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Economic forecast summary: August 2015 • Economic forecast summary – July 2014 Global forecasting service www.gfs.eiu.com US economic outlook We have edged up our 2015 US growth forecast to 2.5%. The economy has rebounded from a poor first quarter and we expect it to perform well in the second half. Consumer spending was slower than expected early in the year. But it picked up to 0.6% month on month in May, as the savings rate declined. Business investment has been constrained by a reduction in spending by shale oil producers. The strong US dollar is curtailing exports, which are also suffering from weak global demand. US: Real GDP growth (% change, year on year) 5.0 4.0 3.0 2.0 1.0 0.0 -1.0 -2.0 -3.0 -4.0 -5.0 2009 10 11 12 13 14 15 16 17 18 19 Source: The Economist Intelligence Unit, Global Forecasting Service. US Western Europe Japan Emerging markets Oil Non-oil commodities Monetary policy Currency Forecast risks Forecast risks (cont.) Summary Western Europe economic outlook The risk of Grexit has risen and is set to persist despite an 11th hour deal reached between Greece and its euro zone creditors on July 13th. Relations between Greece and its euro zone creditors have been badly damaged. Grexit would not have an immediate impact on the region’s growth outlook but would create another serious faultline in EMU. We forecast 2015 GDP growth of 1.5% for the euro zone. The region is benefiting from lower oil prices, the ECB’s QE programme and a weakening of the euro over the past 12 months. US Western Europe Japan Emerging markets Oil Non-oil commodities Euro zone: Real GDP growth (% change, year on year) 3.0 2.0 1.0 0.0 -1.0 -2.0 -3.0 -4.0 -5.0 2009 10 11 12 13 14 15 16 17 18 19 Source: The Economist Intelligence Unit, Global Forecasting Service. Monetary policy Currency Forecast risks Forecast risks (cont.) Summary Japan economic outlook Real GDP growth in the first quarter of 2015 grew by 1% quarter on quarter (3.9% annualised). Both private consumption and investment made hefty contributions to the growth rate. Japan: Real GDP growth (% change, year on year) 6.0 5.0 4.0 The yen has weakened further recently while the equity rally has continued. 3.0 For 2015 as a whole we expect an expansion of 1.4% in 2015, rising to 2% in 2016. 1.0 Another increase in the consumption tax—to 10% in April 2017—will cause growth to slow to 1.3% in that year. The prospect of consistent GDP growth of 2% and above, as Abenomics is targeting, remains some distance away. US Western Europe Japan Emerging markets Oil Non-oil commodities 2.0 0.0 -1.0 -2.0 -3.0 -4.0 -5.0 -6.0 2009 10 11 12 13 14 15 16 17 18 Source: The Economist Intelligence Unit, Global Forecasting Service. Monetary policy Currency Forecast risks Forecast risks (cont.) Summary 19 Emerging market economic outlook Emerging markets face a testing few months as we expect the Fed to embark on a monetary tightening cycle in September. This will draw capital back to the US and support further dollar appreciation. The stock market plunge in China wiped US$3trn off valuations. But we expect only a modest impact on the wider economy. Countries dependent on oil for fiscal or export revenue are having to tighten their belts. China, India, South Korea and Turkey are among the countries set to benefit from lower oil prices. US Western Europe Japan Emerging markets Oil Non-oil commodities Non-OECD Real GDP growth OECD (% change, year on year) World 10.0 9.0 8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0 -1.0 -2.0 -3.0 -4.0 -5.0 2009 10 11 12 13 14 15 16 17 18 19 Source: The Economist Intelligence Unit, Global Forecasting Service. Monetary policy Currency Forecast risks Forecast risks (cont.) Summary Oil price and demand outlook Oil prices and demand 7.0 120 6.0 110 5.0 100 4.0 90 3.0 80 2.0 70 1.0 60 0.0 50 -1.0 40 -2.0 30 -3.0 20 2009 10 11 12 13 14 15 16 17 18 19 Demand (% change; av; left scale) Nominal price (US$/b; dated Brent; right scale) Brent prices have fallen in recent weeks, owing to the expectation that a comprehensive deal on Iran’s nuclear programme would be signed, enabling exports to rise substantially. We have not moved our forecast, as we had expected such a deal to be agreed. Oil will remain oversupplied this year as the US and OPEC continue to battle for market share. Although proving resilient, growth in US shale production will eventually slow. We forecast that prices will rise gradually, from an average of US$60/b in 2015 to US$89 in 2019. Sources: International Energy Agency; The Economist Intelligence Unit; IMF, International Financial Statistics. US Western Europe Japan Emerging markets Oil Non-oil commodities Monetary policy Currency Forecast risks Forecast risks (cont.) Summary Non-oil commodities outlook Industrial raw materials index (1990=100) IRM index FFB index 300 An overhang of supply in major markets will remain a drag on industrial raw materials prices in 2015-16. The slowdown in China’s economy will weigh on major industrial commodities. Other emerging markets (many of which face economic headwinds and currency depreciation) do not have the demand to soak up the excess supply. 250 200 150 100 50 2019 2018 2017 2016 2015 2014 2013 2012 2011 2010 2009 0 Large harvests will help to bring down prices for our food, feedstuffs and beverages index. Major stockpiles will need to be worked through in 2015, keeping prices soft. The biggest upside risk remains a significant El Niño phenomenon, which reduces harvests. Note: IRM index includes base metals, natural rubber and fibres. Source: The Economist Intelligence Unit, Global Forecasting US Western Europe Japan Emerging markets Oil Non-oil commodities Monetary policy Currency Forecast risks Forecast risks (cont.) Summary Monetary policy outlook UK base rate US federal funds rate Japan overnight call rate Euro zone refi rate Interest rates (%) 7.0 6.5 6.0 5.5 5.0 In the light of stronger high-frequency data in the US, we maintain our forecast that the Fed will embark on a tightening cycle this year. We expect the first rise in the policy rate in September. The ECB’s €60bn monthly bondbuying programme, launched in March, will last at least until September 2016. 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 -0.5 2009 10 11 12 13 14 15 16 17 18 19 Monetary policy in emerging markets is following divergent trends. Many countries eased policy early in 2015. In countries with strong dollar links interest rates may have to track US rates higher later in the year. Source: Haver Analytics. US Western Europe Japan Emerging markets Oil Non-oil commodities Monetary policy Currency Forecast risks Forecast risks (cont.) Summary Currency outlook After pausing in March-April, the US dollar’s rally against most other major currencies resumed in May. US$:€ exchange rate 1.5 (av) Divergent outlooks for growth and monetary policy will push the dollar higher against the euro, the yen and many EM currencies. For 2015 we forecast an average dollar:euro exchange rate of US$1.07:€. In 2016 we expect the rate to dip below parity. 1.4 1.3 1.2 1.1 1.0 0.9 2009 10 11 12 13 14 15 16 17 18 19 EM currencies are likely to remain under pressure but in the medium term should gain support from positive growth differentials relative to OECD economies. Source: The Economist Intelligence Unit, Global Forecasting Service. US Western Europe Japan Emerging markets Oil Non-oil commodities Monetary policy Currency Forecast risks Forecast risks (cont.) Summary Forecast risks Intensity Scenario - “Grexit” is followed by a euro zone break-up 20 - Commodity slump and investment crunch in China entrench EM slowdown 20 + Lower oil prices provide a global economic fillip 20 - Russia’s military intervention in Ukraine revives Cold War-era tensions 16 - Global monetary policy divergence leads to extreme currency volatility 16 Risk intensity is a product of probability and impact, on a 25-point scale US Western Europe Japan Emerging markets Oil Non-oil commodities Source: The Economist Intelligence Unit, Global Forecasting Service. Monetary policy Currency Forecast risks Forecast risks (cont.) Summary Forecast risks continued Intensity Scenario - The rising threat of jihadi terrorism destabilises the global economy 12 - US economy stumbles in the face of monetary tightening 10 - Economic upheaval leads to widespread social and political unrest 9 + A “Grexit” prompts a euro zone economic revival 8 - A collapse in investment in the oil sector prompts a future oil price shock 4 Risk intensity is a product of probability and impact, on a 25-point scale US Western Europe Japan Emerging markets Oil Non-oil commodities Source: The Economist Intelligence Unit, Global Forecasting Service. Monetary policy Currency Forecast risks Forecast risks (cont.) Summary Summary Real GDP, 2014 World GDP (% change, year on year) (% change, year on year) 11.0 6.0 10.0 5.0 Market exchange rates PPP exchange rates 9.0 4.0 8.0 7.0 China India 3.0 2.0 6.0 5.0 4.0 3.0 1.0 ASEAN Africa 0.0 Middle East Latin AmericaEastern Europe 2.0 US -1.0 UK -2.0 1.0 CIS -3.0 0.0 Euro zone -1.0 Japan 2009 10 11 12 13 14 15 16 17 18 19 Source: The Economist Intelligence Unit, Global Forecasting Service. US Western Europe Japan Emerging markets Oil Non-oil commodities Monetary policy Currency Forecast risks Forecast risks (cont.) Summary Access analysis on over 200 countries worldwide with the Economist Intelligence Unit The analysis and content in our reports is derived from our extensive economic, financial, political and business risk analysis of over 203 countries worldwide. You may gain access to this information by signing up, free of charge, at www.eiu.com Click on the country name to go straight to the latest analysis of that country: Further reports are available from Economist Intelligence Unit and can be downloaded at www.eiu.com G8 Countries * Canada * France * Germany * Italy * Japan * Russia * United Kingdom * United States of America * Russia * India * China * Vietnam * Egypt * Turkey * South Africa BRIC Countries * Brazil CIVETS Countries * Colombia * Indonesia Or view the list of all the countries. Should you wish to speak to a sales representative please telephone us: Americas: +1 212 698 9717 Asia: +852 2585 3888 Europe, Middle East & Africa: +44 (0)20 7576 8181 www.gfs.eiu.com Access analysis and forecasting of major industries with the Economist Intelligence Unit In addition to the extensive country coverage the Economist Intelligence Unit provides each month industry and commodities information is also available. 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Consumer goods Analysis and five-year forecast for the consumer goods and retail industry throughout the world providing detail on a country by country basis Energy Analysis and five-year forecast for the energy industries throughout the world providing detail on a country by country basis Financial services Analysis and five-year forecast for the financial services industry throughout the world providing detail on a country by country basis Healthcare Analysis and five-year forecast for the healthcare industry throughout the world providing detail on a country by country basis Technology Analysis and five-year forecast for the technology industry throughout the world providing detail on a country by country basis www.gfs.eiu.com Media enquiries for the Economist Intelligence Unit Europe, Middle East & Africa Asia excl China Grayling PR Will Bleeker Tel: +44 (0) 20 7932 1834 Email: [email protected] om MHP Communications Rhonda Taylor Tel: +852 2140 6022 Email: [email protected] Americas China Grayling New York Gina Sorice Tel: + 1 (646) 284-9414 Email: [email protected] om Grayling Shanghai Sissi Jiang Tel: +86 (10) 8535 0762 Mobile: +86 137 1792 8681 Email: [email protected] www.gfs.eiu.com