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

Following GDP growth of 3.5% in the third quarter, the US economy is on track for growth of 2.2% in Jobs growth and consumer confidence are buoyant. In 2015 we forecast GDP growth of 3.2%. Consumer spending will benefit from rising incomes and lower fuel prices, offsetting the drag from sluggish external demand. We expect 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

The euro zone expanded by 0.2% quarter on quarter in the July- September period, in line with our forecast. Conditions remain weak in the major economies, including Germany, which has been hurt by the turmoil in Russia. Spain and are faring better, but they are too small to compensate fully for weakness in their larger neighbours. The French and Italian governments are trying to pass structural reforms. The results of EU-wide bank stress tests were credible and broadly positive. Some Italian and Greek banks need to raise more capital. Western Europe economic outlook Western Europe USJapan Emerging markets Oil Non-oil commodities Monetary policy Currency Forecast risks Forecast risks (cont.) Summary

Japan fell into recession in the third quarter as GDP contracted again. After a strong first quarter, the economy has slumped badly following an April tax rise. The Bank of Japan was alarmed even before the Q3 dat and announced a huge expansion of its monetary stimulus plan in late October. This fuelled further yen weakness and a stock market rally. We have cut our 2014 GDP estimate to 0.3% but maintain our forecast that expansive policy will keep the economy on a growth path in the medium term. Real interest rates have become negative for the first time in years but real wages remain depressed. 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 vulnerable to capital outflows as the normalisation of US monetary policy progresses. The recent plunge in the price of oil will 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 expect China’s GDP growth to slow from 7.3% in 2014 to 7% in 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 pledged to cut their prices to export markets in an attempt to preserve market share. It’s unclear whether OPEC will agree to cut quotas in November and, if so, whether it would have much effect. The price of dated Brent will fall from an average of US$102/b in 2014 to US$88/b in 2015 as demand remains 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 remain a drage on prices in The slowdown in China’s economy will weigh on major industrial commodities. Other emerging markets are 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. Given declining interest in commodities as an asset class, prices will tend to reflect fudamentals more closely. 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 ended its bond buying programme in October. Markets are looking ahead to the first hike in US policy rates, which we expect in the second half of In response to deflationary pressures, the ECB again cut interest rates in September and announced measures to boost liquidity, including a programme of asset purchases. Bank of Japan further expanded its monetary stimulus programme in October. Monetary stances diverge in EMs depending on country-specific factors. 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 are pushing the dollar higher against the euro and the yen. The greenback is also strengthening 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 - Policy paralysis entrenches the emerging market slowdown - 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 + A sustained decline in oil prices provides a global economic filip - Economic upheaval leads to widespread social and political unrest - 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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