Economic forecast summary – July Economic forecast summary: December 2015 Global forecasting service

We maintain our estimate of 2015 US GDP growth at 2.5%, although the economy expanded by only 1.5% at an annual rate in the third quarter. Consumption and residential investment are growing but the strong US dollar is curtailing exports, which are also suffering from weak global demand. We forecast average real GDP growth of 2.4% in Without a significant boost to productivity or a broad improvement to the global economy, economic growth of below 3% is the new normal for the US. We forecast a short recession in US economic outlook Western Europe US Japan Emerging markets Oil Non-oil commodities Monetary policy Currency Forecast risks Forecast risks (cont.) Summary

Despite lower oil prices, the ECB’s QE programme and a weakening of the euro over the past 12 months, the euro zone economy continues to disappoint. GDP growth in the euro zone slowed to 0.3% in the third quarter, following growth of 0.4% in the second quarter. We forecast GDP growth of 1.5% for the full year, rising to 1.7% in 2016 and an average of 1.6% in The risk of Grexit has receded following a third bail-out deal reached between Greece and its euro zone creditors. Migration has emerged as the main political issue in Europe in the face of a surge in refugee numbers. Western Europe economic outlook Western Europe USJapan Emerging markets Oil Non-oil commodities Monetary policy Currency Forecast risks Forecast risks (cont.) Summary

Japan’s economy contracted in the second quarter of 2015, by an annualised rate of 1.2%, largely driven by a 2.7% fall in private consumption. For 2015 we estimate an expansion of 1% in 2015, rising to 1.7% in Core consumer prices fell by 0.1% year on year in September, the first deflationary reading in two years. Another increase in the consumption tax—to 10% in April 2017—will cause growth to slow to 1.2% in that year. The prospect of consistent GDP growth of 2% and above, as Abenomics is targeting, remains distant. Japan economic outlook Western Europe US Japan Emerging markets Oil Non-oil commodities Monetary policy Currency Forecast risks Forecast risks (cont.) Summary

Emerging markets face a testing time. The main focus of concern is the slowdown in China, which will crimp demand for commodities. The prospect of rising US interest rates is another source of pressure on emerging markets. Capital outflows have exerted sustained downward pressure on emerging market currencies, many of which are trading at multi-year lows against the dollar. We expect a structural slowdown to reduce Chinese GDP growth to 4.8% by We have cut our 2015 Brazil GDP growth estimate to -3% and our 2016 forecast to -1%. Emerging market economic outlook Western Europe USJapan Emerging markets Oil Non-oil commodities Monetary policy Currency Forecast risks Forecast risks (cont.) Summary

Brent prices have remained weak, as surging demand, especially in developed markets failed to offset concerns about excessive global supply. Prolonged price weakness will slow output growth in 2016 (US production will contract), but markets will remain oversupplied due to robust OPEC output (including from Iran) and moderating demand growth. Prices will rise only gradually in 2016, to US$60/b from an average of US$53/b in Tightening markets will drive Brent up, but annual average prices will not exceed to US$80/b throughout 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.

After collapsing in 2015, non-oil commodity prices will stage only a modest rebound in The slowdown in China’s industrial sector will weigh on major industrial raw materials. Other emerging markets (many of which face economic slowdown and currency depreciation) do not have the demand to soak up the excess supply. Despite smaller harvests for key global crops, partly as a result of the El Niño climate phenomenon, major stockpiles will need to be worked through, keeping prices of agricultural commodities soft. Non-oil commodities outlook Western Europe USJapan Emerging markets Oil Non-oil commodities Monetary policy Currency Forecast risks Forecast risks (cont.) Summary

A strong October US jobs report supports our forecast that the Fed will raise interest rates in December, for the first time since mid A gradualist approach to monetary tightening will take the main US policy rate to 3.25% by the end of We expect the ECB’s €60bn monthly bond-buying programme, launched in March, to be extended to mid In some emerging markets with strong dollar links interest rates are likely to have to track US rates higher, particularly if the dollar appreciates further. Monetary policy outlook Western Europe USJapan Emerging markets Oil Non-oil commodities Monetary policy Currency Forecast risks Forecast risks (cont.) Summary

The dollar will remain strong, supported by a growing yield differential against the euro and the yen but further gains will be limited after the dollar’s surge in Most emerging-market currencies have given back at least part of the gains posted in October. Sustained rallies in emerging-market currencies are unlikely until there is a marked improvement in fundamentals, which is not in prospect in China’s shift in August to a more market-determined exchange rate followed sustained capital outflows and reserve depletion in the year to date. Currency outlook Western Europe USJapan Emerging markets Oil Non-oil commodities Monetary policy Currency Forecast risks Forecast risks (cont.) Summary

- “Grexit” is followed by a euro zone break-up - Russia’s interventions in Ukraine and Syria precede a new “cold war” - Global monetary policy divergence leads to extreme currency volatility - China experiences a sharp economic slowdown + Lower oil prices provide a global economic fillip 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. 15

Forecast risks continued Western Europe USJapan Emerging markets Oil Non-oil commodities Monetary policy Currency Forecast risks Forecast risks (cont.) Summary - The rising threat of jihadi terrorism destabilises the global economy - US economy stumbles in the face of monetary tightening - Economic upheaval leads to widespread social and political unrest - Chinese expansionism prompts a clash of arms in the South China Sea - A collapse in investment in the oil sector prompts a future oil price shock 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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