EIU global forecast may 2012

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

Master Template 1

Global forecasting service

Economic forecast summary - May 2012

www.gfs.eiu.com

We have raised our forecast for real GDP growth in 2012 to 2.2% from 1.9% US economic figures this year have been reasonably strong, especially on the

consumer spending front.

Serious headwinds remain, and our

outlook is still cautious Job creation

slowed in March, and income growth of late has been negative in real terms

Housing market data has improved

recently but a large overhang of unsold houses remains a drag on the property market.

A drastic tightening of fiscal policy is in prospect in 2013 for the incoming

administration

The euro zone debt crisis has returned

as the effects of the ECB’s recent

liquidity injections fade Spain’s fiscal misjudgements sent bond yields soaring

in late March and April Yields also rose

in Italy, but at a slower pace.

As in 2011, the authorities will struggle

to keep sovereign funding costs at

sustainable levels We expect the euro zone to survive, but anticipate much

turmoil in 2012 The EU’s bail-out funds,

at present, are not large enough to

accommodate Spain

We expect euro zone GDP to contract

by 0.7% in 2012 Germany will fare best; Greece, Portugal and Spain worst

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

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.

The economy is expected to grow by

1.5% in 2012, supported by a stronger export performance and reconstruction activity From 2013 we expect the

economy to grow at a rate of between 1-1.5%, a downgrade from prior forecasts

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

We have raised our China 2012 GDP forecast to 8.3% from 8.2%, higher 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$115/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 high oil prices will push up

headline inflation in coming months 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

The ECB cut its policy rate twice in

2011 as the regional economic crisis worsened We expect the ECB to hold its policy rate steady at 1% in 2012 Most emerging market central banks will keep interest rates broadly stable

in 2012

The return of Europe’s debt crisis will keep the euro under pressure We

expect an average 2012 rate of

US$1.31:€1 vs US$1.39:€1 in 2011

The yen has weakened since the start

of the year as risk appetite has

recovered somewhat and the Bank of Japan has become more aggressive in easing monetary policy

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 after Greek exit prevents contagion

- An attack on Iran results in an oil price shock

- The global economy falls into recession

- The euro zone breaks up

+ Stronger than anticipated US growth boosts the global economy

15 16

15 15 12

- Tensions over currency manipulation lead to protectionism

- The Chinese economy crashes

- US dollar crashes

- Economic upheaval leads to widespread social and political unrest

- Resumption of monetary stimulus leads to new asset bubbles

10 12

10 9 8

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