Master Template1 Global forecasting service Economic forecast summary - March

The tone of recent data has been fairly strong. economy has been creating more jobs in recent months. We are maintaining our 2012 GDP growth at 1.8%. But if payroll tax cuts and unemployment benefits are extended beyond the end of February, we may revise upward our growth forecast. The Fed has signalled that it will keep interest rates very low through to end of 2014, but deleveraging will constrain spending. A further round of quantitative easing is possible if the threats of recession and deflation re-emerge. A large overhang of houses will prevent a strong recovery in the housing market.

The injection of liquidity by the ECB into euro zone banking system has eased funding pressures on banks and sovereigns, notably Italy and Spain. In Greece a deep recession continues to foment social and industrial unrest. Talks on a restructuring of debt owed to private creditors are proving difficult. Greece has yet to satisfy the conditions set by the EU and IMF for a second, €130bn bail-out. Unless this deal is signed, Greece will default on a €14.5bn bond repayment in March. We expect the euro zone economy to contract by 0.7% in 2012.

The March 2011 earthquake and tsunami had a severe impact on power supplies and supply chains. Industrial production is now recovering as infrastructure is rebuilt. The strong yen is proving a headwind for exporters. Strong GDP growth in the third quarter was not sustained in the fourth quarter, when the economy contracted by 2.3% q-on-q at an annualised rate. Our forecast of GDP growth of 2% in 2012 is subject to downside risks given the loss of momentum in late From 2013 we expect the economy to grow at a rate of just above 1%.

In response to fears of an economic downturn, a number of EM central banks have cut interest rates or at least postponed monetary tightening. EM currencies and asset markets have rebounded since the start of the year as risk appetite has recovered. EMs lost momentum during 2011 as developed markets struggled. We forecast a soft landing in China, despite problems in the housing market. Growth in 2012 will be constrained by sluggish OECD demand. EMs will still comfortably outperform their peers in the developed world in

Oil consumption growth will be constrained in 2012 by the weak OECD economic outlook. It will average nearly 2% year on year in , led by rising demand in the developing world. The prospect of a resumption of Libyan output in the next 1-2 years has improved the supply outlook. Geopolitical risk remains high, however. Prices will average around US$110 as supply concerns offset the negative impact of weaker demand.

Consumption growth is expected to slow in 2012, constrained by weak EU and growth and somewhat slower growth in the developing world. 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.

Faced with persistently high unemployment, the Federal Reserve will keep its policy rate at exceptionally low levels until late Another round of quantitative easing (QE) is possible. The ECB cut rates twice in late 2011, reversing the two rate rises earlier in the year. In 2012 we expect the ECB to cut its policy rate from 1% to 0.75%. The ECB’s injection of large amounts of liquidity into the euro zone financial system has alleviated funding stresses.

As funding stresses on euro zone banks and sovereigns have eased, the euro has rebounded. Having bounced from a recent low of US$1.26, the single currency appears to be establishing a new trading range above US$1.30:€. The yen has weakened as risk appetite has recovered. But it is likely to remain well supported until the global economic outlook becomes clearer. EM currencies have rebounded. Over the medium term they will be supported by positive growth and interest rate differentials with OECD economies.

- The global economy falls into recession - Oil prices remain at extremely high levels + Unprecedented policy response after Greek exit prevents contagion - The euro zone breaks up - The Chinese economy crashes

- Resumption of monetary stimulus leads to new asset bubbles - Tensions over currency manipulation lead to protectionism - US dollar crashes - Economic upheaval leads to widespread social and political unrest + Stronger than anticipated US growth boosts the global economy

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