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

3. 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.

4. 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.

5. 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.

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.
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.

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. 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.

9. 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.

10. + Unprecedented policy response prevents break-up of euro zone 20
- The global economy falls into recession 15
- The euro zone breaks up
15
+ Stronger than anticipated US growth boosts the global economy
12
- Tensions over currency manipulation lead to protectionism 12

11. - Social and political disorder undermine stability in China 10
- US dollar crashes 10
- Economic upheaval leads to widespread social and political unrest
9
- An attack on Iran results in an oil price shock
8
- Resumption of monetary stimulus leads to new asset bubbles 8

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