Master Template1 Global forecasting service Economic forecast summary – September

We have cut our 2013 economic growth forecast for the US, to 1.6% from 2% following a downward revision to first- quarter output to 1.1%. But growth accelerated to 1.7% in the second quarter, driven by strong consumer spending and a pick-up in business investment. Investors have begun pricing in a tapering of the US Fed’s bond buying programme as early as September. This has pushed up US bond yields: 10- year US Treasury yields have risen from 1.7% in May to 2.8% in mid August. This has triggered a sell-off of risky assets.

We have raised our 2013 GDP forecast for the euro zone, to -0.5% from -0.8%. Most economies in the currency bloc performed better than expected in the second quarter, led by Germany. We have edged up our 2014 euro zone growth forecast. to 0.7% High unemployment, excessive debt levels and fiscal austerity remain constraints on growth. Having cut its main interest rate by 25 basis points to 0.5% in May, the ECB said that rates would remain at low levels for an extended period. Funding for firms and households in the periphery remains scarce and costly.

We maintain our 2013 GDP growth forecast at 1.7%. The economy performed well in the first half, as the government implemented aggressive fiscal and monetary stimulus. Sentiment has dulled recently owing to the lack of details about structural reforms, the third, and most politically sensitive plank of Abenomics. A weaker yen will benefit Japan’s exporters and will contribute to raising the annual inflation rate. Over the long term the ageing of the population and disorderly public finances, will make it difficult for policymakers to engineer a self-sustaining recovery in domestic demand.

Capital has fled emerging markets since June as investors anticipate less bond-buying by the US Federal Reserve. More episodes of volatility in global capital markets are in prospect and emerging markets with large financing requirements could come under strain. For China following 7.5% Y-on-Y GDP growth in the second quarter, we maintain our 2013 GDP forecast at 7.5% We expect growth to continue to slow over the medium term. We have made further downgrades to our growth forecasts for the other BRIC economies.

Oil consumption growth in 2013 is expected to be a subdued 1% reflecting the slowdown in China’s growth and the weak euro zone economies. Overall, consumption growth will average around 1.6% 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. Weak demand growth and ample supply will constrain prices in 2013, assuming no unforeseen disruptions to supply or heightened political risk.

Demand will remain 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. We now expect the food, feedstuffs and beverages (FFB) index to fall by nearly 9% this year (6.6% previously). Nominal commodity prices will remain historically high in , but prices will ease in real terms.

Investors are anticipating a tapering of the US Fed’s programme of bond purchases in September. This has led to a back-up in global bond yields. Emerging markets have been badly hit, with sharp increases in yields on both local- and hard-currency debt. The reining in of US monetary expansion will be gradual: we do not expect rates to rise until Even so a gradual tightening of global liquidity will create headwinds for the world economy. Monetary expansion in Japan will provide only a partial offset to US tightening..

The euro should receive some support from the region’s emergence from recession. But concerns about a resurgence of the debt crisis will remain a potential source of pressure. The outperformance of the US economy and the anticipation of a less expansionary monetary stance on the part of the US Fed are pushing up the dollar across the board. EM currencies are vulnerable to monetary tightening in the West. Over the medium term they should gain support by positive growth and interest rate differentials with OECD economies.

- One or more countries leave the euro zone - Tensions over currency manipulation lead to protectionism - 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

- Tensions over disputed islands ruptures Sino-Japanese ties - Social and political disorder undermine stability in China - Economic upheaval leads to widespread social and political unrest - An attack on Iran results in an oil price shock + Co-ordinated stimulus kick-starts a global recovery

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