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Master Template1 Global forecasting service Economic forecast summary – March 2013 www.gfs.eiu.com
Post-election, the political scene continues to suffer from sharp ideological differences between the parties. Following a mini-deal on raising taxes at end-2012, further confrontations loom over federal spending and the federal debt ceiling. Loose monetary policy and a recovering housing market will partly offset contractionary fiscal policy. We maintain our GDP growth forecast for 2013 at 2.1%, down slightly from an estimated 2.2% in 2012. We forecast average growth of 2.3% in 2014-17.
The existence of the ECB’s OMT bond- buying programme (as yet unactivated) continues to foster a period of financial calm, easing Spain and Italy’s funding pressures. The real economy remains weak although it should emerge from recession by mid-year: euro area unemployment reached a record highs in late 2012. The ECB’s move buys time. Structural issues of competitiveness and solvency still need to be addressed. Fiscal consolidation will remain a constraint on growth in the medium term.
We forecast 0.9% growth for 2013, rising to 2% in 2014. Demand will be boosted by the expansionary monetary and fiscal policies of Shinzo Abe. The consumption tax rate is forecast to rise from 5% at present to 8% in April 2014 and then to 10% in October 2015. We forecast average annual inflation of around 1.3% between 2014 and 2017. A weaker yen will provide some relief to Japan’s exporters. Over the long term the ageing of the population, combined with disorderly public finances, will make it difficult for policymakers to engineer a self- sustaining recovery in domestic demand.
Growth in 2012 was constrained by sluggish OECD demand and a policy- induced slowdown in China designed to deflate a housing bubble. Chinese data started to strengthen in the final quarter of 2012. Stimulus measures and an increase in bank lending support our view that the economy will strengthen in 2013 and grow by 8.5%. Growth in Brazil is expected to improve in 2013, but remain relatively modest at 3.5%. We estimate that India’s growth will pick up in 2013 to 6.5%, after growth of just 5.4% in 2012.
Oil consumption growth will pick up slightly in 2013 as China returns to stronger economic growth and US consumption turns slightly positive. Overall, consumption growth will average around 1.7% a year in 2013- 17, led by the developing world. Geopolitical risks continue to weigh on the supply picture, particularly the tensions between the West and Iran. Still weak demand growth and ample supply will constrain prices in 2013, assuming no unforeseen disruptions to supply or heightened political risk.
Demand will remain relatively subdued in 2013, constrained by weak OECD growth, but will pick up supported by a pick up in China’s consumption Rising emerging market incomes and urbanisation will underpin medium- term demand growth. Years of underinvestment, particularly in agriculture, will support prices. Nominal prices will remain historically high in 2013-17, but prices will ease back in real terms.
The Fed’s current monetary stimulus, a third round of QE, worth US$85bn in monthly bond purchases, is open- ended and will last until at least 2014. The ECB has said it will buy short- term bonds of euro zone governments without limit, subject to strict conditions. Given indications that the eurozone will exit recession in mid-2013 we no longer expect the ECB to cut interest rates this year. Emerging market central banks are adopting an easier monetary stance.
Europe’s debt crisis and a protracted recession will remain potential sources of pressure on the euro. All the same, the dollar has little fundamental support, given the combination of loose monetary policy, fiscal tightening and a large external funding requirement. We forecast an average euro:dollar rate of 1.34 in 2013. EM currencies will be sensitive to changes in global risk appetite. They should be supported over the medium term by positive growth and interest rate differentials with OECD economies.
- One or more countries leave the euro zone - Tensions over currency manipulation lead to protectionism - The global economy falls into recession + A sustained decline in oil prices provides a global economic fillip - Tensions over disputed islands rupture Sino-Japanese ties 16 20 15 12
- Social and political disorder undermine stability in China - US economy stumbles in the wake of a wave of fiscal tightening - Economic upheaval leads to widespread social and political unrest - An attack on Iran results in an oil price shock + Co-ordinated monetary stimulus kick-starts a global recovery 10 9 8 8
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