Master Template1 Global forecasting service Economic forecast summary – April

The US economy is reviving after a weather-induced slowdown at the turn of the year. Employers created 175,000 net new jobs in February, and retail sales recovered. We maintain our GDP growth of 3% for This would be the fastest rate since the recovery. Government spending will support economic growth in 2014 for the first time since We expect the US Fed to have wound down its monthly bond purchases by year end. This will 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 the region has emerged from recession and we maintain our 2014 growth forecast at 1.1%. The ECB kept its main policy rate at 0.25% in February. It cut rates in November in response to a decline in the euro zone’s inflation rate to 0.7%, well below its 2% target. The periphery is undergoing “internal devaluations”. This will help to restore competitiveness but will make real debt burdens more onerous. We forecast GDP growth of 1.1% in 2014.

Growth slowed to only 0.3% quarter on quarter in the third quarter, after a strong first half. Private consumption and business investment were subdued. We maintain our full-year 2013 GDP growth estimate at 1.7%. Despite a hike in the consumption tax, monetary stimulus will sustain the recovery in 2014 when we forecast growth of 1.7% in A weak 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 in the medium term.

Investors are showing more discrimination between emerging markets than in the mid-2013 sell-off. The stand-off with the West fover Russia’s annexation of Crimea will damage Russia’s already weak economy and raise downside risks. In China the need to curb credit growth poses risks to the growth outlook. After growth of 7.7% in 2013, we forecast a slowdown to 7.3% in 2014, followed by a further slowdown to 6% by After a weak performance in 2012/13, India’s economy is poised for a recovery in 2013/14 and 2014/15.

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 mounting 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 7.4% 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.

We expect the US Fed to reduce its asset purchases by US$10bn at each Federal Open Market Committee meeting. This would conclude QE3 by end The winding down of the Fed’s QE will put upward pressure on global bond yields and could lead to further capital flight from emerging markets. We do not expect US policy rates to rise until A gradual tightening of global liquidity will create headwinds for the world economy. QE in Japan will provide only a partial offset.

We have revised our 2014 forecast for the euro:dollar exchange rate to an average of US$1.34:€. The euro is receiving support from the region’s emergence from recession and from the eurozone’s strong balance of payments position. We expect monetary tightening by the US Fed to lead to US dollar strength in the second half of EM currencies remain vulnerable to US monetary tightening. Over the medium term they should gain support by positive growth and interest rate differentials with OECD economies.

- Tensions over currency volatility lead to a rise in 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 + A sustained decline in oil prices provides a global economic fillip

- Russia’s intervention in Ukraine leads to Cold War-era tensions - Tensions over disputed islands ruptures Sino-Japanese ties + A rapid recovery in parts of the OECD drives global growth higher - Economic upheaval leads to widespread social and political unrest - Civil war in Syria escalates into a wider regional conflict

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