Economic forecast summary – July Economic forecast summary: February 2016 Global forecasting service

We forecast US GDP growth of 2.4% in 2016, the same rate as in Shale oil output and investment will decline owing to low prices. Consumption will be supported by a strong labour market but could be hit by a decline in equity prices. US dollar strength and weak global demand will curtail exports. Taking into account subdued prospects for productivity growth, we forecast average real GDP growth of 2.4% in We forecast a short recession in 2019, followed by a rebound in US economic outlook Western Europe US Japan Emerging markets Oil Non-oil commodities Monetary policy Currency Forecast risks Forecast risks (cont.) Summary

Lower oil prices, the ECB’s QE programme and the weakening of the euro against the dollar helped to consolidate a subdued euro zone recovery in Following GDP growth of 1.5% in 2015, we expect growth to quicken to 1.7% in 2016 and to average 1.5% in The risk of Grexit has receded following a third bail-out deal. We continue to see it as a high risk in the medium term. Migration has emerged as the main political issue in Europe in the face of a surge in refugee numbers. Western Europe economic outlook Western Europe USJapan Emerging markets Oil Non-oil commodities Monetary policy Currency Forecast risks Forecast risks (cont.) Summary

Following an expansion of 0.7% in 2015, we expect Japanese growth to pick up to 1.3% in 2016, helped by loose monetary policy and rising real wages. Core consumer prices remain subdued, and the BOJ will struggle to push inflation up to its 2% target. Another increase in the consumption tax—to 10% in April 2017—will cause growth to slow to 0.7% in that year. The prospect of consistent GDP growth of 2% and above, as Abenomics is targeting, remains distant. 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 time. The main focus of concern is the slowdown in China, which is crimping demand for commodities. The prospect of rising US interest rates is another source of pressure on emerging markets. Capital outflows continue to exert downward pressure on emerging market currencies, many of which are trading at multi-year lows against the dollar. A structural slowdown will reduce Chinese GDP growth to 4.8% by Emerging market economic outlook Western Europe USJapan Emerging markets Oil Non-oil commodities Monetary policy Currency Forecast risks Forecast risks (cont.) Summary

Brent fell below US$30/b in January amid concerns about the outlook for China. The prospect of additional Iranian supply following the lifting of sanctions compounded fears of a supply glut. Prolonged price weakness will slow output growth in 2016 (US production will contract), but markets will remain oversupplied owing to robust OPEC output (including from Iran) and moderating demand growth. Prices will average US$43/b in 2016, down from US$52/b in Tightening markets will drive Brent up in but downward pressure on prices will resume 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.

After collapsing in 2015, non-oil commodity prices will stage only a modest rebound in The slowdown in China’s industrial sector will weigh on major industrial raw materials, whose prices will slip further in Other emerging markets (many of which face economic slowdown and currency depreciation) do not have the demand to soak up the excess supply. Despite smaller harvests for key global crops, partly as a result of the El Niño climate phenomenon, major stockpiles will need to be worked through, keeping the rise in the price of agricultural commodities subdued. Non-oil commodities outlook Western Europe USJapan Emerging markets Oil Non-oil commodities Monetary policy Currency Forecast risks Forecast risks (cont.) Summary

As expected, the Fed raised interest rates in December, for the first time since mid A gradualist approach to monetary tightening will take the main US policy rate to 3.38% by the end of The Fed will delay rate rises if the economy shows signs of weakness. The ECB’s €60bn monthly bond- buying programme has been extended to mid In some emerging markets with strong dollar links interest rates are likely to have to track US rates higher, particularly if the dollar appreciates further. Monetary policy outlook Western Europe USJapan Emerging markets Oil Non-oil commodities Monetary policy Currency Forecast risks Forecast risks (cont.) Summary

The dollar will remain strong, supported by a growing yield differential against the euro and the yen but further gains will be limited after the dollar’s surge in Given their role as funding currencies, the yen and the euro will gain support in periods of risk aversion. China’s decision to let the renminbi weaken against the dollar in early 2016 has fuelled fears of further depreciation in the face of large capital outflows. Sustained rallies in emerging-market currencies are unlikely until there is a marked improvement in fundamentals, which is not in prospect in 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 - Russia’s interventions in Ukraine and Syria precede a new “cold war” - Currency volatility culminates in an emerging markets corporate debt crisis - China experiences a sharp economic slowdown - Beset by external and internal pressures, the EU begins to fracture 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. 15

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 - Chinese expansionism prompts a clash of arms in the South China Sea - 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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