Master Template1 Global forecasting service Economic forecast summary - May

We have raised our forecast for real GDP growth in 2012 to 2.2% from 1.9%. US economic figures this year have been reasonably strong, especially on the consumer spending front. Serious headwinds remain, and our outlook is still cautious. Job creation slowed in March, and income growth of late has been negative in real terms. Housing market data has improved recently but a large overhang of unsold houses remains a drag on the property market. A drastic tightening of fiscal policy is in prospect in 2013 for the incoming administration.

The euro zone debt crisis has returned as the effects of the ECB’s recent liquidity injections fade. Spain’s fiscal misjudgements sent bond yields soaring in late March and April. Yields also rose in Italy, but at a slower pace. As in 2011, the authorities will struggle to keep sovereign funding costs at sustainable levels We expect the euro zone to survive, but anticipate much turmoil in The EU’s bail-out funds, at present, are not large enough to accommodate Spain. We expect euro zone GDP to contract by 0.7% in Germany will fare best; Greece, Portugal and Spain worst.

The economy contracted by 0.7% in 2011, undermined by the negative impact of the March earthquake and tsunami as well as a strong yen that constrained export potential. A recovery in Japan's automotive sector—after the disruption caused by the natural disasters and flooding later in the year in Thailand—will support both industrial output and exports. The economy is expected to grow by 1.5% in 2012, supported by a stronger export performance and reconstruction activity. From 2013 we expect the economy to grow at a rate of between %, a downgrade from prior forecasts.

Growth in 2012 will be constrained by sluggish OECD demand. EMs will still comfortably outperform their peers in the developed world in EM currencies will be sensitive to the “risk-on”, “risk-off” trade, rallying when investors are more tolerant of risk and falling back when investors flock to the US dollar. We have raised our China 2012 GDP forecast to 8.3% from 8.2%, higher than the government’s new medium- term target of 7.5%. Rebalancing the economy away from investment towards private spending will make for less commodity-intensive growth.

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. Geopolitical risks are weighing on the supply picture particularly the tensions between the West and Iran. Our forecast assumes a military outcome is avoided. Prices will average around US$115/b in 2012 as supply concerns offset the negative impact of weaker demand.

Consumption growth is expected to slow in 2012, constrained by weak EU and 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.

Sluggish demand will be deflationary but high oil prices will push up headline inflation in coming months. The Fed has said it will keep interest rates very low until late A further round of quantitative easing appears unlikely if the US economy grows at a reasonable pace. The ECB cut its policy rate twice in 2011 as the regional economic crisis worsened. We expect the ECB to hold its policy rate steady at 1% in Most emerging market central banks will keep interest rates broadly stable in 2012.

The return of Europe’s debt crisis will keep the euro under pressure. We expect an average 2012 rate of US$1.31:€1 vs US$1.39:€1 in The yen has weakened since the start of the year as risk appetite has recovered somewhat and the Bank of Japan has become more aggressive in easing monetary policy. EM currencies will be supported over the medium term by positive growth and interest rate differentials with OECD economies. China’s decision to allow the renminbi to move in a wider trading ban will increase volatility.

+ Unprecedented policy response after Greek exit prevents contagion - An attack on Iran results in an oil price shock - The global economy falls into recession - The euro zone breaks up + Stronger than anticipated US growth boosts the global economy

- Tensions over currency manipulation lead to protectionism - The Chinese economy crashes - US dollar crashes - Economic upheaval leads to widespread social and political unrest - Resumption of monetary stimulus leads to new asset bubbles

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