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

We expect US real GDP growth of 2.4% in 2015, unchanged from last year. The economy had a bad first quarter, largely due to poor weather and transitory factors, but will bounce back in the second quarter, spurred by stronger private consumption. Yet some of the positive impact from lower energy prices is being offset by weaker business investment, especially by shale oil producers, and the strong US dollar, which is curtailing exports. We forecast that the Fed will start to raise interest rates in September. US economic outlook Western Europe US Japan Emerging markets Oil Non-oil commodities Monetary policy Currency Forecast risks Forecast risks (cont.) Summary

Our forecast for 2015 GDP growth in the euro zone remains at 1.5%. The region is benefiting from lower oil prices, the ECB’s QE programme and a weakening of the euro over the past 12 months. The euro zone economy grew by 0.4% in the first quarter, helped by a stronger performance by France (0.6%). Italy returned to growth (0.3%), but Germany came in below expectations at 0.3%. Deflation remains a risk. We continue to assess the risk of Grexit at 40%. Grexit would generate instability and turmoil, reviving fears of a break-up of the euro. Western Europe economic outlook Western Europe USJapan Emerging markets Oil Non-oil commodities Monetary policy Currency Forecast risks Forecast risks (cont.) Summary

The economy continues to perform below potential, with growth flat in We have slightly increased to our forecast for Japan this year, to 1.4%, from 1.3% previously. Revised data for the first quarter showed that the economy had expanded much faster than was initially thought, due to strong consumption and investment growth. Although Shinzo Abe’s retains a strong mandate for reform, having won a snap election in December, the weak state of the economy is undermining confidence in his economic programme. The parlous state of public finances could narrow the government's policymaking options. 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 2015 as the Fed tightens monetary policy, which will draw capital back to the US and support the dollar. Record levels of foreign exchange in most emerging markets should afford them some protection from balance- of-payments pressures. China, India, South Korea and Turkey are among the countries set to benefit from lower oil prices. Countries dependent on oil for fiscal or export revenue will have to tighten their belts. For Russia, already hit by Western sanctions, we forecast a contraction of 3.5% in Emerging market economic outlook Western Europe USJapan Emerging markets Oil Non-oil commodities Monetary policy Currency Forecast risks Forecast risks (cont.) Summary

Following high volatility in early 2015, Brent prices stabilised in May, trading between US$60/barrel and US$66/b. In the US a falling rig count will feed into slowing output growth as the year progresses. Yet the oil market remains well supplied, with OPEC continuing to pump at record levels. Demand in the first quarter was strong, but mostly because of a temporary factor: the cold winter in the northern hemisphere. 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. Non-oil commodities outlook Western Europe USJapan Emerging markets Oil Non-oil commodities Monetary policy Currency Forecast risks Forecast risks (cont.) Summary

Despite poor performance in the first quarter, we still expect the Fed embark on a tightening cycle this year, with a first rise in policy rates in September. The ECB’s €60bn monthly bond- buying programme, launched in March, will last at least until September More than 25 central banks have cut interest rates in early 2015 in response to disinflation or deflation, while others, such as Brazil are having to raise rates. In countries with strong dollar links interest rates may have to track US rates higher. 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:€. 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” creates fears of 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 - Deteriorating situation in the Middle East threatens global economic stability + A rapid recovery in parts of the OECD drives global growth higher - US economy stumbles in the face of monetary tightening - Economic upheaval leads to widespread social and political unrest - 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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