Master Template1 Global forecasting service Economic forecast summary - February

Post-election, the political scene continues to suffer from sharp ideological differences between the parties. Following a mini-deal on raising taxes at end-2012, another confrontation looms over federal spending. The debt ceiling debate will be especially rancorous. The US will avoid a default, but planned spending cuts may remain as scheduled. Loose monetary policy and a recovering housing market will partly offset contractionary fiscal policy. We maintain our GDP growth forecast for 2013 at 2.1%, down slightly from an estimated 2.2% in We forecast average growth of 2.3% in

The existence of the ECB’s bond- buying programme (as yet unactivated) continues to foster a period of financial calm, by easing Spain and Italy’s funding pressures. The crisis in the real economy continues: euro area unemployment reached a record highs in late Fiscal deficits remain sizeable. The ECB’s move buys time. Structural issues of competitiveness and solvency still need to be addressed. Given the planned stringent fiscal consolidation, we expect the currency bloc’s recession to last well into 2013 and growth in 2014 will be weak.

Our 2013 forecast for Japan’s economic growth has been raised to 0.9% from 0.6% following the introduction of a stimulus plan by the newly elected government of Shinzo Abe. Economic prospects for have also improved owing to the additional spending and the effects of looser monetary policy at the Bank of Japan. The government's commitment to end deflation will be successful: we forecast average annual inflation of around 1.3% between 2014 and We have also weakened our forecast for the yen: we now expect a rate of ¥88:US$1 in 2013.

Growth in 2012 was constrained by sluggish OECD demand and a policy- induced slowdown in China designed to deflate a housing bubble. Chinese data started to strengthen in the final quarter of Stimulus measures and an increase in bank lending support our view that the economy will strengthen in 2013 and grow by 8.5%. Growth in Brazil is expected to improve in 2013, but remain relatively modest at 3.5%. We estimate that India’s growth will pick up in 2013 to 6.5%, after growth of just 5.4% in 2012.

Oil consumption growth will pick up slightly in 2013 as China returns to stronger economic growth and US consumption turns slightly positive. Overall, consumption growth will average around 1.7% a year in , led by the developing world. Geopolitical risks continue to weigh on the supply picture, particularly the tensions between the West and Iran. Still weak demand growth and ample supply will constrain prices in 2013, assuming no unforeseen disruptions to supply or heightened political risk.

Consumption growth will remain relatively subdued in 2013, constrained by weak OECD growth, but will pick up from 2012 levels. However, rising emerging market incomes and urbanisation will underpin medium-term demand growth. Years of underinvestment, particularly in agriculture, will support prices. Nominal prices will remain historically high in , but prices will ease back in real terms.

The Fed’s current monetary stimulus, a third round of QE, worth US$40bn in monthly bond purchases, is open- ended and will last until at least The Fed will keep interest rates low until mid After a 25 basis point cut in July, we expect the ECB to cut its policy rate by a further 25 basis points to 0.75% in the first quarter of The ECB has said it will buy short- term bonds of euro zone governments without limit, subject to strict conditions. Emerging market central banks are adopting an easier monetary stance.

Europe’s debt crisis and a protracted recession will remain sources of pressure on the euro. All the same, the dollar has little fundamental support, given the combination of loose monetary policy, fiscal tightening and a large external funding requirement. We expect the average euro:dollar rate to be little changed in EM currencies will be sensitive to changes in global risk appetite. They should be supported over the medium term by positive growth and interest rate differentials with OECD economies.

- One or more countries leave the euro zone - The global economy falls into recession - Tensions over currency manipulation lead to protectionism + A sustained decline in oil prices provides a global economic fillip - Tensions over disputed islands rupture Sino-Japanese ties

- Social and political disorder undermine stability in China - US economy stumbles in the wake of a wave of fiscal tightening - Economic upheaval leads to widespread social and political unrest - An attack on Iran results in an oil price shock + Co-ordinated monetary stimulus kick-starts a global recovery

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