Global economic forecast February 14th 2011

A new round of fiscal stimulus, together with continued QE, will maintain the momentum of the recovery in 2011

Persistently high unemployment is a serious concern, but firms should be more willing to hire this year

The deleveraging process still has several years to run and will weigh on medium-term economic growth.

A large overhang of houses will prevent a recovery of the property market

Germany and the core are growing strongly but fiscal austerity and high borrowing costs will hold back growth in the periphery

Expectations of an increase in the financing available to distressed euro zone member states has led to an improvement in sentiment. But these measures will not resolve the underlying solvency crisis

We expect Portugal to need a bailout in 2011 but Spain to meet its funding needs in the markets

Export performance in Japan will deteriorate in 2011, reflecting a deceleration of Chinese growth and continued yen strength

The urgent need for fiscal consolidation 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

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

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

Brazil’s performance has been driven by Chinese demand for commodities and by solid domestic consumption

Russia’s recovery is 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

Output restraint and significant spare capacity in OPEC producers 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Demand is expected to weaken as monetary tightening bites in the developing world and as stimulus is withdrawn in the EU.

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

Years of underinvestment, particularly in agriculture, will push up 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 the third quarter of 2012

We have brought forward our forecast of the first interest rate rise by the ECB to the first quarter of 2012

The ECB is keen to cease its emergency purchases of peripharal eurozone government bonds

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

On the assumption that EU policymakers restore confidence in EMU, we now expect the euro to weaken somewhat less against the dollar in 2011

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

- Major sovereigns default as public debt surges

- Tensions over currency manipulation lead to a rise in protectionism

- New asset bubbles burst, creating renewed financial turbulence

- The Chinese economy crashes

- Developed economies fall into a deflationary spiral

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- Commodity prices drive up inflation & force fierce policy tightening

+ Improved confidence prompts a stronger rebound in demand

- The global economy experiences a double-dip recession

- The euro zone breaks up

- Economic upheaval leads to widespread social and political unrest

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