Global economic forecast August 12th 2011

Revised US GDP data showed that the economy grew much more slowly than thought in the first half of 2011, in part owing to high gasoline prices. We have cut our growth forecasts for the US from 2.4% to 1.7% in 2011 and from 2.5% to 2% in Fiscal tightening will subtract from growth in The US Fed has said that it will keep interest rates very low through the first half of But deleveraging will remain a constraint on growth. A large overhang of houses is preventing a recovery of the property market, with an adverse impact on households’ balance-sheets.

The eurozone economy slowed sharply in the second quarter and was flat by midyear. Even Germany is now barely growing. Fiscal austerity and high borrowing costs will hold back the periphery. The eurozone crisis has escalated, engulfing the much larger economies of Italy and Spain. The ECB has reluctantly started buying Italian and Spanish bonds to stabilise yields. Even France has come under scrutiny, because of its banks’ exposure to the periphery and concerns (premature) about a sovereign rating downgrade.

The March 11 th earthquake and tsunami have had a severe impact on power supplies and supply chains, even if second quarter GDP figures were much better than feared. Manufacturing is already experiencing a V-shaped recovery and the economy will return to growth in the second half. We forecast GDP growth of -0.5% for the full year. The yen continues to appreciate, fulfilling its role as a traditional safe haven in uncertain times.

In China further monetary tightening may be needed following an increase in the inflation rate to 6.5%. Elsewhere in the emerging world, monetary tightening is also needed to check inflation. Emerging markets lost momentum in the second quarter but should still post decent growth in the second half of For 2012 we have cut our growth forecasts to reflect sluggish demand in the West.

Oil consumption will continue to grow in , led by the developing world. Consumption is expected to be flat or falling in the developed 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. Tighter global economic policy conditions will lead to lower prices from the second half of 2011

Demand is expected to weaken as monetary tightening bites in the developing world and as stimulus is withdrawn in the mature economies However, rising emerging market incomes and urbanisation will underpin medium-term demand growth Years of underinvestment, particularly in agriculture, will support prices Gold prices will come under pressure by 2013 as interest rates start to rise and investors reduce their holdings

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 ECB raised its policy rate by 25 basis points to 1.50% in July. In light of the escalation of the eurozone debt crisis, we expect further tightening to be very gradual; there is a possibility of rate cuts if the crisis worsens. Japanese policy rates will be held at emergency levels until 2013.

The euro is being supported by a positive interest differential in relation to the dollar, despite debt stresses in the eurozone periphery The yen will be supported by Japanese institutional investors’ home bias but a declining domestic savings rate will make it vulnerable in the medium term Emerging market currencies will continue to be supported by wide interest rate and growth differentials with OECD economies

- The global economy falls into recession - The euro zone breaks up - Disorderly defaults by developed world-sovereigns rock markets - New asset bubbles burst, creating renewed financial turbulence - The Chinese economy crashes

- 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 + Oil prices slump