1. Global forecasting service
Economic forecast summary - March 2012
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2. 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.

3. 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.

4. 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 2011. From
2013 we expect the economy to grow at
a rate of just above 1%.

5. 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 2012-16.

6. Oil consumption growth will be
constrained in 2012 by the weak
OECD economic outlook. It will
average nearly 2% year on year in
2013-16, 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.

7. 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 2012-16, but prices will ease
back in real terms.

8. Faced with persistently high
unemployment, the Federal Reserve
will keep its policy rate at
exceptionally low levels until late
2014. 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.

9. 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.

10. - The global economy falls into recession 20
- Oil prices remain at extremely high levels 16
+ Unprecedented policy response after Greek exit prevents contagion
16
- The euro zone breaks up
15
- The Chinese economy crashes 15

11. - Resumption of monetary stimulus leads to new asset bubbles 12
- Tensions over currency manipulation lead to protectionism 12
- US dollar crashes
10
- Economic upheaval leads to widespread social and political unrest
9
+ Stronger than anticipated US growth boosts the global economy 8

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