Master Template1 Global forecasting service Economic forecast summary - November

Following the announcement of a larger- than-expected third round of QE we have raised our US GDP growth forecast for 2013 to 2.1% from 1.9%. We maintain our 2.1% forecast for 2012 and forecast average growth of 2.3% in The US faces headwinds, from fiscal tightening and unfavourable conditions globally. Job creation has picked up but remains disappointing. The housing market is showing signs of a sustainable recovery. We assume that Congress moderates the drastic tax rises and spending cuts due to come into force in 2013.

The ECB has eased funding pressures on Spain and Italy by signalling its readiness to buy the bonds of sovereigns facing high borrowing costs. Crucially, the ECB will buy the bonds only of countries that have applied for help from euro zone rescue funds and accepted the conditionality attached. Spain is delaying seeking official help. The use of the ECB’s balance-sheet to ease funding pressures buys time. Structural issues of competitiveness and solvency still need to be addressed. After contracting by 0.4% in 2012, euro zone GDP will grow by 0.4% in 2013.

The economy contracted by 0.7% in 2011, undermined by the negative impact of the March earthquake and tsunami. Following a strong first quarter, the economy is on track to grow by 2% in 2012 despite a sharp downturn since mid-year. In growth will slow, constrained by deteriorating demographics, high public indebtedness and a doubling of the consumption tax. The yen will be sensitive to global risk sentiment which is being encouraged by unorthodox policy easing by the US Fed and the ECB.

Growth in 2012 will be constrained by sluggish OECD demand and a policy- induced slowdown in China designed to deflate a housing bubble. Chinese data has shown signs of stabilising in September. Stimulus measures and an increase in bank lending since May support our view that the economy will regain momentum in the final quarter. The Brazilian economy is responding to monetary stimulus. After GDP growth of only 1.5% in 2012, we forecast a recovery to 4.5% in We have again cut India’s growth forecast, to 5.8% in We maintain our 2013 forecast at 6.5%.

Oil consumption growth will have been constrained in 2012 by the weak OECD economic outlook. It will average around 1.5% a year in , led by rising demand in the developing world. Geopolitical risks continue to weigh on the supply picture, particularly the tensions between the West and Iran. Prices will average just over US$110/b in 2012 as supply concerns offset the negative impact of weaker demand. We expect prices to fall to US$103/b in 2013.

Consumption growth will have slowed in 2012, constrained by weak EU and growth and 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.

In September the Fed announced a third round of QE. It will buy US$40bn a month of mortgage-backed securities. It keep interest rates low until mid-2015 (previously late 2014). After a 25 basis point cut in July, we now do not expect the ECB to cut its policy rate until the first quarter of 2013 (by a further 25 basis points). The ECB has said it will buy bonds (0-3 years) of euro zone governments without limit, subject to strict conditions. Emerging market central banks are adopting an easier monetary stance.

Europe’s debt crisis will remain a source of pressure on the euro. We forecast an average 2012 exchange rate of US$1.27:€1. We expect the euro to weaken only marginally against the dollar in 2013 as the combination of loose monetary policy and fiscal tightening undermine the dollar. The yen is currently strong but the medium-term outlook undermined by worsening demographics. 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.

+ Unprecedented policy response prevents break-up of euro zone - The global economy falls into recession - The euro zone breaks up - Tensions over currency manipulation lead to protectionism - Social and political disorder undermine stability in China

- Chinese economic growth slows substantially - The US economy falls off a fiscal cliff - 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

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