3 % in June, after a 3.1 % boost in May.
The multifamily subcomponent jumped 3.4 %, following a 6.9 % increase the month prior, as more
people choose not to purchase big-ticket items and are opting to rent, against the backdrop of an
uncertain macroeconomic environment.
The single family component too increased 3 % in June, following a 2.2 % gain the previous month.
Government construction spending held steady, with public works projects down 1.6 per cent.

EUROZONE: Edging Towards Recession


The Eurozone economy avoided a technical
recessiontwo
consecutive
quarters
of
contraction. EuroStat data out on August 143
confirmed initial estimates that GDP remained
unchanged in the opening quarter of 2012 from
the previous stanza, when it contracted by 0.3%.
Underlying weakness in the recovery from the
2008-2009 recession was also confirmed with
output falling 0.1% from the opening months of
2011. Euro zone PMIs for manufacturing and
services suggest GDP will fall in the current
quarter. We expect the economy will shrink by
around 0.5% in 2012 based on the assumption
3

EuroStat News Release #118/2012 dated 14 August 2012: June 2012 compared with May 2012
Industrial production down by 0.6% in Euro area (http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/414082012-AP/EN/4-14082012-AP-EN.PDF)
Dr. Ahmet N. IMRE

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that Greece remains in the single-currency area. However, the uncertainty over the outlook has
increased significantly over recent months. Over June and July, the Eurozone edged closer to
recession after a hard-wearing economic performance from Germany and France failed to stop the
single currency bloc from contracting in the second quarter.
Gross domestic product in the Eurozone contracted 0.2 % in the three months to June, compared with
the previous three months when there was no growth. This development reflected sharp retrenchments
in economic activity in Greece, Italy, Spain and Finland.
Nonetheless, robust investment and domestic consumption helped the German economy expand 0.3 %
in the second quarter; exceeding expectations of just 0.1 % growth, while Frances GDP remained
unchanged thereby avoiding a highly anticipated contraction. The Netherlands also outperformed
forecasts, growing 0.2 per cent.
EuroStat data released on August 14 confirmed initial estimates that GDP remained unchanged in the
opening quarter of 2012 from the previous position, when it contracted by 0.3 per cent. Underlying
weakness in the recovery from the 2008-2009 recession was also confirmed with output falling 0.1%
from the opening months of 2011. Eurozone PMIs for manufacturing and services suggest GDP will
decrease in the current quarter. Hence, the economy will probably contract by around 0.5% in 2012
based on the assumption that Greece remains in the single-currency area. This said, the uncertainty
over the outlook has increased significantly over recent months.
Despite the evident
favourable economic
performance in France,
Germany and
the
Netherlands,
the
sovereign debt crisis
continues to trouble
southern Europe, as it
is spreading to the
blocs
economically
stronger core northern
states.
This
is
particularly evident in
Finland,
a
close
collaborator
of
Germany in the struggle for greater austerity in the Eurozone, where the economy shrank 1 % in the
second quarter.
Of the more 'problematic' amongst the Eurozone economies; Greeces economy shrank at an
annualised pace of 6.2 % in the second quarter, as the countrys economic administration is spending
efforts to reignite investment and consumption which have remains subdued essentially because of
the strict austerity measures imposed by the EU in exchange for further bailouts. Meanwhile, Italys
economy contracted at an annualised rate of 0.7 % quarter-on-quarter, extending the countrys yearold double-dip recession.
Eurozone GDP fell by 0.2% in the Eurozone during the second quarter of 2012, compared with the
previous quarter, according to flash estimates published by EuroStat, the statistical office of the
European Union. In the first quarter of 2012, growth rates were 0.0% in both zones. Compared with
the same quarter of the previous year, seasonally adjusted GDP fell by 0.4% in the Eurozone in the
second quarter of 2012, after 0.0% in the previous quarter. For the sake of comparison, during the
second quarter of 2012, GDP increased by 0.4% in the United States relative to the previous quarter
(after +0.5% in the first quarter of 2012) and by 0.3% in Japan (after +1.3% in the first quarter of
2012).

Dr. Ahmet N. IMRE

ahmedim52@hotmail.com

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Eurozone Unemployment Escalates to a Record High of 11.2% in June.


Meanwhile, the Eurozone unemployment rate was last reported at 11.2 % in June of 2012. It may be
recalled that historically, from 1995 until 2012, the Eurozone unemployment rate averaged 9.2 %
reaching an all time high of 11.1 % in May of 2012 and a record low of 7.2 %in February of 2008.

Based mainly on the worsening unemployment outlook, Eurozone consumers continued to maintain a
pessimistic attitude as regards the Regions economic prospects in the period ahead and consumer
confidence progressed along a downward path, declining to -21.5 in July of 2012 from -19.8 in June
of 2012. On the other hand, business confidence declined to a lesser extent, to -1.27 in July of 2012,
from -0.95 in June of 2012.
The most significant short-term risk facing the global economy continues to be Europe's debt crisis.
The progress of the Eurozone crisis in the period ahead will depend on the length and depth of the
Eurozone recession. If output continues to shrivel at the same time as unemployment keeps rising,
then austerity measures are likely to make economic conditions worse while generating very little new
revenue. Consequently, the Eurozone may fall into an even deeper abyss.

JAPAN: Public Investment Drove Growth in Q2'12.


Second-quarter gross domestic product data, released on August 13 by Japans Cabinet Office,
showed that public investment, up 1.7 % from the first quarter, was a primary driver of the nations
growth between April and June. Other segments of the worlds third-largest economy have fared less
well, however. GDP figures showed that Japans economy grew by a less-than- expected, in the
second quarter; that is, by an annualized 1.4 %, as weak exports and softer consumer spending offset
strong public investment in tsunami-stricken Tohoku. The data represented a significant fall relative
to the revised annualized 5.5 % expansion between January and March.
While heavy spending on rebuilding following the Tohoku tsunami is necessary, it suggests that
growth may taper further in the second half of this year, as less cash is disbursed to the region from
central government. Meanwhile, private consumption, the engine of the economy, grew a mere 0.1 %,
the weakest in five quarters, as spending on services and non-durables fell.

Dr. Ahmet N. IMRE

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Net exports, meanwhile, trimmed 0.1 percentage points from GDP the sixth quarterly subtraction in
a row amid sluggish shipments from manufacturers and high imports of fuel to replace lost nuclear
capacity.
Perhaps most disquieting was a 0.5 % year-on-year fall, in the nominal remuneration of employees,
suggesting that even though economic activities have risen somewhat, incomes are not keeping up and
companies have begun to squeeze payrolls to offset weaker sales, or to counter the impact of the
stubbornly strong yen which undermines the future outlook for consumption.

TURKEY: Consumer Confidence Improved in July.


Despite the increasingly uncertain outlook of the global economy and a moderate uptrend in inflation,
monthly changes in consumer confidence remained in positive territory. The Consumer Confidence
Index, which was 91.8 in June 2012 increased by 1.1% compared to previous month and became 92.8
in July 2012.

Source: TurkStat Turkish Statistical Institute Press Release # 10886 dated August 16, 2012
(http://www.turkstat.gov.tr/PreHaberBultenleri.do?id=10886)
Dr. Ahmet N. IMRE

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The increase in the index stemmed essentially from an improvement in consumers' purchasing power
in the current period, as well as their relatively more favourable expectations regarding their
employment prospects, purchasing power and the general economic outlook in the period ahead.
Recent data suggest that final domestic demand is growing at a moderate rate. Exports continue to
develop along an uptrend and the balancing of the demand composition continues in the second
quarter. Economic activity is expected to post a relatively higher increase on a quarterly basis in the
second quarter. This said, one ought to bear in mind that this expected surge in activity can be
attributed largely to the low base at the beginning of the year. Accordingly, the recovery in economic
activity is considered to be only mild in this period.

Current Account Deficit Narrowed in the First Half of 2012, While NonResidents' Investments in Turkey Increased Considerably.
Turkeys current account deficit amounted to US$ 31,083 million in the first half of the current year,
implying a narrowing of US$ 13,685 million over the same period of the previous year. This
development is essentially attributable to a US$ 12,041 million decrease in the foreign trade deficit
which amounted to US$ 34,420 million and to a US$ 835 million increase in net services income
reaching to US$ 6,283 million, in addition to a US$ 873 million decrease in net income outflows
amounting to US$ 3,589 million.
Under the services account, the travel revenues and expenditures decreased by US$ 95 million and
US$ 635 million respectively, compared to the same period of the previous year, recording US$ 8,377
million and US$ 1,887 million respectively.
The main sub-items under investment income, namely direct investment, portfolio investments and
other investment consisting of the interest income and expenditures; recorded a net outflow of US$
3,487 million in January-June, decreasing by US$ 902 million observed during the same period of the
previous year.
Non-residents net direct investment in Turkey reached US$ 8,206 million increasing by US$ 1,418
million, while residents net direct investment abroad recorded US$ 2,503 million increasing by US$
1,174 million over the first half of 2011. Non-residents equity security transactions recorded net
purchases of US$ 1,238 million in the first half of 2012, including the net purchases of US$ 898
million in June. Non-residents realized net purchases of US$ 3,891 million of government domestic
debt securities in the first half, including the net purchases of US$ 2,237 million observed in June, and
net purchases of US$ 227 million regarding the domestic securities issued by resident banks in the
first half.

Dr. Ahmet N. IMRE

ahmedim52@hotmail.com

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Consumer inflation rate in Turkey materialized at 9.1 % in July 2012.The IMF has forecast Turkeys
year-end 2012 growth at 2.3 % and increased its 2012 inflation expectation to 10.6 % from 6.5 %,
according to the IMFs world economic outlook report.4 According to the report, Turkeys gross
domestic product (GDP) growth will be 2.3 % at the end of 2012. Turkey is forecast to grow 3.2 % in
2013 and annual consumer prices are expected to materialize in the vicinity of 10.6 % in 2012 and
around 7.1 % in 2013.
The IMF report also predicts that Turkeys current account balance ratio to GDP will be around -8.8
% in 2012 and -8.2 % in 2013. It further forecasts the unemployment rate to be around 10.3 % in 2012
and 10.5 % in 2013.
All in all, Turkeys economy still remains resilient to heightened stress in the Eurozone and to a weak
recovery in most advanced economies. Although reduced, vulnerabilities in Turkeys major trading
partners remain and they continue to pose risks to the sustainability of countrys long-term growth.
Accordingly, the tightening of macroeconomic policies since the second half of 2011 was appropriate
and has contributed to slowing domestic demand and to keeping inflationary pressures tightly
controlled. As an encouraging result, the economy is decelerating toward a 'soft landing', thus helping
redress the imbalances built over the last two years. It will be important to maintain current budget
targets for 2012 and tight monetary policy to guard against external shocks and to strengthen existing
policy buffers. Still, global economic developments pose downside risks. In the event of these risks
materializing, the public sector's strong balance sheet provides Turkeys economic policymakers with
adequate room for implementing effective counter-cyclical policies.

25 August 2012
Dr. Ahmet N. MRE

Turkey's Economy: Reforms to Strengthen Economic Stability Will Help Turkey's Growth and Jobs
IMF Survey Online, May 11, 2012 http://www.imf.org/external/pubs/ft/survey/so/2012/NEW051112A.htm
Dr. Ahmet N. IMRE

10

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