Master Template1 Global forecasting service Economic forecast summary – May

The US economy has been doing well, with strong jobs growth and a sustained recovery in the housing market but the data softened in March. Congress’ failure to reach a deal on tax and spending has led to automatic spending cuts known as sequestration, which are unlikely to be reversed. 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 We forecast average growth of 2.3% in

The shock caused by the bail-in of bank depositors in the financial assistance deal for Cyprus seems to have been absorbed. The ECB’s OMT bond-buying programme (as yet unactivated) continues to exert a calming effect. A period of political instability is in prospect in Italy following elections which ended in stalemate. Conditions in the real economy remain dire and we have downgraded our 2013 growth forecast for the euro zone to - 0.7%. Fiscal consolidation will remain a drage on growth in 2013.

We have upped our 2013 growth forecast to 1.1% from 0.9%. Demand will be boosted by the expansionary monetary and fiscal policies of Shinzo Abe. A weaker yen will provide some relief to Japan’s exporters. It will also contribute to raising the annual inflation rate to around 1.3% between 2014 and 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. The consumption tax rate is forecast to rise from 5% at present to 8% in April 2014 and then to 10% in October 2015.

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 But following 7.7% growth in the first quarter, we have revised down our 2013 growth forecast from 8.4% to 8%. We expect India’s growth to pick up in 2013 to 6.5%, after growth of just 3.3% in Following a slow start to 2013, we have cut our 2013 growth forecast for Russia to 2.8%.

Oil consumption growth in 2013 has been revised down to 1.2% to reflect the downgrades to our euro zone and China GDP forecasts. Overall, consumption growth will average around 1.6% a year in , 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 and only a modest pick up in China’s consumption Rising emerging market incomes and urbanisation will underpin medium- term demand growth Generally low stocks and uncertainty over supply will support agricultural commodity prices Nominal prices will remain historically high in , but prices will ease in real terms

The new governor of the Bank of Japan has announced a massive expansion of QE, with plans to double the monetary base by 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 Given the protracted recession in the eurozone, an ECB rate cut is back on the cards, although not yet our central assumption. Some emerging market central banks may have to tighten monetary policy to control the threat of inflation.

Europe’s debt crisis and a protracted recession will remain potential sources of pressure on the euro. The relative outperformance of the US is supporting the dollar at present, although it faces headwinds from the combination of loose monetary policy, fiscal tightening and a large external funding requirement. Japanese macroeconomic policy will keep the Yen weak. EM currencies 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 - 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 - War breaks out on the Korean peninsula

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