Master Template1 Global forecasting service Economic forecast summary - April

The economy has created an average of 240,000 jobs a month in the past three months, pushing down the unemployment rate to 8.2%. The tone of recent data has been robust. But income growth remains sluggish and high oil prices are cutting disposable income. We have edged up our 2012 GDP growth forecast to 1.9%. Housing market data has improved recently but a large overhang of unsold houses remains a headwind for the property market. A drastic tightening of fiscal policy is in prospect in 2013 for the incoming administration.

The injection of liquidity by the ECB into euro zone banking system has eased funding pressures on banks and sovereigns, notably Italy and Spain. In Greece a restructuring of debt owed to private creditors was completed in March, entailing write-offs of €100bn. The debt restructuring and additional austerity measures have paved the way for a second, €130bn EU/IMF loan deal. This has averted the risk that Greece might default on a €14.5bn bond repayment in March. We expect the euro zone economy to contract by 0.7% in 2012.

Growth in 2011 was undermined by the negative impact of the March earthquake and tsunami as well as a strong yen that constrained export potential. The economy lost momentum in the fourth quarter, contracting by 0.6%, but one positive development was strong growth in investment by Japanese companies. The economy is expected to grow by 1.5% in 2012 supported by a stronger export performance and reconstruction activity. From 2013 we expect the economy to grow at a rate of between 1- 2%.

Growth in 2012 will be constrained by sluggish OECD demand. EMs will still comfortably outperform their peers in the developed world in EM currencies and asset markets have rallied strongly since the start of the year as risk appetite has recovered. Brazil has taken measures to stem upward pressure on the Real. In China we forecast growth of 8.2%, higher than the government’s new, lowered medium-term target of 7.5%. Rebalancing the economy away from investment towards private consumption will make for less commodity-intensive growth.

Oil consumption growth will be constrained in 2012 by the weak OECD economic outlook. It will average nearly 2% year on year in , led by rising demand in the developing world. Geopolitical risks are weighing on the supply picture particularly the tensions between the West and Iran. Our forecast assumes a military outcome is avoided. Prices will average around US$110/b in 2012 as supply concerns offset the negative impact of weaker demand.

Consumption growth is expected to slow in 2012, constrained by weak EU and growth and somewhat slower growth in the developing world. However, 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 , but prices will ease back in real terms.

Sluggish demand will be deflationary but high oil prices will push up headline inflation. The Fed has signalled its intention to keep interest rates very low until late A further round of quantitative easing appears unlikely if the current rate of job creation is sustained. The ECB cut rates twice in late 2011, reversing the two rate rises earlier in the year. In 2012 we expect the ECB to keep its policy rate at 1%. We expect most emerging market central banks to keep interest rates broadly stable in 2012.

As funding stresses on euro zone banks and sovereigns have eased, the euro has rebounded. Having bounced from a recent low of US$1.26, the single currency appears to be establishing a new trading range above US$1.30:€. The yen has weakened as risk appetite has recovered and the Bank of Japan has become more aggressive in easing monetary policy. EM currencies have rebounded. Over the medium term they will be supported by positive growth and interest rate differentials with OECD economies.

+ Unprecedented policy response after Greek exit prevents contagion - An attack on Iran results in an oil price shock - The global economy falls into recession - The euro zone breaks up + Stronger than anticipated US growth boosts the global economy

- Tensions over currency manipulation lead to protectionism - The Chinese economy crashes - US dollar crashes - Economic upheaval leads to widespread social and political unrest - Resumption of monetary stimulus leads to new asset bubbles

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