Master Template1 Global forecasting service Economic forecast summary – May

The US economy is reviving after a weather-induced slowdown at the turn of the year. Manufacturing is recovering, and the labour market is reviving. We maintain our GDP growth of 3% for This would be the fastest rate since the recovery. Government spending will support economic growth in 2014 for the first time since We expect the US Fed to have wound down its monthly bond purchases by year end. This will lead to a rise in government bond yields and mortgage rates.

The recovery in the euro zone is broadening. We maintain our 2014 growth forecast at 1.1%. Greece's government sold €3bn (US$4.1bn) of bonds on April 10 th, its first issue since The periphery is undergoing “internal devaluations”. This will help to restore competitiveness but will make real debt burdens more onerous. Low inflation poses a threat to the euro zone's recovery. The ECB is likely to respond to deflationary pressures by adopting further easing monetary policy (possibly adopting unorthodox monetary measures).

On an annualised basis, the economy grew by 0.7% in the last quarter of 2013, down from 0.9% in the previous quarter. This took full-year 2013 GDP growth to 1.5%. In 2014 an increase in the consumption tax to 8% from 5% from April will make economic growth volatile. For the year as a whole we forecast growth of 1.5%. A weak yen will benefit Japan’s exporters and will contribute to raising the annual inflation rate. The ageing of the population and disorderly public finances will constrain economic growth in the medium term.

Sentiment towards emerging markets remains skittish but investors are showing more discrimination between countries than in the mid-2013 sell-off. Geopolitical risk is high, stemming from the divisions in Ukraine. We are cutting our 2014 growth forecast for Russia to 1.2% from 2%. There is a risk that Russia’s economy will fall into recession. In China the authorities are trying to curb credit growth while maintaining growth of around 7.5%. India’s general elections are taking place. After a sharp slowdown India’s economy is poised for a recovery.

Oil consumption growth in 2013 was constrained by the slowdown in developing countries, including China and India. Consumption in will be curbed by greater energy efficiency and conservation, as well as substitution by, cheaper and cleaner, natural gas. Geopolitical risks weigh on the supply picture, particularly the Syrian civil war, and mounting civil unrest in Iraq and Nigeria. North American output is growing strongly, helping to offset the negative impact of supply outages in a number of OPEC producers.

Demand was relatively subdued in 2013, constrained by weak OECD growth and slower Chinese growth. Our industrial raw materials (IRM) index will fall by close to 3% in 2014 as weakness in the aluminium, copper and rubber markets drags down the index. We expect the food, feedstuffs and beverages (FFB) index to fall by 5.3% in High levels of carry-over stocks are weighing on prices in many markets. Population growth and urbanisation will support soft commodity prices in the medium and long term.

We expect the US Fed to reduce its asset purchases by US$10bn at each Federal Open Market Committee meeting. This would conclude QE3 by end The winding down of the Fed’s QE will put upward pressure on global bond yields and could lead to further capital flight from emerging markets. We do not expect US policy rates to rise until In Japan the BOJ is implementing its own QE programme. The ECB may follow, given concerns about deflation in the euro zone.

The euro is receiving support from the region’s emergence from recession and from the eurozone’s strong balance of payments position. 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$1.34:€. 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.

- Tensions over currency volatility lead to a rise in protectionism - Deflation derails the economic recovery in the euro zone - The emerging market slowdown drags the world back into recession - US economy stumbles in the face of monetary tightening + A sustained decline in oil prices provides a global economic fillip

- Russia’s intervention in Ukraine leads to Cold War-era tensions - 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 - Civil war in Syria escalates into a wider regional conflict

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