Economic forecast summary – July Economic forecast summary: November 2014 Global forecasting service

The US recovery remains on track, and we maintain our 2014 GDP growth estimate of 2.2%. We forecast a pick-up to 3.2% in 2015, provided current fears of a renewed recession in Europe and elsewhere do not materialise. Employment continues to soar, which should start to push up wages, supporting the recovery. This will clear the way for the Fed to start raising policy rates in mid Domestic energy production is contributing to a narrowing of the trade deficit although the recent surge in the dollar will erode US competitiveness. US economic outlook Western Europe US Japan Emerging markets Oil Non-oil commodities Monetary policy Currency Forecast risks Forecast risks (cont.) Summary

Conditions in the euro zone look increasingly bleak. We have cut our GDP growth forecasts in 2015 to 1.1% from 1.2% and in 2016 to 1.4% from 1.7%. In Germany, which has been hurt by spillover effects from the sanctions on Russia, industrial production in August fell by the fastest rate since January Any recovery in the euro zone recovery will remain fitful until structural reforms are put in place, particularly in France and Italy. The results of bank stress tests will be announced in October. Western Europe economic outlook Western Europe USJapan Emerging markets Oil Non-oil commodities Monetary policy Currency Forecast risks Forecast risks (cont.) Summary

We have again cut our estimate for GDP growth in 2014, to 1.1% from 1.4% and our forecast for growth in 2015 to 1.6%, from 1.8% previously Japan’s economy soared in the first quarter as consumers and businesses spent heavily ahead of an April 1st tax increase; the decline in spending in the second quarter was larger than we expected. Real interest rates have become negative for the first time in years. But real wages remain depressed. A weaker yen has failed to fuel an export boom and corporates are sceptical about the benefit of further yen weakness. Japan economic outlook Western Europe US Japan Emerging markets Oil Non-oil commodities Monetary policy Currency Forecast risks Forecast risks (cont.) Summary

Growth in emerging markets is disappointing, leaving them particularly vulnerable to capital outflows as the normalisation of US monetary policy progresses. The recent plunge in the price of oil threatens to deepen the downturn in Russia and could create debt servicing problems for Venezuela. Lower commodity prices will worsen the terms of trade for Latin America, the Middle East and Africa. India and Turkey will be among the beneficiaries. We have cut our 2014 China growth estimate to 7.3% from 7.5%. Emerging market economic outlook Western Europe USJapan Emerging markets Oil Non-oil commodities Monetary policy Currency Forecast risks Forecast risks (cont.) Summary

Oil prices have collapsed as large supply increases have swamped only meagre demand from major consumers. Saudi Arabia, Iran and Iraq have all now pledged to cut their prices to export markets in an attempt to preserve market share, rather than cutting back on output to boost prices. Prices will weaken from an average of US$104.43/b in 2014 to US$97.63/b in 2015 as underlying demand conditions remain weak and supply continues to grow. 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.

A heavy supply picture in many major commodity markets will weigh against prices in The slowdown in China’s economy will sap vigour away from major industrial commodities. Other emerging markets are still not large enough to soak up the excess supply Large harvests will help to bring down prices for our food, feedstuffs and beverages (FFB) index. Major stockpiles will need to be worked through in 2015, helping to keep prices soft The departure of many banks from commodities will keep prices tracking fundamentals more closely in Non-oil commodities outlook Western Europe USJapan Emerging markets Oil Non-oil commodities Monetary policy Currency Forecast risks Forecast risks (cont.) Summary

The US Fed is on track to conclude its bond buying programme in October. Markets are now looking ahead to the first hike in US policy rates, which we expect in the second half of US bond yields, which had been rising since August, have fallen back as risk-averse investors have fled into US Treasuries. In response to concerns about deflation, the European Central Bank again cut interest rates in September and announced a range of measures to boost liquidity, including a programme of asset purchases. Monetary policy outlook Western Europe USJapan Emerging markets Oil Non-oil commodities Monetary policy Currency Forecast risks Forecast risks (cont.) Summary

Divergent outlooks for growth and monetary policy have since the dollar rally strongly against the euro and the yen. The greenback has also strengthened against EM currencies. We expect monetary tightening by the US Fed to continue to support a stronger US dollar for the next 18 months. In 2015 we expect the euro:dollar exchange rate to average US$1.22:€. Over the medium term EM currencies should gain support by positive growth and interest rate differentials with OECD economies. Currency outlook Western Europe USJapan Emerging markets Oil Non-oil commodities Monetary policy Currency Forecast risks Forecast risks (cont.) Summary

- Deflation derails the economic recovery in the euro zone - The spillover from Syria’s civil war overwhelms its neighbours - Russia’s intervention in Ukraine leads to Cold War-era tensions - The emerging market slowdown drags the world back into recession - US economy stumbles in the face of monetary tightening 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.

Forecast risks continued Western Europe USJapan Emerging markets Oil Non-oil commodities Monetary policy Currency Forecast risks Forecast risks (cont.) Summary - Tensions over currency volatility lead to a rise in protectionism + A rapid recovery in parts of the OECD drives global growth higher - Economic upheaval leads to widespread social and political unrest + A sustained decline in oil prices provides a global economic fillip - Social unrest undermines stability in China 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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