Master Template1 Global forecasting service Economic forecast summary - December

The US economy grew by 2.5% in the third quarter, demonstrating resilience. However, weak EU demand and fiscal tightening will constrain growth in We are forecasting US GDP growth of 1.7% in 2011 and 1.3% in The Fed will keep interest rates very low through the first half of 2013, but deleveraging will constrain spending. A further round of quantitative easing will only be enacted if the economy moves towards recession and deflation is a risk. A large overhang of houses will prevent a recovery of the property market, with an adverse impact on households’ balance-sheets.

Policymakers are struggling to contain the eurozone crisis which has spread to the large economies of Italy and Spain. The latest plan to resolve the crisis is expected to comprise coordinated bank recapitalisation, an expansion of the lending capacity of the EFSF through guarantees, and an increased write- down of Greek debt. None of these steps is without problems. The eurozone economy has slowed sharply since mid-2011 and we now expect it to contract, by 0.3%, in 2012, before staging a modest recovery in 2013.

The March 11 th earthquake and tsunami had a severe impact on power supplies and supply chains. But manufacturing is already experiencing a V-shaped recovery and the economy returned to growth in the second half. After a contraction of 0.3% in 2011, we forecast GDP growth of 2.2% in From 2013 we expect the economy to grow at a rate of just above 1%. While the outlook for the global economy remains uncertain, the yen is set to remain strong, creating headwinds for manufacturers.

The Brazilian and Israeli central banks have responded to the worsening global outlook by cutting policy rates. With inflationary pressures now abating, other EM central banks may cut rates or at least postpone monetary tightening. EMs lost momentum over the course of 2011 as developed markets hit the buffers. China is causing concern because of stresses in the housing market. For 2012 we have trimmed our growth forecasts to reflect sluggish demand in the West. We still expect EMs to outperform their developed peers in

Oil consumption growth will be constrained in 2012 by the weak OECD economic outlook. It will average nearly 2% year on year in , led by rising demand in the developing world. The prospect of a resumption of Libyan output in the next 1-2 years has improved the supply outlook. Geopolitical risk remains high, however. Prices will weaken in 2012 in tandem with weaker demand but will pick up thereafter.

Consumption growth is expected to slow in 2012 owing to weak EU and US growth and somewhat 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.

Faced with persistently high unemployment and the risk of a double-dip recession, the Federal Reserve will keep its policy rate at exceptionally low levels until mid The Fed is extending the maturity of bonds it holds through its quantitative easing (QE) programme. In light of the escalation of the eurozone debt crisis, we now expect the ECB to reverse the rate rises of April and July by the end of the year. The ECB has reactivated its term liquidity facilities for banks experiencing funding stresses.

The support the euro received from a positive interest differential in relation to the dollar is fading as debt stresses in the euro zone escalate. The yen is currently fulfilling its traditional role as a safe haven but a declining domestic savings rate will make it vulnerable in the medium term. In the short term EM currencies are susceptible to risk aversion. But over the medium term they will be supported by growth and interest rate differentials with OECD economies.

- The global economy falls into recession - The euro zone breaks up - The Chinese economy crashes - Resumption of monetary stimulus leads to new asset bubbles - Tensions over currency manipulation lead to protectionism

- Oil prices remain at extremely high levels - The US dollar crashes - Economic upheaval leads to widespread social and political unrest - Unprecedented policy response in euro zone prevents contagion + Oil prices slump

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