Global economic forecast June 10th 2011

GDP growth softened to 1.8% in the first quarter as consumer spending and confidence was hit by oil gasoline prices.

After two strong months, job creation weakened in May, raising doubts about firms’ willingness to hire.

We assume that current weakness is a soft patch and that the economy will regain momentum in the second half.

Fiscal tightening and deleveraging will constrain medium-term growth rates.

A large overhang of houses is preventing a recovery of the property market, with an adverse impact on households’ balance-sheets.

A strong first quarter augurs well for Germany and other “core” countries but fiscal austerity and high borrowing costs will hold back the periphery.

Unable to return to the markets in 2012, Greece needs a top-up loan. We assume the EU/IMF will disburse this although the German government is insisting on “bailing in” the private sector, an idea opposed by the ECB.

Portugal received a €78bn bailout in May 2011. We expect Spain to meet its funding needs in the markets

The March 11th earthquake and tsunami are having a servere impact on power supplies and supply chains

We have revised down our 2011 GDP forecast to -0.5%. The second quarter will be dire but we expect a recovery in the second half, boosted by a rebound in manufacturing and by reconstruction activity

Coordinated international action was taken in March to stem the appreciation of the yen

In China massive stimulus has aggravated existing imbalances. Further tightening of monetary policy is needed to tame inflation.

Elsewhere in the emerging world, monetary tightening is needed to check inflation. Growth is expected to remain strong on the back of robust domestic demand.

Growth in Brazil will slow to 4% as the cental bank tightens policy to control inflation.

Russia’s recovery will be supported by higher oil prices

Oil consumption will continue to grow strongly in 2011, led by the developing world. Consumption is expected to fall in the EU and Japan

Despite the collapse of Libyan output, significant spare capacity in OPEC suggests ample supply. However, any escalation in geopolitical tensions could disrupt our supply forecasts

Loose global monetary conditions and investors’ search for return will support prices

Demand is expected to weaken as monetary tightening bites in the developing world and as stimulus is withdrawn in the mature economies

However, rising emerging market incomes and urbanisation will underpin medium-term demand growth

Years of underinvestment, particularly in agriculture, will support prices

Gold prices will come under pressure in 2012 as interest rates start to rise and investors reduce their holdings

Amid high unemployment the Federal Reserve will not raise its policy rate until late in 2012.

The ECB raised its policy rate by 25 basis points to 1.25% in April. We expect one more increase in 2011, followed by a further two in 2012.

The ECB has made clear its unwillingness to buy more peripheral eurozone government bonds.

Japanese policy rates will be held at emergency levels until late 2012.

The euro is being supported by a positive interest differential in relation to the dollar, despite debt stresses in the eurozone periphery

The yen will be supported by Japanese institutional investors’ home bias but a declining domestic savings rate will make it vulnerable in the medium term

Emerging market currencies will continue to be supported by wide interest rate and growth differentials with OECD economies

- Oil prices remain at extremely high levels

- Major sovereigns default as public debt surges

- New asset bubbles burst, creating renewed financial turbulence

- China’s economy crashes

- Tensions over currency manipulation lead to a rise in protectionism

16

16

16

15

12

- Developed economies suffer stagflation

- The US dollar crashes

- The euro zone breaks up

- Economic upheaval leads to widespread social and political unrest

+ Oil prices slump

10

10

10

9

8