Economic forecast summary – July 2014 Economic forecast summary: February 2015 Economic forecast summary – July 2014 Global forecasting service www.gfs.eiu.com

US economic outlook We have increased our 2015 forecast for US GDP growth to 3.4%, from 3.3%, reflecting the positive impact of lower energy prices on consumer spending. 2014 saw the strongest job growth for 15 years and there are signs that real wages are finally picking up. Strong private consumption will offset the drag from sluggish external demand in 2015. We expect the Fed to start raising policy rates in mid-2015. Domestic energy production is contributing to a narrowing of the trade deficit although the surge in the dollar will erode US competitiveness. The euro zone is forecast to underperform the US in 2009 as it suffers from a massive drop in external demand, the impact of the global financial crisis and the unwinding of domestic imbalances. The US recovery will be driven partly by aggressive fiscal stimulus which will make itself felt from the second half of 2009 and some restocking, after the extensive drawdown of inventories in the first half 2009. US Western Europe Japan Emerging markets Oil Non-oil commodities Monetary policy Currency Forecast risks Forecast risks (cont.) Summary

Western Europe economic outlook In the euro zone, lower oil prices will provide a modest lift to consumption, but the European Central Bank is worried that this could push inflation expectations down further, increasing the risk of a debt deflation cycle. Conditions remain weak in France and Italy. Germany is also struggling, been hurt by the sanctions on Russia. An election in Greece in late January could bring Syriza, an anti-austerity party, to power. If Syriza does not cede on its demands for more debt relief, it could lead to Greece’s exit from the euro, reviving fears of a break-up. The euro zone is forecast to underperform the US in 2009, largely reflecting the severe weakness of Germany, which, like Japan, remains highly exposed to the global trade cycle. The US recovery will be driven partly by aggressive fiscal stimulus, which will make itself felt from the second half of 2009. US Western Europe Japan Emerging markets Oil Non-oil commodities Monetary policy Currency Forecast risks Forecast risks (cont.) Summary

Japan economic outlook The economy was flat in 2014. After a strong first quarter, the economy slumped badly following an April tax rise. Japan's slide back into recession is undermining confidence in Shinzo Abe's economic programme. But he won a snap election in December that he called in the hope that a fresh mandate will enable him to push through contentious structural reforms. We 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. US Western Europe Emerging markets Oil Non-oil commodities Monetary policy Currency Forecast risks Forecast risks (cont.) Summary Japan

Emerging market economic outlook Emerging markets face a testing 2015 as the Fed tightens monetary policy. We have raised our 2015 GDP growth forecast for China to 7.2% on the back of the decline in oil prices. India and South Korea will also benefit. All countries heavily dependent on oil for fiscal or export revenue will have to tighten their belts. In Russia, already hit by Western sanctions, we forecast a contraction of 3.5%. Among the oil exporters, Venezuela is most exposed to payment problems, having failed to save sufficiently when prices were high. US Western Europe Japan Emerging markets Oil Non-oil commodities Monetary policy Currency Forecast risks Forecast risks (cont.) Summary

Oil price and demand outlook Oil prices have continued to fall as new supply, mainly from the US, has outstripped meagre demand growth. We have cut our forecast for the price of dated Brent to an average of US$54/b in 2015. We expect prices to hit bottom in the first quarter before mounting a recovery. This view is supported by futures prices which are now substantially higher than spot. Lower prices will make higher-cost production, including some US shale, uneconomic. Energy firms have announced cuts to investment in 2015 as margins are squeezed. Although we are forecasting steady growth in oil demand in 2011-13, ample supply and capacity will prevent significant price gains. While our forecast suggests markedly lower prices in 2009-13 than in 2008, they are still relatively high in both historical and real terms. Sources: International Energy Agency; The Economist Intelligence Unit; IMF, International Financial Statistics. US Western Europe Japan Emerging markets Non-oil commodities Monetary policy Currency Forecast risks Forecast risks (cont.) Summary Oil

Non-oil commodities outlook A heavy supply picture in many major commodity markets will remain a drag on prices in 2015. 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. The copper price has been hit by concerns about how it has been used as a pledge for financing in China. 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, keeping prices soft. US Western Europe Japan Emerging markets Oil Non-oil commodities Monetary policy Currency Forecast risks Forecast risks (cont.) Summary

Monetary policy outlook 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 2015. In response to deflationary pressures, the ECB again cut interest rates in September and announced measures to boost liquidity. The ECB is expected to launch a programme of sovereign QE in late January. Bank of Japan has further expanded its monetary stimulus programme. Monetary stances diverin EMs depending on country-specific factors. Policy rates in the largest industrial economies are forecast to remain at ultra-loose levels at least until the end of 2010. Concerns not to inflate fresh bubbles will persuade the Federal Reserve (the US central bank) to start to tighten policy from 2011. US Western Europe Japan Emerging markets Oil Non-oil commodities Monetary policy Currency Forecast risks Forecast risks (cont.) Summary

Currency outlook 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$1.08:€. Over the medium term EM currencies should gain support by positive growth and interest rate differentials with OECD economies. US Western Europe Japan Emerging markets Oil Non-oil commodities Monetary policy Forecast risks Forecast risks (cont.) Summary Currency

Forecast risks Scenario Intensity - Economic stagnation and political populism prompt a euro zone break-up The commodity price slump entrenches the emerging market slowdown + A sustained decline in oil prices provides a global economic filip Syria’s civil war overwhelms its neighbours and threatens global security Russia’s intervention in Ukraine leads to Cold War-era tensions 20 20 20 16 16 Risk intensity is a product of probability and impact, on a 25-point scale Source: The Economist Intelligence Unit, Global Forecasting Service. US Western Europe Japan Emerging markets Oil Non-oil commodities Monetary policy Currency Forecast risks Forecast risks (cont.) Summary

Forecast risks continued Scenario Intensity - US economy stumbles in the face of monetary tightening 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 collapse in investment in the oil sector prompts a future oil price shock 15 12 12 9 4 Risk intensity is a product of probability and impact, on a 25-point scale Source: The Economist Intelligence Unit, Global Forecasting Service. US Western Europe Japan Emerging markets Oil Non-oil commodities Monetary policy Currency Forecast risks Forecast risks (cont.) Summary

Summary US Western Europe Japan Emerging markets Oil Source: The Economist Intelligence Unit, Global Forecasting Service. US Western Europe Japan Emerging markets Oil Non-oil commodities Monetary policy Currency Forecast risks Forecast risks (cont.) Summary

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