Global forecasting service Economic forecast summary - January 2013

1. Global forecasting service Economic forecast summary - January 2013 Master Template www.gfs.eiu.com

2. The elections have maintained the status quo in Washington. We assume that Democrats and Republicans reach a compromise on taxes and spending before the year end. • A drastic fiscal tightening that would push the economy into recession will be avoided. But fiscal tightening will still be a drag on the economy in 2013. • 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%, but now estimate a slightly higher 2.2% in 2012. We forecast average growth of 2.3% in 2014-17.

3. The ECB has eased funding pressures on Spain and Italy by signalling its readiness to buy the bonds of sovereigns facing high borrowing costs. • The ECB will buy the bonds only of countries that have applied for help from euro zone rescue funds and accepted the conditionality attached. Spain is delaying seeking official help. • 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.

4. Following a strong first quarter of 2012, when data were boosted by recovery from the March 2011 earthquake and tsunami, the economy stalled • We estimate growth of just 1.7% in 2012, weakening further to just 0.6% in 2013. • In 2014-17 growth will be sluggish, constrained by deteriorating demographics, high public indebtedness and a doubling of the consumption tax. • The yen will remain sensitive to global risk sentiment. QE by the Bank of Japan will not do much to weaken the yen if investors are in risk-averse mode.

5. Growth in 2012 will be 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 2012. Stimulus measures and an increase in bank lending since May support our view that the economy will strengthen in 2013 and grow by 8.5%. • We have revised down our forecast of GDP growth in Brazil in 2013 to 3.5% (4.5% previously) as recent data have remained poor. • We estimate India’s growth at 5.8% in 2012, quickening to 6.5% in 2013.

6. Oil consumption growth will have been constrained in 2012 by the weak OECD economic outlook. It will average around 1.7% a year in 2013-17, led by rising demand in the developing world. • Geopolitical risks continue to weigh on the supply picture, particularly the tensions between the West and Iran. • Weak demand growth will lead to somewhat lower prices in 2013, assuming no unforeseen disruptions to supply or heightened political risk.

7. 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 2013-17, but prices will ease back in real terms.

8. 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 2014. The Fed will keep interest rates low until mid-2015. • 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 2013. • 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.

9. 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 2013. • 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.

10. 20 • 15 • 12 • 12 • 10

11. 10 • 10 • 9 • 8 • 8

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