June EIU global economic forecast june 2012

Master Template 1Global forecasting service Economic forecast summary - June 2012 www.gfs.eiu.com... Growth in 2012 will be constrained by sluggish OECD demand.. Oil consumption growth w

Master Template 1

Global forecasting service

Economic forecast summary - June 2012

www.gfs.eiu.com

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 has 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.

Greek and French election results are challenging the euro area’s crisis

response A second election in Greece will strengthen the anti-austerity parties, putting pressure on the EU/IMF to

soften their 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.

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.

Growth in 2012 will be constrained by sluggish OECD demand EMs will still comfortably outperform their peers in the developed world in 2012-16

EM currencies will be sensitive to the

“risk-on”, “risk-off” trade, rallying when investors are more tolerant of risk and falling back when investors flock to the

US dollar

China is expected to grow by a

somewhat weaker 8.3% in 2012, but still stronger than the government’s new medium-term target of 7.5%

Rebalancing the economy away from investment towards private spending will make for less commodity-intensive growth

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.

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.

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

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.

+ Unprecedented policy response prevents break-up of euro zone

- The global economy falls into recession

- The euro zone breaks up

+ Stronger than anticipated US growth boosts the global economy

- Tensions over currency manipulation lead to protectionism

15 20

15 12 12

- Social and political disorder undermine stability in China

- US dollar crashes

- Economic upheaval leads to widespread social and political unrest

- An attack on Iran results in an oil price shock

- Resumption of monetary stimulus leads to new asset bubbles

10 10

9 8 8

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