Master Template1 Global forecasting service Economic forecast summary – January

We maintain our 2013 GDP estimate at 1.7% and expect stronger growth at 2.6% in Democrats and Republicans are working towards an agreement to avoid a repeat of the 2013 government shutdown and debacle over the debt ceiling. We expect the US Fed to start scaling back its bond buying programme in early This is likely to lead to a rise in government bond yields and mortgage rates. The Fed will employ forward guidance in order to exert downward pressure on short-term interest rates.

Euro zone growth fell back to only 0.1% in the third quarter from 0.3% in the second. But we believe the region has emerged from recession and maintain our 2014 growth forecast at 0.9%. The ECB’s decision to cut its main policy rate by 25 basis points to 0.25% in November was a response to a decline in the euro zone’s inflation rate to 0.7%, well below its 2% target. Deflationary pressures are building in Greece and Spain as they undergo “internal devaluations”. We expect growth in the euro zone to average 1.4% a year in

Real GDP growth slowed to 0.5% quarter on quarter in the third quarter, down from 0.9% and 1.1% in the two previous quarters respectively. We have shaded down our full-year 2013 GDP growth estimate to 1.8%. Despite a hike in the consumption tax, monetary stimulus will sustain the recovery in 2014 when we forecast growth of 1.7% in A weaker yen will benefit Japan’s exporters and will contribute to raising the annual inflation rate. The ageing of the population and disorderly public finances will constrain economic growth and domestic demand in the medium and long term.

The flight of capital from emerging markets has abated but sentiment remain skittish owing to uncertainty about the eventual impact of the tapering of the US Federal Reserve’s bond buying programme. The Chinese economy has stabilised and we have edged up our GDP growth estimate to 7.7% this year. We forecast a slowdown to 7.3% in 2014, followed by a further slowdown to 5.9% in India’s economy also appears to be stabilising but we maintain our cautious medium-term forecasts given structural constraints.

Oil consumption growth in 2013 was constrained by the slowdown in developing countries, including China and India. Consumption in will be curbed by greater energy efficiency and conservation, as well as substitution by, cheaper and cleaner, natural gas. Geopolitical risks weigh on the supply picture, particularly the Syrian civil war and civil unrest in Iraq and Nigeria. North American output is growing strongly, helping to offset the negative impact of supply outages in a number of OPEC producers.

Demand was relatively subdued in 2013, constrained by weak OECD growth and slower Chinese growth. Rising incomes and ongoing urbanisation in the developing world will underpin medium-term demand growth in industrial raw materials. The food, feedstuffs and beverages (FFB) index fell by nearly 8% in 2013, partly reflecting a bumper maize crop. Prices will continue to slip in , before some recovery thereafter. Nominal commodity prices will remain historically high in , but prices will ease in real terms.

Investors are anticipating a tapering of the US Fed’s programme of bond purchases. This has led to a back-up in global bond yields and capital flight from emerging markets. Sentiment has stabilised in recent months but is likely to remain fragile. The reining in of US monetary expansion will be gradual: we do not expect rates to rise until Even so a gradual tightening of global liquidity will create headwinds for the world economy. Monetary expansion in Japan will provide only a partial offset to US tightening.

The euro should receive some support from the region’s emergence from recession. But concerns about a resurgence of the debt crisis will remain a potential source of pressure. The outperformance of the US economy and the anticipation of a less expansionary monetary stance on the part of the US Fed should continue to support the US dollar across the board. EM currencies remain vulnerable to monetary tightening in the West. Over the medium term they should gain support by positive growth and interest rate differentials with OECD economies.

+ A sustained decline in oil prices provides a global economic fillip - Tensions over currency manipulation lead to protectionism - One or more countries leave the euro zone - The emerging market slowdown drags the world back into recession - US economy stumbles in the face of monetary and fiscal tightening 16 15

- Tensions over disputed islands ruptures Sino-Japanese ties - Social and political disorder undermine stability in China - Economic upheaval leads to widespread social and political unrest - Civil war in Syria escalates into a wider regional conflict + Co-ordinated stimulus kick-starts a global recovery

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