Global economic forecast November 16th 2010

The recovery is softening, with the weakness of private-sector jobs creation giving particular cause for concern Inflationary pressures remain very weak—both the core consumer price index and the core personal consumption expenditure index are hovering just above zero in year-on-year terms House prices have stabilised, but a large stock of houses on the market now or coming in the near future will exert renewed downward pressures on prices

Europe’s economy is recovering but the fiscal crisis has raised risks The economy is burdened with spare capacity and urgent need for fiscal consolidation Unemployment has risen only moderately owing to wage subsidies, but employment recovery will be slow Greece is likely to need a re- structuring of its government debt despite a massive rescue package

Export performance in Japan will deteriorate over the remainder of 2010 and into 2011, reflecting a deceleration of Chinese growth and continued yen strength The urgent need for fiscal consolidation greatly limits room for further fiscal stimulus beyond measures already approved Weak domestic demand is putting downward pressure on Japanese prices again, so that deflation continues

Chinese growth has been supported by massive stimulus, but this has aggravated existing imbalances India is growing strongly on the back of robust domestic demand. However, fiscal pressures remain and will act as a constraint on potential growth Brazil’s performance has been driven by demand for commodities from China and by solid domestic consumption Russia’s recovery is supported by the rise in oil prices over the past year

Oil consumption growth will bounce back in 2010, led by the developing world and the US. Consumption growth in the EU will remain subdued Output restraint and significant spare capacity in OPEC producers suggests ample supply. Any escalation in geopolitical tensions could disrupt our supply forecasts Loose global monetary conditions and investors’ search for return will support prices

Rising emerging market incomes and urbanisation will underpin medium- term demand growth Years of underinvestment, particularly in agriculture, will push up prices In the near-term, many raw materials suffer from temporary supply shortfalls Gold prices have been strong, fuelled by vibrant investor demand, while fundamentals remain weak. Persistent economic uncertainty will support prices in

The Federal Reserve will not raise its policy rate until the third quarter of 2012 The Greek crisis has triggered ECB bond purchases; the central bank is also now unlikely to raise rates until the third quarter of 2012 Japanese policy rates will be held at emergency levels until late 2012 The European fiscal crisis also raises new concerns for banking sector stability

Concerns about the US economy and Fed monetary policy have helped to weaken the US$ against the euro in recent weeks Expectations of earlier rate hikes in the US and lingering concerns about the fragility of the euro zone will support the US$ against the euro over the longer term The yen will remain firm against the US$, reflecting heightened risk perceptions and Japanese institutional investors’ home bias

- A number of developed sovereigns default as public debt surges - Tensions over currency manipulation lead to a rise in protectionism - New asset bubbles burst, creating renewed financial turbulence - Developed economies fall into a deflationary spiral - The global economy experiences a double-dip recession 16 15

- The Chinese economy crashes - The euro zone breaks up - Economic upheaval leads to widespread social and political unrest + Emerging-market growth surges + Confidence revives, prompting a stronger rebound in demand