Global forecasting service Economic forecast summary - June 2012

1. Global forecasting service Economic forecast summary - June 2012 Master Template www.gfs.eiu.com

2. About the Economist Intelligence Unit (EIU) • Research arm of The Economist Group for business executives • 380 analysts and industry specialists worldwide covering • Analysis and forecasting for over 200 countries and territories • Risk assessment • Industry data and trends: automotive, consumer goods, energy, financial services, healthcare, technology • Market sizing • Custom client research • Visit www.eiu.com to register for free macroeconomic information on 187 countries Master Template www.gfs.eiu.com

3. Today’s presenter Jake StathamEditor-in-Chief, ViewsWireEconomist Intelligence Unit Master Template www.gfs.eiu.com

4. Key themes • Global GDP growth of 3.2% at PPP in 2012 • Austerity. Euro zone in recession • Greek euro exit still less than 50:50 likely • China likely to avoid “hard landing” • Key threats to global economy: – Euro crisis, contagion – Oil shock – Political risk (Greece, euro zone, China, Russia) • Our headline numbers largely unchanged since last month

5. We forecast US real GDP growth of 2.2% in 2012. Consumer spending started the year strongly, but will decelerate. Growth is forecast to average 2.3% in 2013-16. • Serious headwinds remain, and our outlook is still cautious. Job creation remains uneven, and household indebtedness is weighing on spending . • Housing market data have improved recently, but a large overhang of unsold houses will drag on the property market. • A drastic tightening of fiscal policy is in prospect in 2013 for the incoming administration. Congress is likely to moderate the impending tax rises.

6. Greek and French election results are challenging the euro area’s crisis response. A second election in Greece could strengthen anti-austerity parties, putting pressure on the EU/IMF to soften insistence on austerity. • Sovereign funding costs will spike again. We expect the euro zone to survive, but anticipate much turmoil in 2012. The EU’s current bail-out funds are not large enough to accommodate Spain, let alone Italy. • We expect euro zone GDP to contract by 0.7% in 2012. Germany will fare best; Greece, Portugal and Spain worst. GDP will recover only slowly thereafter.

7. The economy contracted by 0.7% in 2011, undermined by the negative impact of the March earthquake and tsunami as well as a strong yen that constrained export potential. • Real GDP will grow by at least 1.5% in 2012, boosted by export growth and reconstruction activity. From 2013 growth will be constrained by high public indebtedness and deteriorating demographics. • A recovery in Japan's automotive sector—after the disruption caused by the natural disasters and flooding later in the year in Thailand—will support both industrial output and exports in 2012.

8. Growth in 2012 will be constrained by sluggish OECD demand. EMs will still comfortably outperform their peers in the developed world in 2012-16. • Euro downturn will hit EM exports. • Threat to investment and financing in eastern Europe. • “Post-revolution dividend” in some Arab countries, especially Libya. • Chinese growth will slow to 8.3% in 2012. Implications for EM commodity exporters.

9. 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. • Geopolitical risks are weighing on the supply picture, particularly the tensions between the West and Iran. Our forecast assumes a military outcome is avoided. • Prices will average around US$113/b in 2012 as supply concerns offset the negative impact of weaker demand.

10. Consumption growth is expected to slow in 2012, constrained by weak EU demand 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.

11. Sluggish demand will be deflationary, but headline inflation will be elevated on the back of earlier oil price rises. • The Fed has said it will keep interest rates very low until late 2014. A further round of quantitative easing appears unlikely if the US economy grows at a reasonable pace. • We expect the ECB to hold its policy rate steady at 1% for two years. It may well need to reactivate its bond-buying and liquidity programmes to counter market tensions. • Most emerging market central banks will keep interest rates broadly stable in 2012.

12. Europe’s debt crisis will keep the euro under pressure. We expect an average 2012 rate of US$1.31:€1, before a weakening in 2013-16. • After a weak start to the year, the yen has strengthened in recent weeks. We have raised slightly our yen forecast given that we expect the currency to benefit from periods of risk aversion. • EM currencies will be supported over the medium term by positive growth and interest-rate differentials with OECD economies. • China’s decision to allow the renminbi to move in a wider trading ban will increase volatility.

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