Global economic forecast October 11th 2010

The recovery has started to soften, with the weakness of private-sector jobs creation giving particular cause for concern

Inflationary pressures remain very weak—both the core consumer price index and the core personal consumption expenditure index are hovering just above zero in year-on-year terms

House prices have stabilised, but a large stock of houses on the market now or coming in the near future will exert renewed downward pressures on prices

Europe’s economy is recovering but the fiscal crisis has raised risks

The economy is burdened with spare capacity and urgent need for fiscal consolidation

Unemployment has risen only moderately owing to wage subsidies, but employment recovery will be slow

Greece is likely to need a re-structuring of its government debt despite a massive rescue package

Export performance in Japan will deteriorate over the remainder of 2010 and into 2011, partly reflecting a deceleration of Chinese growth

The urgent need for fiscal consolidation greatly limits room for further fiscal stimulus beyond measures already approved

Weak domestic demand is putting downward pressure on Japanese prices again, so that deflation continues

Chinese growth has been supported by massive stimulus, but this has aggravated existing imbalances

India is growing strongly on the back of robust domestic demand. However, fiscal pressures remain and will act as a constraint on potential growth

Brazil has been hit less than expected by the crisis, and has recovered rapidly on solid domestic consumption

Russia’s recovery is supported by the rise in oil prices over the past year

Oil consumption growth will bounce back in 2010, led by the developing world. OECD consumption growth will remain subdued

Output restraint and significant spare capacity in OPEC producers suggests ample supply. Any escalation in geopolitical tensions could disrupt our supply forecasts

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

Rising emerging market incomes and urbanisation will underpin medium-term demand growth

Years of underinvestment, particularly in agriculture, will push up prices

In the near-term, many raw materials suffer from temporary supply shortfalls

Gold prices have been strong, fuelled by vibrant investor demand, while fundamentals remain weak. Persistent economic uncertainty will support prices in 2010-11

The Federal Reserve will not raise its policy rate until the third quarter of 2012

The Greek crisis has triggered ECB bond purchases; the central bank is also now unlikely to raise rates until the third quarter of 2012

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

The European fiscal crisis also raises new concerns for banking sector stability

Concerns about the US economy have helped to weaken the US$ against the euro in recent weeks

Expectations of earlier rate hikes in the US and lingering concerns about the fragility of the euro zone will support the US$ against the euro over the longer term

The yen will remain firm against the US$, reflecting heightened risk perceptions and Japanese institutional investors’ home bias

- Sovereigns default as public debt spirals out of control

- Developed economies fall into a deflationary spiral

- The global economy has a double-dip recession as stimulus fades

- New asset bubbles burst, creating renewed financial turbulence

- Protectionism takes hold, undermining globalisation

15

16

15

12

12

- The Chinese economy crashes

- The euro zone breaks up

- Economic upheaval leads to widespread social and political unrest

+ Emerging-market growth surges

+ Confidence revives, prompting a stronger rebound in demand

10

10

9

8

8