Economic forecast summary – July Economic forecast summary: August 2015 Global forecasting service

We have edged up our 2015 US growth forecast to 2.5%. The economy has rebounded from a poor first quarter and we expect it to perform well in the second half. Consumer spending was slower than expected early in the year. But it picked up to 0.6% month on month in May, as the savings rate declined. Business investment has been constrained by a reduction in spending by shale oil producers. The strong US dollar is curtailing exports, which are also suffering from weak global demand. US economic outlook Western Europe US Japan Emerging markets Oil Non-oil commodities Monetary policy Currency Forecast risks Forecast risks (cont.) Summary

The risk of Grexit has risen and is set to persist despite an 11 th hour deal reached between Greece and its euro zone creditors on July 13 th. Relations between Greece and its euro zone creditors have been badly damaged. Grexit would not have an immediate impact on the region’s growth outlook but would create another serious faultline in EMU. We forecast 2015 GDP growth of 1.5% for the euro zone. The region is benefiting from lower oil prices, the ECB’s QE programme and a weakening of the euro over the past 12 months. Western Europe economic outlook Western Europe USJapan Emerging markets Oil Non-oil commodities Monetary policy Currency Forecast risks Forecast risks (cont.) Summary

Real GDP growth in the first quarter of 2015 grew by 1% quarter on quarter (3.9% annualised). Both private consumption and investment made hefty contributions to the growth rate. The yen has weakened further recently while the equity rally has continued. For 2015 as a whole we expect an expansion of 1.4% in 2015, rising to 2% in Another increase in the consumption tax—to 10% in April 2017—will cause growth to slow to 1.3% in that year. The prospect of consistent GDP growth of 2% and above, as Abenomics is targeting, remains some distance away. Japan economic outlook Western Europe US Japan Emerging markets Oil Non-oil commodities Monetary policy Currency Forecast risks Forecast risks (cont.) Summary

Emerging markets face a testing few months as we expect the Fed to embark on a monetary tightening cycle in September. This will draw capital back to the US and support further dollar appreciation. The stock market plunge in China wiped US$3trn off valuations. But we expect only a modest impact on the wider economy. Countries dependent on oil for fiscal or export revenue are having to tighten their belts. China, India, South Korea and Turkey are among the countries set to benefit from lower oil prices. Emerging market economic outlook Western Europe USJapan Emerging markets Oil Non-oil commodities Monetary policy Currency Forecast risks Forecast risks (cont.) Summary

Brent prices have fallen in recent weeks, owing to the expectation that a comprehensive deal on Iran’s nuclear programme would be signed, enabling exports to rise substantially. We have not moved our forecast, as we had expected such a deal to be agreed. Oil will remain oversupplied this year as the US and OPEC continue to battle for market share. Although proving resilient, growth in US shale production will eventually slow. We forecast that prices will rise gradually, from an average of US$60/b in 2015 to US$89 in 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.

An overhang of supply in major markets will remain a drag on industrial raw materials prices in The slowdown in China’s economy will weigh on major industrial commodities. Other emerging markets (many of which face economic headwinds and currency depreciation) do not have the demand to soak up the excess supply. Large harvests will help to bring down prices for our food, feedstuffs and beverages index. Major stockpiles will need to be worked through in 2015, keeping prices soft. The biggest upside risk remains a significant El Niño phenomenon, which reduces harvests. Non-oil commodities outlook Western Europe USJapan Emerging markets Oil Non-oil commodities Monetary policy Currency Forecast risks Forecast risks (cont.) Summary

In the light of stronger high-frequency data in the US, we maintain our forecast that the Fed will embark on a tightening cycle this year. We expect the first rise in the policy rate in September. The ECB’s €60bn monthly bond- buying programme, launched in March, will last at least until September Monetary policy in emerging markets is following divergent trends. Many countries eased policy early in In countries with strong dollar links interest rates may have to track US rates higher later in the year. Monetary policy outlook Western Europe USJapan Emerging markets Oil Non-oil commodities Monetary policy Currency Forecast risks Forecast risks (cont.) Summary

After pausing in March-April, the US dollar’s rally against most other major currencies resumed in May. Divergent outlooks for growth and monetary policy will push the dollar higher against the euro, the yen and many EM currencies. For 2015 we forecast an average dollar:euro exchange rate of US$1.07:€. In 2016 we expect the rate to dip below parity. EM currencies are likely to remain under pressure but in the medium term should gain support from positive growth differentials relative to OECD economies. Currency outlook Western Europe USJapan Emerging markets Oil Non-oil commodities Monetary policy Currency Forecast risks Forecast risks (cont.) Summary

- “Grexit” is followed by a euro zone break-up - Commodity slump and investment crunch in China entrench EM slowdown + Lower oil prices provide a global economic fillip - Russia’s military intervention in Ukraine revives Cold War-era tensions - Global monetary policy divergence leads to extreme currency volatility 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. 16

Forecast risks continued Western Europe USJapan Emerging markets Oil Non-oil commodities Monetary policy Currency Forecast risks Forecast risks (cont.) Summary - The rising threat of jihadi terrorism destabilises the global economy - US economy stumbles in the face of monetary tightening - Economic upheaval leads to widespread social and political unrest + A “Grexit” prompts a euro zone economic revival - A collapse in investment in the oil sector prompts a future 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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