Economic forecast summary – July Economic forecast summary: September 2014 Global forecasting service

The Economist Intelligence Unit has again lowered its 2014 forecast for real GDP growth to 1.7% from 2.2%. Employment and consumer confidence are strong but the weather-induced slump in the economy at the start of the year was much worse than first thought. We expect real GDP to expand by more than 3% at an annual rate in the final three quarters of 2014 and by 3.2% in Firms have created 1.4m jobs since the start of 2014 and in June the unemployment rate fell to 6.1% from 6.3%, the lowest for five years. US economic outlook Western Europe US Japan Emerging markets Oil Non-oil commodities Monetary policy Currency Forecast risks Forecast risks (cont.) Summary

We have shaded down our 2014 forecast for euro zone growth to 1% from 1.1%. The flash composite purchasing managers' index (PMI) for the euro zone fell to a six-month low of 52.8 in June. Momentum in Germany has flagged in recent months, in part reflecting weakness in Russia. More worrying are stagnation in France and further declines in output in Italy. Deflationary pressures pose a threat to the euro zone's recovery. The ECB responded by announcing a range of monetary easing measures in June. Western Europe economic outlook Western Europe USJapan Emerging markets Oil Non-oil commodities Monetary policy Currency Forecast risks Forecast risks (cont.) Summary

Japan’s economy expanded by 6.7% at an annualised rate in the first quarter. Some of that growth was a one-off as consumers and businesses spent heavily early in the year to pre-empt an April 1st tax increase. Despite a soft second quarter, we have again raised our 2014 GDP growth forecast, to 2.2% from 1.7%. A weak yen is helping Japan’s exporters and contributing to an uptick in inflation. Real interest rates have become negative for the first time in years. The ageing of the population and disorderly public finances will constrain economic growth in the medium term. Japan economic outlook Western Europe US Japan Emerging markets Oil Non-oil commodities Monetary policy Currency Forecast risks Forecast risks (cont.) Summary

Sentiment towards emerging markets has improved despite lingering concerns about the impact of the normalisation of US monetary policy. We expect growth in Russia to slow to 0.5% from 1.8%, owing to Western sanctions, capital flight and an increase in interest rates. But the risk of outright recession has receded. In China the authorities are trying to curb credit growth while maintaining growth of around 7.5%. India’s elections gave an outright majority to the BJP, which should facilitate implementation of the party’s pro-business policies. Emerging market economic outlook Western Europe USJapan Emerging markets Oil Non-oil commodities Monetary policy Currency Forecast risks Forecast risks (cont.) Summary

Oil prices have shown some considerable volatility in recent weeks as markets reeled from political unrest in Iraq. The US military intervention there is now weighing down on prices as Iraq’s production potential is relatively secure. Large production increases from the US and Canada will help to contribute to an expanding market surplus in Demand in several major emerging markets has been slow in 2014 so far but we still expect non-OECD demand to outpace developed countries’ oil consumption Oil price and demand outlook Western Europe USJapan Emerging markets Oil Non-oil commodities Monetary policy Currency Forecast risks Forecast risks (cont.) Summary Sources: International Energy Agency; The Economist Intelligence Unit; IMF, International Financial Statistics.

A heavy supply picture in many major commodity markets will weigh against prices in An improving picture in critical metals such as aluminium and copper means that we now expect a smaller fall in our Industrial Raw Materials index in Large expected harvests in several major staples will help to bring down prices for our food, feedstuffs and beverages (FFB) index. Major stockpiles will need to be worked through in 2015, helping to keep prices soft An El Nino weather event seems likely to occur in but the severity has been downgraded recently Non-oil commodities outlook Western Europe USJapan Emerging markets Oil Non-oil commodities Monetary policy Currency Forecast risks Forecast risks (cont.) Summary

The US Fed is on track to conclude its bond buying programme in October. Markets will be looking ahead to the first hike in US policy rates, which we expect in the second half of Bond yields have fallen so far in 2014 but we expect them to rise later in the year. In response to concerns about deflation, the European Central Bank cut interest rates in June and announced a range of measures to boost liquidity. The ECB is considering asset purchases. Monetary policy outlook Western Europe USJapan Emerging markets Oil Non-oil commodities Monetary policy Currency Forecast risks Forecast risks (cont.) Summary

Monetary easing by the ECB has taken some of the steam out of the single currency but it is proving surprisingly resilient. We expect monetary tightening by the US Fed to lead to US dollar strength in the second half of For 2014 as a whole we expect the euro:dollar exchange rate to average of US$1.35:€. EM currencies remain vulnerable to US monetary tightening. Over the medium term they should gain support by positive growth and interest rate differentials with OECD economies. Currency outlook Western Europe USJapan Emerging markets Oil Non-oil commodities Monetary policy Currency Forecast risks Forecast risks (cont.) Summary

- Deflation derails the economic recovery in the euro zone - The spillover from Syria’s civil war overwhelms its neighbours - Russia’s intervention in Ukraine leads to Cold War-era tensions - The emerging market slowdown drags the world back into recession - US economy stumbles in the face of monetary tightening Forecast risks Western Europe USJapan Emerging markets Oil Non-oil commodities Monetary policy Currency Forecast risks Forecast risks (cont.) Summary Scenario Intensity Risk intensity is a product of probability and impact, on a 25-point scale Source: The Economist Intelligence Unit, Global Forecasting Service.

Forecast risks continued Western Europe USJapan Emerging markets Oil Non-oil commodities Monetary policy Currency Forecast risks Forecast risks (cont.) Summary - Tensions over currency volatility lead to a rise in protectionism - Tensions over disputed islands ruptures Sino-Japanese ties + A rapid recovery in parts of the OECD drives global growth higher - Economic upheaval leads to widespread social and political unrest - Global geopolitical tumult causes an oil price shock Scenario Intensity Risk intensity is a product of probability and impact, on a 25-point scale Source: The Economist Intelligence Unit, Global Forecasting Service.

Summary Western Europe USJapan Emerging markets Oil Non-oil commodities Monetary policy Currency Forecast risks Forecast risks (cont.) Summary Source: The Economist Intelligence Unit, Global Forecasting Service.

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