Global economic forecast July 11th 2011

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

After three strong months, job creation weakened in May and June, 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.

The eurozone economy slowed in the second quarter. Germany and other “core” countries are expected to regain momentum in the second half of 2011. Fiscal austerity and high borrowing costs will hold back the periphery.

EU policymakers are working on a second, large package of assistance for Greece.

Italian and Spanish bond spreads have spiked, raising concerns about the ability of the third and fourth-largest eurozone economies to raise funding in the markets.

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

Second quarter GDP figures will show a steep contraction. But manufacturing is already experiencing a V-shaped recovery and the economy will return to growth in the second half. We forecast GDP growth of -0.5% for the full year.

The yen remains firm despite coordinated international action in March to stem its appreciation.

In China further monetary tightening may be needed following an increase in the inflation rate to 6.5%.

Elsewhere in the emerging world, monetary tightening is also needed to check inflation.

As in the developed world, growth momentum has stalled in the second quarter. Our central assumption is that emerging markets regain momentum in the second half.

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

The loss of Libyan output has tightened the supply outlook but spare capacity in OPEC should suffice to prevent supply bottlenecks. Geopolitical risk remains high, however.

Tighter global monetary conditions will lead to lower prices from the second half of 2011

Demand is expected to weaken as monetary tightening bites in the developing world and as stimulus is withdrawn in the mature economies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

- Disorderly defaults by developed sovereigns rock financial markets

- New asset bubbles burst, creating renewed financial turbulence

- China’s economy crashes

- Tensions over currency manipulation lead to a rise in protectionism

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- 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

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