The world economy.

Hacche, Graham ; Carreras, Oriol ; Kirby, Simon 等

World Overview

Recent developments and the baseline forecast

The UK's decision to leave the European Union (EU) is the main factor contributing to a downward revision of our baseline global growth forecast since May. In our May Review, withdrawal from the EU was discussed in an alternative set of scenarios for the UK, which showed a downside risk to our UK growth forecast. That risk has since materialised, and one of May's alternative scenarios has essentially become our new baseline.

The terms and timing of the UK's exit from the EU remain unknown, but it may well lead to substantial changes in the UK's economic and financial relations with the EU and other countries, with economic consequences abroad as well as at home. For our new baseline forecast, we have assumed, as explained in the chapter on the UK economy, that leaving the EU will take the form of the 'Switzerland' scenario described in the May Review (p.122). This would involve free trade in goods with the EU, but limited access to service sector markets. It would mean significantly reduced access to the UK's largest and geographically closest market, with negative implications in the medium-to-longer term for the UK's potential GDP, which would be expected to affect investment spending in the shorter term.

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Moreover, while the terms of exit are being considered and negotiated, unusual economic uncertainty will prevail, and this is likely to depress demand in the UK, especially investment demand, with repercussions abroad. This uncertainty may also disrupt international financial markets.

The prospect of the UK's withdrawal from the EU is a setback to a global economic outlook that was already weak and fragile. On the basis of our assumptions about the UK's exit from the EU, and taking into account other recent developments, our baseline forecast for global growth has been revised down since the May Review. Thus 2016 still seems likely to see the slowest global expansion since the 2009 recession, with world GDP growth of 3.0 per cent, while projected growth next year has been revised down to 3.3 per cent from 3.5 per cent in the May Review. The largest downward revisions to projected growth outside the UK are for the Euro Area and other countries in the EU, with the effects of the UK's decision to leave the EU, and the associated forecast revisions, importantly varying among EU countries depending partly on the closeness of their economic relations with the UK and partly on their differing vulnerabilities to the broader economic and financial consequences of the UK's exit from the EU (see Box A). For the Euro Area as a whole, projected growth has been revised down to 1.4 per cent this year and 1.3 per cent in 2017 from 1.5 and 1.7 per cent, respectively, in our May forecast.

Partly offsetting these changes are upward revisions for Brazil, Japan and Russia.

Not only because the form and timing of the UK's exit from the EU are unknown, but also because the economic responses to the related unusual economic uncertainty are difficult to predict, our forecast for the world economy, as well as for the UK economy, is itself subject to unusual uncertainty. Risks to the outlook that are related to the UK's exit from the EU are discussed below.

Data for post-referendum economic developments are virtually absent, as yet, but global growth performance was already mediocre and mixed before the UK referendum result. In the Euro Area and Japan, GDP growth in the first quarter was somewhat stronger than expected, but more recent indicators have been more subdued. In the United States, by contrast, GDP growth slowed further in the first quarter, with a decline in labour productivity, but it seems to have picked up more recently although employment growth has slowed. Among the major emerging market economies, the slowing of growth in China has continued to be moderated by official measures that seem likely to incur a cost in retarding structural change. Recessions have continued in Brazil, although market confidence has recently improved, and in Russia, where activity seems to be stabilising, helped by the partial recovery in global oil prices. India is likely to be the fastest growing major economy in 2016 for the second successive year.

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Inflation rates in the advanced economies have been broadly stable in recent months, with annual 'all-items' rates continuing to run significantly below central banks' objectives. Core inflation rates have been running closer to targets, and the upturn in global energy prices since February should help 'all-items' inflation rise closer to official objectives, but persistent output gaps seem likely to prevent these objectives from being met in the short term. Wage increases have remained subdued, even in economies with low unemployment, such as the United States, Japan and Germany, which adds to doubts about the reliability of any Phillips curve-type relationship. In the emerging market economies, meanwhile, inflation remains above targets in Brazil and Russia, and has risen close to the upper bound of the target range in India.

Since late April, there have been no further adjustments in the settings of monetary policy instruments in the advanced economies. In June, the ECB began implementing its programme of corporate bond purchases announced in March, and also undertook the first operations in its new series of targeted long-term refinancing operations (TLTRO), intended to promote bank lending. On 21 July, President Draghi indicated that the ECB would be ready to take additional easing measures to address the consequences of the UK's decision to leave the EU after reassessing the situation on the basis of data emerging over the coming months. The US Federal Reserve in June pushed back slightly, and lowered, its expected path of rate increases. In Japan, expectations of further action to ease monetary conditions have been disappointed. Elsewhere in recent months, official interest rates have been lowered in Argentina, Australia, Korea, Malaysia and Taiwan, but raised in Colombia, Egypt and Mexico.

The result of the UK referendum surprised financial markets, which had reflected indications from opinion polls and especially betting markets that the result would be in favour of 'Remain'. The surprise was shown most clearly in a sharp decline in UK government bond yields and a plunge in sterling on the two trading days following the result: the yield on 10-year gilts fell by 44 basis points to 1.05 per cent in this period, while sterling fell by 11 per cent against the dollar and 9 per cent in trade-weighted terms. The fall in sterling on the day after the referendum was the largest one-day drop in the period of floating exchange rates since 1972. There were also large declines in global stock markets immediately following the referendum result. However, with the major central banks having announced before the referendum result that they stood ready to provide liquidity if needed, there were no notable market disruptions. Subsequently, sterling stabilised and stock markets generally recovered.

Other developments in financial markets over the past three months have reflected the weak global outlook.

Thus, since late April, 10-year government bond yields have fallen back by 30-50 basis points in the major Euro Area economies and North America, and by about 15 basis points in Japan. None of the declines in the other advanced economies, however, has matched the fall of about 75 basis points in bond yields in the UK. In the United States, Canada and Germany, the declines in bond yields occurred mainly before the UK referendum, while in the other advanced economies, including the UK, most of the declines have occurred since it. In some cases 10-year yields have recently reached historic lows --below zero in Germany as well as Japan, where they have been negative since early March. In fact, in mid-July, Germany became the first Euro Area country to sell 10-year bonds at auction with a negative yield. (Outside the Euro Area, Switzerland was the first country to do so, in 2015.) The recent decline in long-term interest rates seems attributable partly to receding expectations of increases in official interest rates in the US following the Fed's recent deliberations, partly to revised expectations of easier monetary policy in other advanced economies (including the UK), and partly to increased risk aversion related, to some extent, to the UK referendum. It is notable, however, that there has been no widening of interest spreads in the Euro Area.

In foreign exchange markets, the main development since late April, apart from the drop in sterling--by about 9 per cent against the US dollar and 7 per cent in effective terms--has been a further appreciation of the yen against the currencies of all other major advanced economies, by about 5 per cent against the US dollar and 3 per cent in trade-weighted terms. While sterling's depreciation occurred entirely following the referendum, the yen's appreciation occurred before it. The euro's trade-weighted value is broadly unchanged since late April, although it has depreciated against the US dollar by about 3 per cent. The US dollar, meanwhile, has appreciated by about 3 per cent in effective terms. Apart from the impact of the referendum result on prospects for UK growth, monetary policy, and trade, and thus particularly on sterling, these currency movements may be attributed partly to the shifts in interest differentials described above and partly to increased risk aversion, with both the yen and the dollar apparently benefiting from haven demand. Among the major emerging market currencies, the renminbi has continued its gradual depreciation against the US dollar and in effective terms, while the Brazilian real and Russian rouble have partially recovered following earlier declines, mainly reflecting political developments in the former case and oil price developments in the latter.

Any increase that there may have been in risk aversion in recent months has not caused a general decline in equity markets. In fact, movements in stock market prices have been mixed since late April, rising in North America, the UK (in terms of the FTSE-100 and sterling), and the major emerging markets, while falling in Japan and the major economies of the Euro Area. Most of the declines in these latter cases occurred before the UK referendum, a notable exception being Spain, which is particularly exposed to the UK economy (see figures 3 and 4). The movements in equity prices in Japan and the UK, in particular, may be attributed partly to exchange rate movements. Especially in the Euro Area, the declines have been particularly severe in the financial sector, perhaps reflecting fears of the implications for bank profits of lower interest rates.

Oil prices, in US dollar terms, have stabilised in recent months after picking up to about $45 a barrel in late April from their trough of about $26 in early February. Prices rose above $50 in early June, reflecting supply disruptions in Canada and Nigeria as well as declines in US inventories, but have fallen back to about $45 more recently, following a build-up of inventories and reports of a recovery of investment in productive capacity in the US. Other commodity prices have been broadly stable since late April: the Economist all-items index is up by about 1 per cent, despite the dollar's effective appreciation in this period, but it remains about 2 per cent lower than a year ago.

Risks to the forecast and implications for policy

We focus on risks to our baseline forecast that are related to the UK's decision to leave the EU. They are of two kinds: those concerning its prospective economic effects and those concerning the broader threat to international economic integration that it may signify. Both have important policy implications.

First, the effects of the UK's exit from the EU may turn out to be different from what we have assumed, for several reasons. The exit may take a different form from our 'Switzerland' scenario assumption. It may turn out to be closer to our 'Norway' scenario, which would involve UK membership of the EEA, with free trade in goods and services with the EU. This seems unlikely because it would seem to require the UK to agree to free movement of labour, which would presumably be unacceptable to the UK government. But if it were agreed, it would imply more favourable paths of medium-to-longer term growth of UK, EU and world GDP than in our baseline forecast, with correspondingly more favourable shorter-term implications: this possibility forms an upside risk to our baseline. But the UK's exit from the EU could alternatively be closer to our 'WTO' scenario, with no free trade agreements with the EU--a downside risk to our forecast. The effects of the UK's exit from the EU could also be different because we may have underestimated the effects of uncertainty, which seems more likely than that we could have overestimated them.

On balance, therefore, the risks concerning the economic effects of the UK's exit from the EU seem to be on the downside. This, together with the downward revision of our baseline, represents a setback to a global economic outlook that was already weak and vulnerable. It calls for policy action.

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It seems most useful to focus on the economies of the EU, and especially the Euro Area, which are particularly exposed to the effects of the UK's exit from the EU. The economy of the Euro Area already suffers from a range of weaknesses, discussed in previous issues of this Review. It has been struggling to achieve sufficient economic growth to reduce unemployment to reasonable levels. Wide divergences in economic performance among member economies persist, with a few countries close to full employment and others with extraordinarily high unemployment levels. Moreover, there has been limited progress in reducing financial imbalances among the Area's member economies: Germany, which is close to full employment, has the largest current account surplus among the world's major economies--about 9 per cent of GDP--while the most externally indebted economies in the Area have no foreseeable prospect of achieving reasonably high employment together with external balance.

Meanwhile, public and private debt burdens remain high, aggravated by excessively low inflation as well as weak real growth. Limited fiscal space in most countries has put the burden on the ECB to support demand, but the scope for further monetary easing has become increasingly constrained. This is partly because of the possible effects of further reductions in interest rates on the profitability of a weak banking system. Meanwhile, the failure to complete the Area's banking union with a common deposit insurance scheme and a meaningful, common fiscal backstop means that dangerous links remain between risks to sovereigns and risks to national banking systems. In this regard, there has been a notable lack of progress in implementing the plan for completing the Economic and Monetary Union set out in the June 2015 Five Presidents' Report (see August 2015 Review, F17).

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Against this backdrop, the UK referendum result has added to the risk of an economic slowdown in the Euro Area sharper than that shown in our baseline forecast. If the prospective path of inflation falls further below the ECB's objective, there remains scope for the central bank to increase monetary accommodation further, probably more through increased asset purchases than through further reductions in short-term interest rates. (Current constraints on asset purchases could be relieved by, for example, allowing purchases of bonds with yields below the ECB's deposit rate.) The President of the ECB has recently and appropriately emphasised the central bank's "readiness, willingness, and ability" to take additional action if warranted. But with long-term as well as short-term interest rates having now fallen to extremely low levels, in some cases below zero, monetary easing is increasingly subject to diminishing returns and heightening risks, including risks to the supply of credit as a result of pressure on banks' profitability.

Moreover, the heterogeneous prospective effects of the UK's exit from the EU across different member countries of the Euro Area imply different policy needs that cannot be met by changes in the Area's common monetary policy.

Thus the need for a more balanced policy approach has become even clearer.

First, structural reforms should be intensified. The most helpful reforms would be those that boost demand as well as supply--such as reforms that remove impediments to investment and business formation, that promote investment by raising expectations of future growth and boosting confidence, or that promote job creation by allowing firms more flexibility in hiring and firing. Reforms that lower wages and hence consumer spending are likely to be less helpful. In fact, in Germany, in particular, policies to boost wage growth would promote a reduction of external imbalances in the Area and globally. Stronger action to reduce banking sector risks, including promoting the resolution of nonperforming loans, is also important. This may require a pragmatic application of the EU's Bank Recovery and Resolution Directive. Also with regard to the financial sector, a mercantilist approach by Euro Area countries to gaining financial services at the expense of the City of London could backfire by raising the financing costs of banks within the Area.

Second, there is underutilised scope for fiscal policy to support demand. After several years of consolidation, fiscal policy in the Area this year is expected to be mildly expansionary, largely reflecting refugee-related spending in Germany. But little further fiscal stimulus is in prospect. Taking into account debt sustainability considerations as well as targets under the Stability and Growth Pact (SGP) and national fiscal rules, fiscal space seems limited, and concentrated in countries such as Germany with small or no output gaps and little need for demand support (figure 5). However, recent further declines in borrowing costs to extraordinarily low levels have increased both fiscal space and the prospective profitability of investment projects.

These considerations suggest that fiscal policy could play a larger role in managing and supporting demand in several ways, and thus relieve the burden on monetary policy. First, countries like Germany that have fiscal space should use it to promote investment, which would boost productive potential as well as current demand and activity. Second, all countries can make their fiscal policies more conducive to growth by, for example, replacing unproductive spending by productive investment, and reducing marginal tax rates while broadening tax bases. Third, if the risk of a severe downturn in the Euro Area materialises, fiscal adjustment required under the SGP should be suspended, using the escape clause under the Pact. Fourth, mechanisms for fiscal support at Euro Area level need to be developed, as envisaged in the Five Presidents' Report's call for a fiscal union, with a macroeconomic stablilisation function to improve the cushioning of economic shocks.

In addition, it should be recognised that the prospective heterogeneous effects of the UK's decision to leave the EU across the Area's member countries are likely to call for differentiated demand management, which only fiscal policy can provide.

The second kind of risks is that the referendum result may presage a broader retreat from globalisation--meaning the increasing international economic integration of countries through more open trade, financial flows, and labour mobility, which has been a major feature of the postwar period. The vote may be viewed as one of a number of indications of a strengthening sentiment across several advanced economies opposed to such integration.

Progress in increasing international economic openness has already slowed in recent years. The latest WTO (World Trade Organization) round of global trade negotiations, the Doha Round that began in 2001, is virtually dead, with attention having shifted to the negotiation of various regional and bilateral arrangements. According to WTO statistics,

world trade growth has slowed significantly since 2008, from an average of over 7 per cent between 1990 and 2008 to less than 3 per cent between 2009 and 2015; 2015 marked the fourth consecutive year with global trade growth below 3 per cent. And protectionist actions seem to have intensified recently: the WTO reported in June that protectionist measures had been introduced by G20 economies in the previous seven months at the highest monthly rate since the WTO began monitoring the G20 in 2009. Moreover, since the global financial crisis, cross-border finance has become more fragmented, with less cross-border exposure as banks, in particular, have consolidated and been pressured to serve domestic needs.

The UK referendum result has been widely interpreted as one example--perhaps the clearest thus far--of evidence of a more widespread disillusionment with, and opposition to, international economic integration. This has also been apparent in other countries--in some cases in the election of governments with more inward-looking policies, and in others in increased electoral support for fringe parties and political leaders opposed to the liberalisation of international trade, finance, and migration.

The grounds for continuing to believe that open international economic relations are beneficial to a country's economic welfare remain solid; and conversely, a retreat to more defensive, inward-looking economic policies would threaten further damage to economic growth, employment, and welfare worldwide.

On the other hand, however, there is no doubt that there have been losers as well as winners from globalisation. Indeed, it is not possible to have the gains from increased economic openness without making some worse off, at least in the short run. It is also clear that unfettered international labour mobility can disturb social cohesion, particularly when immigration is highly concentrated geographically. Losers from globalisation have often included workers whose products have had to compete with imported products produced abroad with cheaper labour, and workers who have had to compete with immigrant labour from lower-income countries. (Winners, of course, have included the consumers of the cheaper imported and immigrant-produced products.) If the support for international economic integration is to be maintained so that the risk of damaging protectionist policies is to be averted, more active policies appear to be needed to compensate and support globalisation's losers, including through income support, retraining, and other active labour market policies, and through action to promote alternative employment opportunities. This may well require higher taxes on globalisation's winners.

The US Trade Adjustment Assistance Program, which for more than 50 years has provided support for workers who have lost their jobs as a result of foreign trade, through the provision of job training, job search and relocation allowances, and income support, represents one kind of approach, which may need to be used on a much larger scale.

There may also have to be recognition that the requirements of social cohesion call for more restrictive migration policies than would serve to maximise the growth of GDP.

Indeed, those countries that have recently pursued fiscal consolidation in pursuit of arguably arbitrary budget targets may, by cutting welfare spending, have exacerbated the losers' problems.

Box A. The UK's decision to leave the EU: the impact on European
economies

This box updates the analysis in Lloyd et al. (2016) which used
movements in financial market data from the immediate aftermath of
the UK referendum to analyse the possible impacts on European
economies. We calibrate shocks to a variety of risk premia in the
UK and EU based on calibrations from financial market data and
other indicators from the post referendum period and feed these
into our global econometric model, NiGEM, to assess the overall
impacts. This analysis encompasses only short-run dynamics; it does
not include any impacts from a transition by the UK to an
alternative relationship with the EU. (1)

The referendum result was immediately followed by movements in
financial and currency markets as participants evaluated the
possible impacts on the UK and spillovers to the EU economy. As
predicted by Baker et al. (2016), the impact on sterling was a
sharp depreciation, which continued for several days. Against the
US dollar, the depreciation has since stabilised at around 9 per
cent. The euro has depreciated against the dollar, by about 2.5 per
cent since the referendum.

Equity price indices also fell sharply in the UK and across other
major European stock markets in the days following the referendum
but have since then recovered some of the lost ground. (2) Baker et
al. (2016) assumed that there would be an increase in risk premia
on sovereign bonds, but since the referendum sovereign yields have
fallen. While some of this represents a shift in interest rate
expectations towards a looser monetary policy path, there has also
been a fall in risk premia as investors demand for safer assets
increased (see Lloyd and Meaning, 2016).

In NiGEM, the cost of funding for firms is measured as the spread
between interest rates on corporate and government bonds. The yield
on corporate bonds has remained broadly stable since the
referendum; this implies that there has been an increase in the
risk premia broadly equal to the decrease on government yields.

We further apply an uncertainty shock to the UK alone, which feeds
directly into business investment as described in Baker et al.
(2016). Measures of uncertainty in the UK economy leading up to and
after the referendum have been at elevated levels; Box B in the UK
chapter of this Review provides a fuller account. We calibrate
shocks to reflect the movement in the data above and input these
into NiGEM. The impacts on the UK and the EU are plotted in figure
AI. The impact on the rest of the EU is a direct spillover from
lower UK GDP growth and higher levels of sovereign risk premia in
countries such as Greece and Portugal. In aggregate the effect on
Europe is that GDP is 0.4 per cent below the 'Remain'
counterfactual in 2017. However, the negative impact is not
symmetric across countries. There are significantly smaller impacts
on France and Germany than on Ireland, Spain and Italy. For
Ireland, this is unsurprising given the relative importance of the
UK economy as an export destination. For the other economies the
importance of UK trade is much smaller. In these cases the implied
movements in premia may reflect vulnerabilities to the broader
economic and financial consequences of the decision to leave the
EU: for example the implications of lower interest rates on the
already troubled Italian banking sector. This also highlights the
presence of significant downside risks to the UK's exit from the
EU, particularly if financial linkages start to amplify the
economic shocks.

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NOTES

(1) Ebell and Warren (2016) assess the possible impacts of
alternative trade on the UK economy.

(2) We use the FTSE 250 to calibrate this shock.

REFERENCES

Baker, J., Carreras, O., Ebell, M., Hurst, l., Kirby, S., Meaning,
J., Piggott, R. and Warren, J. (2016), 'The short-term economic
impact of leaving the EU', National Institute Economic Review. 236,
pp. 108-20.

Ebell, M. and Warren, J. (2016), 'The long-term economic impact of
leaving the EU', National Institute Economic Review, 236, pp.
F121-38.

Lloyd, S.P. and Meaning, J. (2016), 'Sovereign risk and the
referendum--how have bonds responded?', NiGEM Observations, 2, 22
June, NIESR.

Lloyd, S., Meaning, J. and Warren, J. (2016), 'After the
Referendum: what are financial markets telling us so far?', NiGEM
Observations, 3, July, NIESR.

This box was prepared by James Warren.

Prospects for individual economies

Euro Area

The economic recovery strengthened early this year, driven by all major components of domestic demand, supported by highly accommodative monetary policy, low oil prices and slightly expansionary fiscal policy. Since the first quarter, however, growth appears to have slowed back. Unemployment has declined somewhat further, but it remains higher than before 2010 and widely disparate among member countries. Inflation has remained stubbornly low. In early June, the ECB began purchasing corporate bonds--an extension, announced in March, to its programme of asset purchases designed to ease monetary and credit conditions further. With growth prospects now damaged by the UK's decision to leave the EU and related uncertainties (see Box A), further easing action by the ECB seems likely to be called for in the period ahead. Assuming unchanged policies, our GDP growth projection for 2016 has been revised down marginally, to 1.4 from 1.5 per cent, and more significantly for 2017, to 1.3 from 1.7 per cent.

In the first quarter of 2016, the Euro Area was the fastest growing of the advanced economies, with GDP rising by 0.6 per cent to a level 1.7 per cent higher than a year earlier. Growth in the first quarter was driven by domestic demand, including a notable upturn in fixed investment related partly to unseasonably mild weather for construction; as in 2015, net exports contributed negatively to the rise in GDP. Eligher frequency indicators, including for retail sales and industrial production, suggest that the expansion slowed back in the second quarter.

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Unemployment fell to 10.1 per cent in May, its lowest level since July 2011 and 2.0 percentage points below the peak reached in April 2013, but still 2.9 percentage points above the trough of March 2008. Less than half of the rise in unemployment that occurred during the recession has therefore been reversed: the rate of decline seen over the past three years continues, unemployment will not return to its pre-recession trough until late 2021. Differences in unemployment among member countries remain extremely large, with rates ranging from 4.2 per cent in Germany to 9.9 per cent in France, 11.5 per cent in Italy, 19.8 per cent in Spain and 24.1 per cent in Greece. Employment growth in the Area has strengthened since 2014, reaching 1.4 per cent in the year to the first quarter, up from 0.8 per cent in the preceding year.

Consumer price inflation, on a 12-month basis, has been broadly stable in recent months at around zero, well short of the ECB's medium-term objective of "below, but close to, 2 per cent": in June, it was 0.1 per cent, with inflation negative in seven of the Area's nineteen member countries. Annual core inflation, meanwhile, has recently been running a little below 1 per cent: in June, it was 0.9 per cent. The modest appreciation of the euro since spring last year--by about 3.5 per cent in trade-weighted terms between April 2015 and June 2016--as well as the decline in oil prices between mid-2014 and early 2016, has contributed to the persistence of low inflation. The partial recovery of oil prices since February is expected to boost inflation to some extent in the coming months, but output gaps will continue to retard progress towards the ECB's objective. There have been signs of a modest pickup in wage increases: the annual increase in hourly labour costs has trended upwards from about 1.0 per cent in late 2103 to 1.7 per cent in the first quarter of 2016.

On 21 July, the ECB left its benchmark interest rates unchanged at the levels set in March, confirming that "we expect them to remain at present or lower levels for an extended period of time, and well past the horizon of our net asset purchases". The ECB also confirmed that monthly purchases under its extended Asset Purchase Programme (APP) would continue at 80 [euro] billion a month on average, the level to which it was increased last April, "until March 2017, or beyond, if necessary, and in any case until the Governing Council sees a sustained adjustment in the path of inflation consistent with its inflation aim". With regard to the UK referendum, President Draghi observed that "Euro Area financial markets have weathered the spike in uncertainty and volatility with encouraging resilience. The announced readiness of central banks to provide liquidity, if needed, and our accommodative monetary policy measures, as well as a robust regulatory and supervisory framework, have all helped to keep market stress contained." Ele also indicated that after reassessing the situation in light of information becoming available in "the coming months", the ECB would "act by using all the instruments available within its mandate" if warranted to achieve its objective.

On 8 June, the eurosystem began purchases under the corporate sector purchase programme (CSPP), a new component of the APP announced by the ECB in March; in June as a whole, APP purchases amounted to 85.1 billion [euro], including 6.4 billion [euro] of corporate bonds. Also, on 22 June, the ECB conducted its first operation under its new series of targeted longer-term refinancing operations (TLTROII), intended to give banks additional incentives to lend to the private sector. (See May Review, 2016, p. 56.) The growth of bank credit has continued to pick up gradually: in the year to May, loans to nonfinancial corporations rose by 1.4 per cent, while loans to households rose by 1.6 per cent.

Germany

Our growth forecast for 2016 is unchanged from the May Review, but our forecast for 2017 has been revised down slightly, to 1.5 from 1.7 per cent. The economy expanded by 0.7 per cent in the first quarter of 2016, the strongest quarterly growth in two years and 0.2 percentage point more than we assumed in our May forecast. This was driven by domestic demand, with a large part of the boost coming from fixed investment, particularly in the construction sector, reflecting unseasonably mild weather at the start of the year. Moderate growth in private and government consumption continued, while net exports contributed negatively to output growth despite a recovery in exports following a drop in the previous quarter. More recent data indicate, not surprisingly, that GDP growth in the second quarter was significantly slower than in the first.

Looking ahead, the underlying picture for fixed investment is positive, given highly accommodative monetary conditions and strong demand for housing, in particular, reflected in recent increases in house prices by about 6 per cent in the six months to June. Growth of household consumption continues to be supported by high employment and moderately rising real wages. It is likely be further boosted later this year and in 2017 by increases in state pension payments resulting from a change in the measurement of average wages, to which they are linked. This will increase pension incomes by between 4 and 5 per cent from the third quarter of 2016 compared with 2015. It is not expected to be offset by higher contribution rates. Net trade is forecast to continue subtracting marginally from GDP growth this year and next. Growth of export volumes weakened in the course of 2015, turning negative in the final quarter. Taking into account downward revisions to growth forecasts for some of Germany's trading partners and the continuing slowdown in China, the projected growth of export volumes has been revised down to 2.4 per cent in 2016, from 3.7 per cent in May, and 3.4 per cent in 2017, from 5.8 per cent in May. The growth of import volumes has also been revised down, but by less, and is expected to continue exceeding the growth of export volumes this year and in 2017. This will help narrow Germany's large current account surplus, although it is projected to remain above 6 per cent of GDP in 2017 and the medium term.

The government budget is expected to remain in surplus over our forecast horizon, by 0.3 per cent of GDP in 2016--slightly smaller than our projection in May widening to 0.7 per cent in 2017. The first quarter of 2016 saw strong tax revenue performance, offset by increased spending, particularly on services and welfare benefits related to the elevated level of migration in 2015. So far in 2016 immigration has been considerably lower than last year, and we have revised down slightly the associated additional spending for 2016 and 2017.

As the refugees who arrived in Germany in 2015 have been gradually absorbed, they have increased the labour force. However, they still account for a significantly smaller part of labour force growth than migrants from other EU countries. Employment growth has continued to exceed that of the labour force, bringing the unemployment rate down to a new post-reunification low of 4.2 per cent in May 2016. We expect unemployment to remain close to this level in the remainder of this year and in 2017. Harmonised consumer price inflation, on a 12-month basis, has recently fluctuated close to zero: it was 0.2 per cent in June and averaged zero in the second quarter. The increase in global oil prices since February will put some upward pressure on prices in the coming months, although this will be partly offset by the strengthening of the euro since late last year. We expect inflation to pick up in 2017, to 1.4 per cent on average, still remaining well below the ECB's medium-term objective.

France

The economy expanded by 0.6 per cent in the first quarter of 2016, the strongest quarterly growth performance in a year, despite significantly negative contributions from net exports and inventory accumulation. Private consumption, the largest component of domestic demand, rose by 1.0 per cent, reflecting a bounce-back after flat consumer spending in the preceding quarter, but also apparently boosted by ticket sales for the European football championships. These temporary factors are unlikely to have been sustained in the second quarter, but we continue to forecast robust consumption growth, of 1.7 per cent in 2016 as a whole. Meanwhile the negative contribution from net exports is likely to have been reversed in the second quarter, with exports boosted by a number of large aeronautical contracts. Nevertheless, in 2016, as a whole, net exports are projected to subtract 0.6 percentage points from GDP growth.

Overall, the unexpectedly strong growth performance in the first quarter is unlikely to have been repeated in the second: the Banque de France has estimated that GDP rose by 0.2 per cent. Assuming similar or slightly faster growth in the second half of the year, our forecast for GDP growth has been revised marginally for 2016, to 1.2 per cent, and more significantly for 2017, to 1.1 per cent.

In April, unemployment fell below 10 per cent for the first time since September 2012, and it remained at 9.9 per cent in May. Youth unemployment in May stood at 23.3 per cent. We expect unemployment to decline somewhat further, to 9.5 per cent on average next year --still above pre-crisis levels of about 7 per cent. Faster progress in reducing unemployment is likely to require labour market reforms. In May, the government used its decree powers to pass through parliament a jobs bill that opens the way to company-level agreements on working hours, facilitates redundancies in cases of economic slowdown, and simplifies various other labour rules. This led to protests and strikes that at one point caused the government to release strategic fuel reserves to relieve shortages. More radical reforms are considered by many to be needed for employment and growth performance to be improved significantly.

Consumer price inflation, on a 12-month basis, has remained close to zero in recent months; in June it was 0.3 per cent. Annual core inflation has been stable in recent months at 0.6 per cent. Wage increases have also been subdued, at 1.6 per cent in the year to the first quarter, on Eurostat data. This suggests a weakness of underlying price and wage pressures that may be disguised in the coming months as the rise in global energy prices since early this year feeds through to 'headline' consumer prices.

Data for 2015 show a marginally better fiscal position than we built into our May forecast. This improvement is enough to bring our projection for the budget deficit in 2017 under 3 per cent of GDP, at 2.8 per cent; this forecast is, of course, subject to a significant margin of error. In our central projection, the debt-GDP ratio rises to 97.5 per cent of GDP at end-2017 from 96.1 per cent in 2015.

Italy

Sluggish economic growth has continued but some significant risks have been increasingly clouding the outlook. GDP grew by 0.3 per cent in the first quarter of 2016 to a level 1.0 per cent higher than a year earlier. Growth was driven by a broad, though modest, expansion of domestic demand, with household consumption contributing 0.2 percentage point. Net trade made a negative contribution to growth of 0.2 percentage point, with a larger decline in exports than in imports. More recent data point to continued weak output growth in the second quarter. With sluggish investment growth, household demand constrained by low employment and stagnant real wages, and net exports benefiting only modestly from limited gains in international competitiveness, growth is expected to remain weak in the period ahead. Our GDP growth forecast for 2016 is unchanged from the May Review, but our projection for 2017 has been lowered to 0.5 from 1.0 per cent.

Significant risks to our growth forecast include uncertainties surrounding the effects of UK's vote to leave the EU, high and persistent unemployment, a troubled banking sector, and domestic political uncertainty surrounding a referendum on constitutional changes that the prime minister has called for October; he has promised to call a general election if he loses the vote.

Unemployment has remained high, fluctuating around 11.6 per cent over the past year: in June it was 11.5 per cent. Large and persistent output and employment gaps have been reflected in continued negative inflation. Consumer price inflation, on a 12-month basis, was -0.2 per cent in June, little changed from earlier in the year. Wage growth, according to Eurostat data, has weakened since 2014: in the year to the first quarter wages fell by 0.5 per cent, compared with a rise of 1.8 per cent in the Euro Area as a whole. Italy's relatively low wage and price inflation should help improve its international competitiveness and support net exports, but declining real wages will meanwhile constrain household spending.

Another concern is the weakness of the banking sector, which after more than a decade of little growth in incomes and productivity (see figure 6), and a financial crisis, is burdened with a large and growing volume of non-performing loans (NPLs), recently representing about 12 per cent of all loans (see figure 7) and 20 per cent of GDP. Increasing concerns about Italian banks have been reflected in a decline of more than 60 per cent in their stock market values since mid-2015.

In April, the government announced that a 5 billion [euro] fund, named 'Atlante', was being set up, mainly on the basis of private sector contributions, to buy junior tranches in securitised assets backed by NPLs and to 'backstop' capital raisings by weak banks. The volume of transactions that Atlante has been called on to carry out since May has made it clear that it is not an adequate solution. The government has recently been discussing with EU partners and the Commission what further steps can be taken consistent with the EU's state aid rules and its Bank Recovery and Resolution Directive, while at the same time avoiding bail-ins of retail bondholders. Also, in June, the European Commission agreed that Italy could provide liquidity guarantees to its banks of up to 150bn [euro] until the end of the year.

[FIGURE 6 OMITTED]

[FIGURE 7 OMITTED]

The government's budget deficit in 2015 was 2.6 per cent of GDP; we expect it to decline slightly this year to 2.4 per cent. In May, the European Commission granted Italy additional budget flexibility for 2016, under the Stability and Growth Pact, in recognition of the government's efforts on structural reforms, increased costs related to the migrant crisis, and increased security spending. The flexibility, which provides additional fiscal space equivalent to around 14bn [euro] for this year, or 0.85 per cent of GDP, will enable Italy to avoid 'excessive deficit procedures' for failing to meet targets for debt reduction.

Spain

Spain's vigorous economic recovery continued in the first quarter of 2016 with GDP growth of 0.8 per cent, the same as the two preceding quarters. According to a preliminary estimate by Banco de Espana, GDP growth in the second quarter was only marginally weaker, at 0.7 per cent. In the first quarter, growth in private consumption remained strong, with a contribution of 0.7 percentage point to GDP growth, while fixed investment decelerated after strong expansion in the second half of last year. Net trade continued to contribute negatively to output growth, deducting 0.3 percentage point partly on account of a small decline in exports.

We expect domestic demand to continue driving output growth in the period ahead, with net exports continuing to make negative contributions, particularly given the weak growth of activity in Spain's main trading partners. Our forecast of GDP growth in 2016 is unchanged at 2.7 per cent, but for 2017 our projection has been revised down to 2.2 per cent from 2.6 per cent. With the domestic political situation having been clarified by the result of the June general election, the main downside risks to our forecast relate to uncertainties surrounding the UK's vote to leave the European Union, continuing high unemployment and persistently large fiscal deficits. The UK's vote to leave the EU raises several risks for the Spanish economy, including for its banking system: some of Spain's largest banks have large exposures to the UK, and their stock market values have declined significantly since the referendum result.

Consumer price inflation has remained negative, significantly below the Euro Area average: in the year to June, the consumer price index fell by 0.9 per cent. Core inflation, on a 12-month basis, has been 0.7 per cent in recent months, below the peak of 1.1 per cent reached in March. Meanwhile wage increases, as measured by Eurostat, have also been subdued: in the year to the first quarter of 2016 they amounted to 0.7 per cent, compared to the Euro Area average of 1.8 per cent.

Spain's low inflation is partly a reflection of its continuing wide output and employment gaps. Unemployment, at 19.8 per cent in May 2016, remains a cause of concern. While unemployment has fallen significantly from its early 2013 peak of 26.3 per cent, it remains far higher than its pre-crisis level of about 8 per cent. It is likely that hysteresis effects are increasing structural unemployment, with a consequent burden on public finances.

The government's budget deficit in 2015 was 5.1 per cent of GDP, significantly higher than the target of 4.2 per cent set by the European Commission. The target for 2016, of 2.8 per cent, also seems infeasible: our forecast is 4.4 per cent. In mid-July, EU finance ministers confirmed the Commission's earlier conclusion that Spain (like Portugal) was in breach of the EU's fiscal rules under the Stability and Growth Pact, and that it had failed to take sufficient action to correct the situation. This opens the way for possible fines and other sanctions. The government subsequently announced measures to help Spain meet its target for 2017, including an increase in corporation tax and increased efforts to stem tax evasion.

United States

In July, the economy began its eighth year of expansion since the recession of December 2007-June 2009. (1) Over the past year, growth has been notably uneven, with output growth slowing markedly in late 2015 and early 2016 before picking up again in recent months, while employment growth was relatively well maintained until it slowed significantly in the second quarter of this year. Unemployment has fluctuated since last October within the Federal Reserve's current range-estimate of its longer-term level, 4.7-5.0 per cent: in June it was 4.9 per cent. Inflation has remained below the Federal Reserve's medium-term objective of 2 per cent, and wage increases have risen only modestly. The Fed has maintained its target range for the federal funds rate at 0.25-0.50 per cent--the level to which it was raised last December --and the median projection of the FOMC at its June meeting, as in March, was that it would be appropriate to raise it by a further 5 0 basis points by the end of 2016. However, projections for 2017, 2018 and the longer run were lowered.

[FIGURE 8 OMITTED]

GDP rose by 2.4 per cent in 2015 as a whole--the same as in 2014. However, quarterly growth slowed markedly at the end of last year, to 1.4 per cent at an annual rate, and further in the first quarter of 2016, to 1.1 per cent. This deceleration is accounted for mainly by a downturn in non-residential fixed investment, partly reflecting the weakness of the energy sector, and slower growth of consumer spending, with an associated increase in the saving rate. Higher frequency data indicate a revival of consumer spending in recent months, and several projections of GDP growth in the second quarter (annualised) are in the 2.0-2.5 per cent range.

The downward trend in employment growth has continued in recent months. Non-farm payrolls increased by 147,000 a month, on average, in the second quarter, compared with 195,000 in the first quarter, 229,000 in 2015, and 251,000 in 2014. The 12-month growth rate of employment, which peaked at 2.3 per cent in February 2015, fell to 1.7 per cent in May and June 2016, the lowest since early 2014. Since last October, unemployment has fluctuated in the 4.7-5.0 per cent range, which is the 'central tendency' of the Federal Reserve's estimates of its longer-run level; in June it was 4.9 per cent. Other indicators, however, indicate that labour market slack is greater than the unemployment rate suggests. Thus the labour force participation rate, at 62.7 per cent in June, though slightly higher than last September's 38-year low 62.4 per cent, remains lower than throughout the period 1978-2014. This is reflected in the employment-population ratio, which stood at 59.6 per cent in June, higher than the 58.2 per cent trough reached in mid-2011, but lower than throughout the period 1985-2008. Moreover, labour earnings have remained subdued. Average hourly earnings increased by 2.6 in the year to May, with little acceleration apparent in recent months. The employment cost index, which takes account of benefits as well as pay, increased by 1.9 per cent in the year to March.

[FIGURE 9 OMITTED]

The performance of labour productivity has remained weak after trending downwards in recent decades (figure 8). Thus output per hour in the non-farm business sector, which rose by only 0.7 per cent in 2015, declined by 0.6 per cent in the first quarter of 2016.

Consumer price inflation, on a twelve-month basis, has been broadly stable in recent months: in terms of the price index for personal consumption expenditures, it was 0.9 per cent in May, while the corresponding core inflation rate stood at 1.6 per cent. Financial market-based measures of inflation compensation have declined slightly since late April, suggesting a possible decline in expected future inflation, although this is not supported by survey evidence. Thus the five-year breakeven inflation rate in late July was about 1.4 per cent, down from 1.6 per cent in late April but significantly higher than the trough of 0.9 per cent reached in mid-February, before the upturn in oil prices.

At its meeting in mid-June, the FOMC left the target range for the federal funds rate unchanged at 0.25-0.50 per cent. Chair Yellen noted that the result of the following week's UK referendum on membership of the European Union was "one of the uncertainties that factored into" the decision not to raise rates. The median projection for the federal funds rate at end-2016 was unchanged from March, implying two increases of 25 basis points between July and December. However, the number of FOMC participants projecting only one increase in this period rose to six from only one in March. Also, the median projections for end-2017 and end-2018 were lowered by 50 and 25 basis points respectively, and the median projection for the longer run was also lowered by 25 basis points. These downward revisions were made even though projections of growth and inflation were little changed.

Canada

The upturn in oil prices since February, as well as the depreciation of the Canadian dollar since mid-2014, has boosted prospects for the economy. Output expanded by 0.6 per cent in the first quarter of 2016, following 0.1 per cent growth in the previous quarter, mainly owing to a rebound in exports benefiting from the improvement in Canada's international competitiveness. However, GDP growth is expected to have been weak or negative in the second quarter because of May's wildfires in Alberta, which reduced oil sands production by an average of 0.8 million barrels a day in May (more than one fifth of Canadian oil production) according to estimates from the US Energy Information Administration. Related disruption is expected to have averaged 0.4 million barrels a day in June.

Business investment has been weak in recent quarters, particularly in the energy sector, and we have revised down our profile for business investment in light of the data for the first quarter of 2016. However, our forecast for the growth rate of business investment in the near term has been revised up slightly to take account of support from higher commodity prices and accommodative monetary and financial conditions. Increased government investment announced in the March budget is expected to continue to foster economic growth. Our forecast for GDP growth this year has been revised down slightly to 1.5 per cent, with our projection for 2017 lowered marginally at 2.0 per cent. A downside risk to our forecast remains the booming housing market, which many analysts fear is an unsustainable bubble.

Consumer price inflation, on a 12-month basis, has fluctuated around 1.5 per cent in recent months, and this was its level in June. Core inflation has remained close to 2 per cent: it was 2.1 per cent in June. In line with market expectations, the Bank of Canada kept its benchmark overnight rate at 0.5 per cent in July, stating that inflation is on track to reach its 2 per cent target in 2017 as temporary effects of exchange rate pass-through and past declines in consumer energy prices dissipate.

Unemployment has fallen from its peak of 7.3 per cent reached last February to 6.8 per cent in June, its lowest level since July 2015. There have also been flows from part-time to full-time employment, which are indicative of a reduction in underemployment. We expect unemployment to average 7.0 per cent in 2016 and 7.1 per cent in 2017.

Japan

The economy bounced back from its contraction of 0.4 per cent in the fourth quarter of 2015 with GDP growth of 0.5 per cent in the first quarter of 2016. Both domestic demand and net exports contributed positively to the upturn. With private and government consumption growing quite vigorously, the main drag on growth in the first quarter was from fixed investment, which contracted in both the private and public sectors. More recent, high frequency, indicators of activity, including industrial production, retail sales, and PMIs, have been weak, suggesting modest growth at best, and the Bank of Japan's June Tankan survey showed a deterioration in business sentiment since March, especially in the nonmanufacturing sectors and among small and medium-sized enterprises.

The appreciation of the yen over the past year--by close to 20 per cent in trade-weighted terms between June 2015 and late July 2016--is forming a drag on net exports, although the currency's broad external value is still about 20 per cent lower than in late 2012, before the advent of 'Abenomics'. The declines in import prices associated with the past year's appreciation should, on the other hand, boost real incomes and consumer spending.

Partly because of the yen's recent appreciation, progress in raising inflation towards the Bank of Japan's 2 per cent target seems to have stalled. In the year to May, consumer prices fell by 0.4 per cent--the third consecutive month of negative inflation, while the 'core core' inflation measure, which excludes energy and food, was 0.6 per cent.

The labour market remains tight, with unemployment at 3.2 per cent in May, for the third consecutive month. The jobs-applicants ratio rose to 1.36 in May, its highest level since October 1991. Nevertheless, there is little sign of any increase in wage growth, despite government pressure. In fact, nominal wages fell by 0.2 per cent in the year to May, partly reflecting an increase in the proportion of part-time workers, whose wages on average fell by 0.5 per cent, while wages for full-time workers were flat.

Given the weakening of the inflation outlook, and also the recent strength of the yen, the case seems clear for further monetary easing by the Bank of Japan, either by lowering official interest rates further below zero or by an expansion of asset purchases. On the assumption of unchanged monetary policy, our inflation forecast has been lowered to -0.4 per cent for 2016, on average, and 0.1 per cent for 2017, pointing to the very limited progress in raising inflation towards the 2 per cent target.

With regard to fiscal policy, the prime minister announced in early June that the increase in the sales tax from 8 to 10 per cent that had been scheduled for April 2017 was being postponed until October 2019. Also, following the government party's success in the upper house elections of the Japanese parliament in July, the prime minister announced that an economic stimulus package would be prepared by the end of the month. There therefore seems little prospect in the short term of progress in tackling Japan's public debt burden, either through healthier fiscal balances or through stronger nominal GDP growth.

Taking into account the postponement of the increase in the consumption tax, as well as recent data, our forecast for GDP growth has been revised upwards marginally for 2016, to 0.3 per cent from 0.2 per cent, and more significantly for 2017, to 0.5 per cent from -0.1 per cent. Our forecast takes no account of the prospective fiscal stimulus package, whose details have not been announced.

Stronger growth performance should help the government to return to the structural reform agenda that remains key to the long-term prospects for the economy.

China

China's continuing efforts to rebalance its economy while avoiding a sharp economic slowdown has proved increasingly challenging. The transition process is complex and has unsurprisingly led to increased vulnerabilities in both corporate and financial sectors. There have also, at times over the past two years, been increased capital outflows, marked exchange rate pressures, and broader financial market instability. Policies designed to protect the economy from the effects of the global financial crisis have led to an increase in total (public and private) debt, to more than 250 per cent of GDP by the end of 2015, 100 percentage points higher than in 2008 (see figure 10). Non-performing loans in the banking system have risen to 1.8 per cent of total loans in June 2016--the highest since 2009--according to official data, but private estimates put the ratio much higher. The government also faces the challenge of reducing overcapacity in some of the largest, industrial, sectors of the economy while at the same time supporting economic growth.

[FIGURE 10 OMITTED]

The government has been pursuing several avenues in its efforts to soften the impact on the economy of deleveraging and restructuring. First, it has used monetary policy, cutting benchmark interest rates five times in 2015 while also reducing banks' reserve ratios and easing lending controls for homebuyers. Second, the government has continued to use fiscal policy to support growth, taking advantage of its relatively low indebtedness, at about 44 per cent of GDP. Thus in recent months there have been announcements of a number of spending initiatives in particular regions and on particular infrastructure projects. Also, in May, the extension of value-added tax to all major service sectors, replacing a business tax, was expansionary on net. Third, a framework is being developed to encourage banks to swap bad corporate loans for equity, although this scheme has been met with some scepticism owing to the questionable value of much of the equity. Fourth, underperforming state-owned enterprises are being encouraged to restructure and become more productive by the redirection of credit from them to better performing ones. Even in some of these policy approaches, the potential for short-tem conflict between restructuring and growth is apparent.

[FIGURE 11 OMITTED]

Capital outflows and currency pressures, particularly apparent at times in 2015, have eased in recent months. Thus China's official foreign exchange reserves, having fallen from their all-time (and all-country) peak of $3.99 trillion in June 2014 to $3.20 trillion in February 2016, have since been virtually stable. Meanwhile, since the first quarter the renminbi has depreciated by about 2 per cent against the US dollar and by 4 per cent in trade-weighted terms.

Consumer price inflation has remained below the central bank's target of 3 per cent, leaving room for further monetary easing. Consumer prices rose by 1.9 per cent in the year to June, down from 2.3 per cent in the spring mainly on account of lower food price inflation. Producer price inflation, on a 12-month basis, was negative in June for the 52nd consecutive month, although the rate of decline of prices, at 2.6 per cent, has waned significantly since the end of 2015.

The government's accommodative fiscal and monetary policies appear thus far to have kept GDP growth on its planned path. Thus after 6.9 per cent growth in 2015, close to the target of "about 7 per cent", GDP grew by 6.7 per cent in the year to the second quarter, as in the year to the first, closely in line with the 2016 target range of 6.5-7.0 per cent. Our forecast is largely unchanged, at 6.6 and 6.2 per cent growth for this and next, respectively.

India

The economy grew by 7.9 per cent in the year to the first quarter of 2016, driven mainly by private consumption; fixed investment contracted, and net exports also contributed negatively to GDP growth in the quarter. We expect private consumption to remain the principal driver of growth in the remainder of this year and in 2017, helped by significant increases in civil service pay and pensions announced in June following a ten-yearly review. Our growth projection for 2016 is unchanged at 7.5 per cent.

Consumer price inflation, on a 12-month basis, stabilised in May and June at 5.8 per cent, a two-year high, after rising from a low of 3.7 per cent in July 2015. Recent inflation is thus close to the upper bound of the Reserve Bank's target of 4, plus or minus 2, per cent. The recent increase in inflation is largely accounted for by rising food prices. This year's monsoon is expected to be of the normal variety, which should not lead to any further spikes in food prices. On this basis, we forecast that inflation will fall back to 5.4 per cent, on average, in 2017, from 5.8 per cent this year.

The Reserve Bank has held its benchmark interest rate at 6.5 per cent since it was lowered to this level in April. The announcement in June that Governor Rajan would relinquish his position in September, after one term, surprised observers but had little impact on financial markets. The rupee's exchange rate against the US dollar has been broadly stable in recent months.

With regard to the government's reform agenda, there were indications in July that legislation to introduce a national general sales tax (GST)--a unified value-added tax system, to replace various provincial taxes --would soon be introduced in the upper house of parliament for approval. The government's aim, which seems optimistic, is to put the GST in place by April 2017. The GST, when implemented, is expected to improve considerably the ease of doing business in India. Also, in May, parliament passed the first national bankruptcy law, intended partly to facilitate the recovery of overdue loans by banks. Finally, in June, the government announced a further relaxation of rules on inward direct investment.

Brazil

The economy surprised on the upside with a 0.3 per cent contraction of output in the first quarter of 2016. The surprise was against the background of significantly larger declines in GDP in the four preceding quarters and a contraction of 3.9 per cent in 2015 as a whole. The decline in output slowed in the first quarter partly on account of an acceleration of government consumption but more importantly because of a 6.5 per cent surge in exports after two quarters of weakness. Private consumption and investment both declined in the first quarter.

Looking ahead, there are mixed signals. We expect limited further scope for rapid export growth in the short term, given the weak expansion of export markets and a significant appreciation of the Real in recent months--by about 20 per cent against the US dollar since January. Unemployment has remained on an upward trend: at 11.2 per cent in April and May, it was almost 5 percentage points higher than in late 2014. And given the weak labour market, it is not surprising that consumer spending remains deeply depressed. Moreover, the fiscal deficit remains large and government consumption is increasingly constrained.

On the other hand, policy announcements by the new interim government, which came into office in May following the suspension of President Rousseff ahead of an impeachment trial, have been well received by markets--as indicated by the upward pressure on the Real--and consumer price inflation has slowed, which could enable the Central Bank to begin reducing official interest rates in the near term. Moreover, the exchange rate remains reasonably competitive despite the recent appreciation.

Taking these developments into account, we have revised our growth forecast upwards from May and now expect GDP to decline by 2.8 per cent this year before picking up by 1.2 per cent in 2017.

Consumer prices rose by 8.8 per cent in the twelve months to July 2016, less than the peak inflation rate of 10.7 per cent recorded last January but still significantly above the upper limit of the Central Bank's target range, which has been lowered for 2017 to 6.0 from 6.5 per cent. The Central Bank has kept its benchmark Selic rate unchanged at 14.25 per cent since July 2015. It could begin lowering rates soon to help support domestic demand. Such action could also ease upward pressure on the Real, which has been partly absorbed recently by official intervention. One of the initiatives of the interim government, announced in May, is a proposed constitutional amendment to give the Central Bank operational independence.

Banks have been coping with the recession relatively well. However, the share of non-performing loans has increased, to 3.8 per cent in May 2016, 0.8 percentage point higher than a year earlier. Recent filings for bankruptcy by large corporations add to concerns that banks' balance sheets may come under increasing pressure.

The interim government has obtained parliamentary approval for a primary fiscal deficit of 2.75 per cent of GDP for 2016 and has announced a number of reforms to reduce the imbalance, including constitutional amendments to freeze government spending in real terms for twenty years and to enable the containment of spending on pensions. The process of consolidating the fiscal position will unavoidably act as a drag on the economy.

Russia

The recession brought on by the decline in global energy prices and exacerbated by international economic sanctions seems to be easing. GDP declined by 1.2 per cent in the first quarter of 2016--the smallest of five consecutive quarterly contractions. The GDP decline in the first quarter was dominated by a large fall in fixed investment, but household consumption also continued to contract, reflecting a sustained deterioration of real incomes. (More recent data show that in the year to May real wages fell by 1.0 per cent while real disposable incomes fell by 5.7 per cent.) The upturn in oil prices since February and also the competitive exchange rate, following the rouble's steep depreciation between mid-2014 and early this year, are supportive of stabilisation and recovery. We have revised our projection of the contraction of GDP in 2016 to 0.9 per cent. For 2017, we are now projecting only a marginal increase in GDP, of 0.1 per cent, down from our May forecast of 0.5 per cent growth.

Unemployment seems to have peaked for the current recession in March, at 6.0 per cent; by June it had fallen to 5.4 per cent, its lowest level in nine months. This contrasts with the peak of over 9 per cent reached in 2009 in the wake of the financial crisis.

In July, the European Council announced that economic sanctions against Russia related to its annexation of Crimea would continue for a further six months. In retaliation, Russia extended its ban on imports of European food products until December 2017, while easing economic sanctions against Turkey. Meanwhile formal as well as informal sanctions have continued to restrict Russia's access to international financial markets.

Consumer price inflation, on a 12-month basis, has eased significantly from the peak of 15.8 per cent reached in July 2015 in the wake of the rouble's depreciation. In June 2016, it was 7.5 per cent, little changed in four months. Inflation thus remains above the Bank of Russia's 4 per cent target for 2017. In June, the Bank reduced its benchmark rate by 50 basis points to 10.5 per cent, citing the decline in actual and expected inflation. It indicated that a further rate cut could be considered if inflationary risks fall further. Our forecast is for inflation to average 6.8 per cent in 2016 before falling to 4.5 per cent in 2017.

NOTE

(1) We use the turning points identified by the Cycle Dating Committee of the NBER.

Appendix A: Summary of key forecast assumptions by Simon Kirby and Iana Liadze

The forecasts for the world and the UK economy reported in this Review are produced using the National Institute's global econometric model, NiGEM. NiGEM has been in use at NIESR for forecasting and policy analysis since 1987, and is also used by a group of more than 40 model subscribers, mainly in the policy community. Most countries in the OECD are modelled separately, (1) and there are also separate models of China, India, Russia, Brazil, Hong Kong, Taiwan, Indonesia, Singapore, Vietnam, South Africa, Latvia, Lithuania, Romania and Bulgaria. The rest of the world is modelled through regional blocks so that the model is global in scope. All models contain the determinants of domestic demand, export and import volumes, prices, current accounts and net assets. Output is tied down in the long run by factor inputs and technical progress interacting through production functions, but is driven by demand in the short to medium term. Economies are linked through trade, competitiveness and financial markets and are fully simultaneous. Further details on NiGEM are available on http://nimodel.niesr. ac.uk/.

The key interest rate and exchange rate assumptions underlying our current forecast are shown in tables A1-A2. Our short-term interest rate assumptions are generally based on current financial market expectations, as implied by the rates of return on treasury bills and government bonds of different maturities. Long-term interest rate assumptions are consistent with forward estimates of short-term interest rates, allowing for a country-specific term premium. Where term premia do exist, we assume they gradually diminish over time, such that long-term interest rates in the long run are simply the forward convolution of short-term interest rates. Policy rates in major advanced economies are expected to remain at extremely low levels, at least throughout 2016.

The Reserve Bank of Australia and the central bank of New Zealand lowered their benchmark interest rates by a further 25 basis points in 2016, after cutting them by 50 and 100 basis points correspondingly in 2015. The People's Bank of China and the Indian central bank both reduced their interest rates throughout 2015 by a total of 125 basis points each. While the People's Bank of China has kept them unchanged since, the Indian central bank lowered its benchmark rate further by 25 basis points in April 2016. After reducing its policy rate by 100 basis points in four steps between August 2014 and June 2015, the Bank of Korea cut it again by 25 basis points in June 2016. Indonesia's central bank reduced its benchmark interest rate by 25 basis points in February 2015, for the first time since 2012, and then lowered it again in 2016 in three steps--bringing its interest rate down to 6.5 per cent. The Central Bank of Turkey has left its policy rate unchanged at 7.5 per cent since February last year, following a spell of reductions around the middle of 2014, where the interest rates were reduced by a cumulative 250 basis points. Through 2014 and 2015, the Romanian Central Bank reduced its benchmark interest rate by a total of 275 basis points in six steps and has kept it unchanged since. The National Bank of Hungary has brought its benchmark interest rates down by 120 basis points over eight rounds since the beginning of last year. The central banks of Norway and Poland have lowered their policy rates by 50 basis points each in 2015, to 0.75 and 1.5 per cent respectively. While the central bank of Norway cut its benchmark rate further by 25 basis points in March 2016, the central bank of Poland has left its rate unchanged since. Over the course of last year, the Swedish Riksbank cut its policy rate by 35 basis points in three rounds and has lowered it again by 15 basis points this year. At the time of writing, the Riksbank's policy rate stands at -0.5 per cent. At the turn of 2015 the Swiss National Bank cut its benchmark rate by 25 basis points to -0.75 per cent, while the Central Bank of Denmark reduced its rate by 15 basis points to just 0.05 per cent. Both central banks have left their main policy rate unchanged since. After reducing its interest rate by a cumulative 600 basis points to 11 per cent over five stages in the first seven months of 2015, the Central Bank of Russia lowered it again by 50 basis points in June 2016. The Bank of Canada has kept its benchmark interest rate unchanged, at 0.5 per cent, after lowering it by 50 basis points over two rounds last year. These were the first cuts in nominal interest rates by the Bank of Canada since April 2009.

In contrast, the Central Bank of Brazil and the South African Reserve Bank both increased interest rates in response to inflationary and financial market pressures in 2015. The South African Reserve Bank increased its benchmark rate by 25 basis points in July last year and the Central Bank of Brazil has raised its interest rate by 200 basis points to 14.25 per cent, in a series of steps over the course of 2015. While the Central Bank of Brazil has left its interest rate unchanged since, the South African Reserve Bank increased them further by 75 basis points in two rounds this year. To stem downward pressure on the Peso following a rise in the federal funds rate in the US, the central bank of Mexico has increased its interest rate by 125 basis points in three rounds since December 2015. These were the first increases since August 2008. (2)

In December 2016, the Federal Reserve raised the target range for the federal funds rate by 25 basis points to 0.25-0.50 per cent. This action, agreed unanimously by the Federal Open Market Committee (FOMC), was taken seven years after the target range had been lowered close to zero, and six and a half years after the end of the US recession of December 2007-June 2009. The statement accompanying the Fed's decision emphasised that monetary conditions remained accommodative after the increase; that the timing and size of future adjustments would depend on its assessment of actual and expected economic conditions relative to its objectives, and that it expected that only gradual increases in the rate would be warranted. This message has been reiterated by the FOMC at subsequent meetings. Indeed these assessments have led the FOMC to conclude that further interest rates were not warranted in the first half of this year.

The expectation of the first rate change of the Monetary Policy Committee (MPC) of the Bank of England is based on our view of how the economy will evolve over the next few years. As the UK chapter in this Review discusses, we expect the UK economy to enter a downturn as a consequence of the vote to leave the EU. (3) In the near term we expect a policy response by the Monetary Policy Committee (MPC) of the Bank of England. At the August 2016 meeting we have assumed the MPC will lower interest rates by 25 basis points and by a further 15 basis points at their November 2016 meeting. In line with market expectations, Bank Rate is then assumed to remain at 0.1 per cent until the end of 2017. At the time of writing, financial markets expect the MPC first to raise rates towards 25 basis points in the summer of 2019, and to 50 basis points in the first quarter of 2021. We think a much earlier move is more likely, with the return to 25 basis points in February 2018 and a rise to 50 basis points in May of that year. Published market expectations are based on the mean of the distribution. As such, a skew to the downside, possibly reflecting where the perceived risks are weighted towards, weighs on the arithmetic mean as opposed to other measures of central tendency. Indeed, it is 'our modal view' that we discuss here. Bank Rate is expected to reach 2 per cent by the second quarter of 2021, this being the point at which the MPC is assumed to stop reinvesting the proceeds from maturing gilts it currently holds, allowing the Bank of England's balance sheet to shrink 'naturally'.

The central banks of the Euro Area (ECB) and Japan (BoJ) have continued to expand their balance sheets. The 'expanded asset purchase programme' which began in March 2015 was expanded further in March this year. The original package envisaged combined purchases of assets amounting to 60 billion [euro] a month until at least September 2016. In the latest package, beginning in April 2016, monthly purchases increased to 80 billion [euro] and "run until end-March 2017, or beyond, if necessary, and in any case until the Governing Council sees a sustained adjustment in the path of inflation consistent with its inflation aim". On 8 June this year, the eurosystem began purchases under the corporate sector purchase programme (CSPP), a new component of the APP announced by the ECB in March; in June as a whole, APP purchases amounted to 85.1 billion [euro], including 6.4 billion [euro] of corporate bonds. Also, on 22 June, the ECB conducted its first operation under its new series of targeted longer-term refinancing operations (TLTRO II), intended to give banks additional incentives to lend to the private sector.

In October 2014, the BoJ surprised financial markets by announcing that it would expand its asset purchase programme by about 30 per cent. The programme envisaged an increment of about [yen] 80 trillion added to the monetary base annually, up from an existing [yen] 60-70 trillion. In December 2015, the BoJ announced a further modification of its programme of quantitative and qualitative easing (QQE). This involves lengthening the average maturity of bonds purchased from the beginning of 2016 to 7-12 from 7-10 years; increasing purchases of Japan's real estate investment trusts and also of exchange-traded funds and loosening collateral constraints by allowing foreign currency bonds and housing loans to be eligible. Additionally, at the end of January 2016, the Bank of Japan lowered the interest rate on one tier of bank reserves marginally below zero. Figure A1 illustrates the recent movement in, and our projections for, 10-year government bond yields in the US, Euro Area, the UK and Japan. Convergence in Euro Area bond yields towards those in the US, observed since the start of 2013, reversed at the beginning of 2014. Since February 2014, the margin between Euro Area and US bond yields started to widen, reaching a maximum of about 150 basis points (in absolute terms) at the beginning of March 2015. Since then the margin has narrowed, remaining at around 100 basis points. In the second half of 2014 a wedge has opened between the US and UK government bond yields, which fluctuated between 20-30 basis points throughout last year. Since the beginning of 2016, the margin has started to widen, reaching 60 basis points by mid-July. Looking at the levels of 10-year sovereign bond yields, these have declined since April in the US, Euro Area, the UK and Japan--by about 20-30 basis points in the US, the Euro Area and Japan and 70 basis points in the UK. Looking ahead, expectations for bond yields for the end of 2016 are lower, compared with expectations formed just three months ago. Expectations are lower by about 40-50 basis points in the US and the Euro Area and 70 basis points in the UK. The exception is Japan, where expectations are virtually unchanged. Sovereign risks in the Euro Area have been a major macroeconomic issue for the global economy and financial markets over the past five years. Figure A2 depicts the spread between 10-year government bond yields of Spain, Italy, Portugal, Ireland and Greece over Germany's. The final agreement on Private Sector Involvement in the Greek government debt restructuring in February 2012 and the potential for Outright Money Transactions (OMT) announced by the ECB in August 2012 brought some relief to bond yields in these vulnerable economies. Sovereign spreads have remained stable, in most cases, from late July 2014, the most notable exception being a marked widening of Greek spreads. For Greece this reflected initial uncertainty over the fiscal stance and probability of debt repayment following the formation of a government dominated by a political party elected on an 'anti-austerity' manifesto in January 2015. The risk of Greece leaving the Euro Area returned to the fore, as a deal on a third bailout for Greece appeared unlikely. In the summer of 2015 a lack of liquidity led to a three-week closure of the domestic banking system, with withdrawal limits imposed upon on Greeks' bank accounts and the imposition of controls on external payments. The dangers relating to the financial difficulties of Greece and the policy programme being negotiated with its European partners subsequently receded. In mid-August last year, it was confirmed that negotiators had reached agreement in principle on a 3-year fiscal and structural reform programme to be supported by 86 billion [euro] of financing from the European Stability Mechanism (ESM). Disbursements (including cash and cashless) totalling 28.9 billion [euro] were made by the ESM between August last year and July 2016. However, sovereign spreads remain elevated as long-term debt sustainability remains an issue.

[FIGURE A1 OMITTED]

[FIGURE A2 OMITTED]

[FIGURE A3 OMITTED]

In Portugal sovereign spreads started to widen at the end of 2015, and throughout 2016 have been around the levels last seen at the beginning of 2014. A combination of factors, including the 'anti-austerity' stance of the new Socialist government, the surprise decision by the Portuguese central bank to impose losses on bank bonds held by international investors, a risk of a credit-rating downgrade that could result in the exclusion of government bonds from the ECB's asset-buying programme and weakness in the banking system combined with a high level of government debt (around 128 per cent of GDP) led to Portuguese bonds being the worst performers in the Euro Area (after Greece). In our current forecast, we have assumed spreads over German bond yields continue to narrow in all Euro Area countries, and that this process resumes both in Greece and Portugal from the end of this year.

Figure A3 reports the spread of corporate bond yields over government bond yields in the US, UK and Euro Area. This acts as a proxy for the margin between private sector and 'risk-free' borrowing costs. Private sector borrowing costs have risen more or less in line with the observed rise in government bond yields from the second half of 2013 till the second half of 2015, illustrated by the stability of these spreads in the US, Euro Area and the UK. However, since late last year corporate bond spreads have widened, reflecting a tightening of financial conditions. Our forecast assumption for corporate spreads is that they gradually converge towards their long-term equilibrium level.

[FIGURE A4 OMITTED]

Nominal exchange rates against the US dollar are generally assumed to remain constant at the rate prevailing on 14 July 2016 until the end of March 2017. After that, they follow a backward-looking uncovered-interest parity condition, based on interest rate differentials relative to the US. Figure A4 plots the recent history as well as our forecast of the effective exchange rate indices for Brazil, Canada, the Euro Area, Japan, UK, Russia and the US. In foreign exchange markets, the main developments since our April forecast have been a further appreciation of the yen against the currencies of all other major advanced economies and a general depreciation of sterling. The yen has appreciated by about 9 per cent both against the US dollar and in trade-weighted terms since the first quarter of this year. Over the same period, the pound depreciated by about 9 per cent against the US dollar and 8 per cent in effective terms. The euro's trade-weighted value has been broadly stable since late April, although it has depreciated against the US dollar by about 3 per cent. Among the major emerging market currencies, the Brazilian real and Russian rouble have partially recovered following earlier declines, mainly reflecting political developments in the former case and oil price developments in the latter.

Our oil price assumptions for the short term are based on those of the US Energy Information Administration (EIA), published in July 2016, and updated with daily spot price data available up to 14 July 2016. The EIA use information from forward markets as well as an evaluation of supply conditions, and these are illustrated in figure A5. Oil prices, in US dollar terms, have stabilised in recent months after picking up to about $45 a barrel in late April from their trough of about $26 in early February. Prices rose above $50 in early June, reflecting supply disruptions in Canada and Nigeria as well as declines in US inventories, but have fallen back more recently, following reports of a recovery of investment in productive capacity in the US. Projections from the EIA suggest more than 20 per cent increase in prices towards the end of 2017. Current expectations for the position of oil prices at the end of this year have increased by about 30 per cent, compared to the expectations formed just three months ago. However, this still leaves oil prices more than $60 lower than their nominal level in mid-2014. Oil prices are expected to be about $46 and $58 a barrel by the end of 2016 and 2017 respectively.

[FIGURE A5 OMITTED]

Our equity price assumptions for the US reflect the expected return on capital. Other equity markets are assumed to move in line with the US market, but are adjusted for different exchange rate movements and shifts in country-specific equity risk premia. Figure A6 illustrates the key equity price assumptions underlying our current forecast. Overall, between 2013 and the second half of 2014, global share prices had performed well, irrespective of a short-lived drop--a reaction to the QE tapering signals emanating from the Federal Reserve in summer 2013. However, concerns about weak growth and low inflation seem to have induced a fall in share prices in many countries in the second half of 2014, with the scale of the drop varying significantly between economies. Share prices in many countries rose again in the first half of 2015, especially in the Euro Area economies, partly supported by the wide-scale asset purchase programme introduced by the ECB in March 2015. However, between mid-2015 and the first quarter of 2016, the performance of share prices globally has been disappointing. The triggers for equity price declines seem to have been related to turmoil in the Chinese equity market, with in some cases country-specific issues exacerbating the impact. Since the first quarter of 2016 the performance of equity markets has been mixed, rising in North America, the UK (in terms of the FTSE100), and the major emerging markets, while falling in Japan and the major economies of the Euro Area. Most of the declines in these latter cases occurred before the UK's referendum on EU membership. The movements in equity prices, especially in Japan and the UK, may be attributed partly to exchange rate movements. In the Euro Area in particular, the declines have been especially severe in the financial sector, for a variety of reasons, but perhaps including concerns about the implications for bank profits from even lower interest rates across advanced economies.

[FIGURE A6 OMITTED]

Fiscal policy assumptions for 2016 follow announced policies as of 8 July 2016. Average personal sector tax rates and effective corporate tax rate assumptions underlying the projections are reported in table A3, while table A4 lists assumptions for government spending, which is expected to decline as a share of GDP between 2015 and 2016 in the majority of Euro Area countries reported in the table. Pressure continues to mount for a loosening of fiscal policy to support demand. Infrastructure investment, which supports both demand in the near term and potential growth in the longer term is where these calls are particularly focused (IMF, 2016 and OECD, 2016). A policy loosening relative to our current assumptions poses an upside risk to the short-term outlook in Europe. For a discussion of fiscal multipliers and the impact of fiscal policy on the macroeconomy based on NiGEM simulations, see Barrell et al. (2012).

NOTES

(1) With the exception of Chile, Iceland and Israel.

(2) Interest rate assumptions are based on information available for the period to 14 July 2016.

(3) For discussions of the short and long-run economic implications of the UK leaving the EU see Baker et al. (2016) and Ebell and Warren (2016), respectively.

REFERENCES

Baker, J., Carreras, O., Kirby, S., Meaning, J., Piggott, R. and Warren, J. (2016), 'Modelling events: the short-term economic impact of leaving the EU', Economic Modelling, 58, pp. 339-50.

Barrell, R., Holland, D. and Hurst, I. (2012), 'Fiscal multipliers and prospects for consolidation', OECD Journal: Economic Studies, pp. 71-102.

Ebell, M. and Warren, J. (2016), 'Modelling the long-run economic impact of leaving the EU', NIESR Discussion Paper No. 462.

IMF World Economic Outlook, April 2016.

OECD Interim Economic Outlook, February 2016.

Table A1. Interest rates

Per cent per annum

                       Central bank intervention rates

                                             Euro
                   US     Canada   Japan     Area      UK

2012              0.25     1.00     0.10     0.88     0.50
2013              0.25     1.00     0.10     0.56     0.50
2014              0.25     1.00     0.10     0.16     0.50
2015              0.26     0.65     0.10     0.05     0.50
2016              0.50     0.50    -0.10     0.01     0.38
2017              0.75     0.61    -0.41     0.00     0.10
2018-2022         2.39     2.26    -0.55     0.89     1.44

2014        Q1    0.25     1.00     0.10     0.25     0.50
2014        Q2    0.25     1.00     0.10     0.23     0.50
2014        Q3    0.25     1.00     0.10     0.13     0.50
2014        Q4    0.25     1.00     0.10     0.05     0.50

2015        Q1    0.25     0.81     0.10     0.05     0.50
2015        Q2    0.25     0.75     0.10     0.05     0.50
2015        Q3    0.25     0.54     0.10     0.05     0.50
2015        Q4    0.30     0.50     0.10     0.05     0.50

2016        Q1    0.50     0.50     0.00     0.04     0.50
2016        Q2    0.50     0.50    -0.10     0.00     0.50
2016        Q3    0.50     0.50    -0.10     0.00     0.38
2016        Q4    0.50     0.50    -0.19     0.00     0.15

2017        Q1    0.50     0.50    -0.25     0.00     0.10
2017        Q2    0.75     0.50    -0.38     0.00     0.10
2017        Q3    0.75     0.64    -0.46     0.00     0.10
2017        Q4    1.00     0.78    -0.55     0.00     0.10

                       10-year government bond yields

                                             Euro
                   US     Canada   Japan     Area      UK

2012               1.8      1.9      0.8      3.2      1.8
2013               2.3      2.3      0.7      2.7      2.4
2014               2.5      2.2      0.6      1.9      2.5
2015               2.1      1.5      0.4      1.0      1.8
2016               1.7      1.2      0.0      0.6      1.2
2017               2.2      1.8      0.0      1.1      1.6
2018-2022          3.5      3.4      0.3      2.7      3.1

2014        Q1     2.8      2.5      0.6      2.5      2.8
2014        Q2     2.6      2.4      0.6      2.1      2.7
2014        Q3     2.5      2.2      0.5      1.7      2.6
2014        Q4     2.3      2.0      0.4      1.3      2.1

2015        Q1     2.0      1.4      0.3      0.8      1.6
2015        Q2     2.2      1.6      0.4      1.0      1.9
2015        Q3     2.2      1.5      0.4      1.2      1.9
2015        Q4     2.2      1.5      0.3      1.0      1.9

2016        Q1     1.9      1.2      0.1      0.8      1.5
2016        Q2     1.8      1.3     -0.1      0.7      1.4
2016        Q3     1.4      1.0      0.0      0.4      0.9
2016        Q4     1.7      1.3      0.0      0.6      1.1

2017        Q1     1.9      1.5      0.0      0.8      1.3
2017        Q2     2.1      1.7      0.0      1.0      1.5
2017        Q3     2.3      2.0      0.0      1.2      1.7
2017        Q4     2.4      2.2      0.0      1.3      1.9

Table A2. Nominal exchange rates

            Percentage change in effective rate

             US     Canada    Japan    Euro
                                       Area

2012         3.4       0.9      2.2    -3.6
2013         2.9      -3.1    -16.7     5.6
2014         4.1      -5.4     -5.1     3.8
2015        13.7     -10.7     -5.8    -5.1
2016         4.4       1.9     16.6     5.0
2017        -0.2       1.0      5.1     0.5

2014   Q1    1.6      -3.8     -1.5     1.6
2014   Q2   -0.9       2.4      0.1    -0.2
2014   Q3    1.5      -1.0     -1.1    -1.5
2014   Q4    4.8      -3.1     -6.6    -0.7

2015   Q1    6.2      -6.9     -0.6    -4.1
2015   Q2    0.7       2.4     -1.5    -2.1
2015   Q3    3.6      -6.0      2.0     3.3
2015   Q4    2.2      -2.5      2.3     0.7

2016   Q1    1.7       4.6      6.9     3.0
2016   Q2   -1.6       2.2      5.6     0.6
2016   Q3    0.7       0.2      3.2    -0.4
2016   Q4   -0.2       0.4      2.3     0.3

2017   Q1    0.0       0.0      0.0     0.0
2017   Q2    0.0       0.0      0.2     0.2
2017   Q3    0.0       0.1      0.3     0.2
2017   Q4    0.0       0.0      0.3     0.2

       Percentage change in effective rate

       Germany    France    Italy    UK

2012      -2.0      -2.0    -1.6     4.2
2013       2.8       3.0     3.7    -1.2
2014       1.8       1.8     3.2     7.8
2015      -3.2      -3.3    -2.2     6.5
2016       2.4       2.5     3.2    -8.6
2017       0.2       0.4     0.2    -4.0

2014       0.9       0.7     1.1     2.6
2014      -0.2      -0.1     0.2     1.4
2014      -0.8      -0.9    -0.8     1.6
2014      -0.5      -0.7    -0.3    -0.5

2015      -2.5      -2.5    -2.0     2.8
2015      -1.2      -0.8    -1.2     2.3
2015       1.8       1.5     2.1     2.3
2015       0.3       0.2     0.6    -0.4

2016       1.5       1.4     1.9    -5.4
2016       0.2       0.5     0.4    -1.9
2016      -0.2      -0.1    -0.4    -6.5
2016       0.2       0.1     0.2    -0.4

2017       0.0       0.0     0.0     0.0
2017       0.1       0.1     0.2     0.1
2017       0.1       0.1     0.2     0.1
2017       0.1       0.1     0.2     0.1

                Bilateral rate per US $

       Canadian     Yen      Euro    Sterling
           $

2012      0.997     79.8    0.778       0.631
2013      1.039     97.6    0.753       0.640
2014      1.112    105.8    0.754       0.607
2015      1.299    121.1    0.902       0.654
2016      1.297    107.7    0.897       0.725
2017      1.284    102.2    0.894       0.751

2014      1.111    102.7    0.730       0.604
2014      1.083    102.1    0.729       0.594
2014      1.100    104.0    0.755       0.599
2014      1.153    114.6    0.801       0.632

2015      1.262    119.1    0.888       0.660
2015      1.237    121.4    0.905       0.652
2015      1.327    122.2    0.899       0.646
2015      1.370    121.5    0.914       0.659

2016      1.323    115.2    0.908       0.699
2016      1.288    108.0    0.886       0.697
2016      1.290    104.9    0.900       0.752
2016      1.285    102.6    0.896       0.752

2017      1.285    102.6    0.896       0.752
2017      1.285    102.4    0.895       0.752
2017      1.284    102.1    0.894       0.750
2017      1.283    101.8    0.892       0.749

Table A3. Government revenue assumptions

              Average income tax      Effective corporate
              rate (per cent) (a)     tax rate (per cent)

              2015    2016    2017    2015    2016    2017

Australia     14.8    14.9    14.9    25.7    25.7    25.7
Austria       32.4    32.7    33.0    21.8    21.8    21.8
Belgium       35.2    35.2    35.0    21.7    21.7    21.7
Canada        20.6    20.7    20.9    20.8    20.8    20.8
Denmark       35.4    31.5    32.1    17.9    17.9    17.9
Finland       33.0    32.7    32.5    23.1    23.1    23.1
France        30.9    30.8    30.8    32.7    32.7    32.7
Germany       29.2    29.5    29.5    19.4    19.4    19.4
Greece        24.2    23.8    23.8    13.5    13.5    13.5
Ireland       26.3    25.3    24.4     9.8     9.8     9.8
Italy         29.2    29.2    29.1    26.5    26.9    26.9
Japan         24.5    24.7    24.7    29.6    29.6    29.6
Netherlands   33.0    33.2    33.2     8.4     8.4     8.4
Portugal      23.2    23.7    23.6    20.1    20.1    20.1
Spain         25.1    24.8    24.7    16.0    16.4    16.4
Sweden        26.1    25.9    25.9    23.1    23.1    23.1
UK            22.2    22.2    22.1    13.3    13.1    12.3
US            19.6    19.5    19.6    29.0    29.0    29.0

                 Gov't revenue
                 (% of GDP) (b)

              2015    2016    2017

Australia     33.1    33.6    33.6
Austria       43.6    43.0    42.8
Belgium       44.2    44.2    43.4
Canada        36.3    35.8    35.7
Denmark       47.2    47.9    47.5
Finland       47.1    47.1    46.7
France        46.0    45.7    45.8
Germany       41.2    40.5    40.6
Greece        38.7    37.7    37.2
Ireland       21.1    21.6    21.1
Italy         42.9    42.8    42.1
Japan         35.1    35.2    35.0
Netherlands   39.8    39.3    38.9
Portugal      37.7    37.9    37.8
Spain         37.9    37.9    38.0
Sweden        44.8    43.9    44.2
UK            35.5    35.8    35.5
US            30.8    30.8    31.1

Notes: (a) The average income tax rate is calculated as total
income tax plus both employee and employer social security
contributions as a share of personal income. (b) Revenue shares
reflect NiGEM aggregates, which may differ from official
government figures.

Table A4. Government spending assumptions (a)

                                                               Deficit
              Gov't spending                                  projected
              excluding interest      Gov't interest           to fall
              payments (% of GDP)     payments (% of GDP)     below 3%
                                                               of GDP
              2015    2016    2017    2015    2016    2017       (b)

Australia     33.0    33.2    32.8     1.8     1.7     1.6       --
Austria       42.4    42.7    42.6     2.4     2.1     1.8       --
Belgium       43.9    43.7    43.1     2.9     2.5     2.1      2015
Canada        34.6    34.8    34.9     3.1     3.0     2.8       --
Denmark       47.7    48.6    47.7     1.6     1.4     1.3       --
Finland       48.6    48.2    47.6     1.2     1.1     0.9      2015
France        47.4    47.1    47.1     2.0     1.8     1.5      2017
Germany       38.7    39.2    39.1     1.7     1.1     0.8       --
Greece        42.1    40.8    39.9     3.9     4.0     3.9       --
Ireland       20.7    20.2    20.2     2.6     2.5     2.4      2015
Italy         41.3    41.2    40.7     4.2     4.0     3.4      2015
Japan         38.5    38.9    39.4     2.0     1.7     1.4       --
Netherlands   40.4    40.1    39.7     1.2     1.0     0.8       --
Portugal      37.6    37.3    36.9     4.6     4.2     4.1      2018
Spain         39.9    39.5    38.7     3.1     2.7     2.2      2017
Sweden        44.2    44.3    44.7     0.6     0.5     0.4       --
UK            36.1    35.6    35.2     1.7     1.8     1.7      2018
US            31.6    31.4    31.1     3.5     3.2     3.2      2019

Notes: (a) Expenditure shares reflect NiGEM aggregates, which may
differ from official government figures. (b) The deficit in
Australia, Austria, Canada, Denmark, Germany, Netherlands and
Sweden is not expected to exceed 3 per cent of GDP within our
forecast horizon. In Greece and Japan the deficit is not expected
to fall below 3 per cent of GDP within our forecast horizon.

Appendix B: Forecast detail

[FIGURE B1 OMITTED]

[FIGURE B2 OMITTED]

[FIGURE B3 OMITTED]

[FIGURE B4 OMITTED]

Table B1. Real GDP growth and inflation

                               Real GDP growth (per cent)

                  2013    2014    2015    2016    2017    2018-22

Australia          2.0     2.7     2.5     2.3     2.3       3.0
Austria (a)        0.3     0.5     0.8     1.3     1.4       1.2
Belgium (a)        0.0     1.3     1.4     1.2     1.0       0.8
Bulgaria (a)       1.0     1.7     3.0     1.8     1.8       1.6
Brazil             3.0     0.1    -3.9    -2.8     1.2       2.6
China              7.7     7.3     6.9     6.6     6.2       5.8
Canada             2.2     2.5     1.1     1.5     2.0       2.0
Czech Rep.        -0.5     2.7     4.6     1.8     2.0       2.2
Denmark (a)       -0.2     1.3     1.0     0.6     1.7       1.5
Estonia (a)        1.7     2.8     1.2     1.3     2.6       1.7
Finland (a)       -0.8    -0.7     0.7     0.8     1.1       1.1
France (a)         0.6     0.7     1.2     1.2     1.1       1.2
Germany (a)        0.4     1.6     1.4     1.7     1.5       0.9
Greece (a)        -3.1     0.7    -0.3    -1.3    -0.3       1.9
Hong Kong          3.1     2.7     2.4     0.9     2.3       2.3
Hungary (a)        2.0     3.6     2.9     0.7     1.8       1.7
India              6.3     7.0     7.2     7.5     6.9       6.7
Indonesia          5.6     5.0     4.8     4.4     4.7       4.5
Ireland (a)        1.1     8.4    26.3     1.5     2.5       2.7
Italy (a)         -1.8    -0.3     0.6     0.7     0.5       1.5
Japan              1.4    -0.1     0.6     0.3     0.5       0.6
Lithuania (a)      3.4     3.1     1.6     2.1     3.3       1.8
Latvia (a)         3.5     2.5     2.6     1.4     3.6       1.9
Mexico             1.6     2.2     2.5     2.6     2.4       3.1
Netherlands (a)   -0.1     1.4     2.0     1.2     1.7       0.9
New Zealand        1.7     3.0     3.0     2.6     1.9       2.4
Norway             1.1     2.2     1.7     0.6     1.3       1.8
Poland (a)         1.2     3.3     3.6     2.4     2.8       2.5
Portugal (a)      -1.1     0.9     1.5     1.2     1.4       1.5
Romania (a)        3.3     3.1     3.8     4.1     3.5       2.3
Russia             1.2     0.7    -3.7    -0.9     0.1       3.1
Singapore          4.6     3.3     2.0     1.5     3.1       3.2
South Africa       2.3     1.6     1.3    -0.2     2.3       2.7
S. Korea           2.9     3.3     2.6     2.6     2.7       3.8
Slovakia (a)       1.4     2.5     3.6     2.7     3.1       1.6
Slovenia (a)      -1.0     2.8     2.6     1.8     1.7       1.1
Spain (a)         -1.7     1.4     3.2     2.7     2.2       2.3
Sweden (a)         1.2     2.4     3.9     2.8     2.1       1.7
Switzerland        1.8     1.9     0.8     1.5     1.2       2.0
Taiwan             2.2     3.9     0.6     0.7     2.4       3.2
Turkey             4.2     3.0     4.0     2.9     2.9       3.7
UK (a)             1.9     3.1     2.2     1.7     1.0       2.1
US                 1.5     2.4     2.4     1.9     2.3       2.2
Vietnam            5.3     5.9     6.6     5.6     6.1       3.9
Euro Area (a)     -0.3     0.9     1.6     1.4     1.3       1.3
EU-27 (a)          0.3     1.4     1.9     1.6     1.4       1.5
OECD               1.2     1.9     2.1     1.7     1.8       2.0
World              3.3     3.4     3.1     3.0     3.3       3.6

                          Annual inflation (a) (per cent)

                  2013    2014    2015    2016    2017    2018-22

Australia          2.4     2.1     1.6     1.3     2.0       2.4
Austria (a)        2.1     1.5     0.8     0.9     1.5       1.8
Belgium (a)        1.2     0.5     0.6     1.9     2.0       1.7
Bulgaria (a)       0.4    -1.6    -1.1    -1.3     2.4       3.3
Brazil             6.2     6.3     9.0     8.0     4.5       4.8
China              2.6     2.0     1.5     2.1     1.6       2.3
Canada             1.4     1.9     1.1     1.4     2.0       1.5
Czech Rep.         1.4     0.4     0.3     0.4     0.7       1.6
Denmark (a)        0.5     0.3     0.2     0.4     1.5       1.5
Estonia (a)        3.2     0.5     0.1     1.4     1.9       1.3
Finland (a)        2.2     1.2    -0.2     0.0     0.9       1.9
France (a)         1.0     0.6     0.1     0.2     1.3       1.6
Germany (a)        1.6     0.8     0.1     0.1     1.4       1.8
Greece (a)        -0.9    -1.4    -1.1    -0.4    -0.4      -0.1
Hong Kong          2.7     3.0     1.0     1.3     1.5       2.2
Hungary (a)        1.7     0.0     0.1    -0.4     0.9       2.4
India             10.7     6.6     4.9     5.8     5.4       4.3
Indonesia          6.4     6.4     6.4     3.6     4.7       4.7
Ireland (a)        0.5     0.3     0.0    -0.9     0.1       1.2
Italy (a)          1.3     0.2     0.1    -0.1     1.3       2.0
Japan             -0.2     2.0     0.2    -0.4     0.1       0.4
Lithuania (a)      1.2     0.2    -0.7     1.1     0.9       2.0
Latvia (a)         0.0     0.7     0.2    -0.3     0.1       1.5
Mexico             3.8     4.0     2.7     3.2     3.6       2.7
Netherlands (a)    2.6     0.3     0.2     0.0     1.1       1.3
New Zealand        0.6     0.8     0.8     0.6     1.6       2.4
Norway             1.8     2.1     2.2     3.1     1.8       2.3
Poland (a)         0.8     0.1    -0.7    -0.5     0.1       1.6
Portugal (a)       0.4    -0.2     0.5     0.4     1.0       1.8
Romania (a)        3.2     1.4    -0.4    -1.2     0.8       2.4
Russia             6.8     7.8    15.5     6.8     4.5       4.6
Singapore          2.3     1.0    -0.5    -0.7     0.4       1.8
South Africa       6.0     5.7     4.1     6.1     5.8       4.8
S. Korea           1.3     1.3     0.7     1.1     1.5       1.8
Slovakia (a)       1.5    -0.1    -0.3    -0.1     1.4       1.9
Slovenia (a)       1.9     0.4    -0.8    -0.6    -0.1       3.1
Spain (a)          1.5    -0.2    -0.6    -0.5     1.4       1.8
Sweden (a)         0.4     0.2     0.7     1.4     1.4       1.8
Switzerland       -0.6    -0.3    -1.1    -0.4     0.4       2.1
Taiwan             0.3     0.7    -0.6     0.5     0.3       0.8
Turkey             7.5     8.9     7.6     7.4     6.8       6.3
UK (a)             2.6     1.4     0.1     0.5     2.5       2.2
US                 1.4     1.4     0.3     0.9     1.4       2.0
Vietnam            6.6     4.1     0.9     3.6     3.7       5.0
Euro Area (a)      1.3     0.4     0.0     0.1     1.3       1.7
EU-27 (a)          1.5     0.5     0.0     0.1     1.3       1.8
OECD               1.5     1.6     0.7     0.9     1.6       2.0
World              4.3     3.8     3.6     3.5     3.4       3.3

Notes: (a) Harmonised consumer price inflation in the EU
economies and inflation measured by the consumer expenditure
deflator in the rest of the world.

Table B2. Fiscal balance and government debt

                   Fiscal balance (per cent of GDP) (a)

              2013    2014    2015    2016    2017    2022

Australia     -2.0    -2.3    -1.7    -1.3    -0.8    -1.1
Austria       -1.3    -2.7    -1.2    -1.8    -1.5    -1.6
Belgium       -3.0    -3.1    -2.6    -2.0    -1.7    -2.0
Bulgaria      -0.4    -5.4    -2.1    -2.5    -2.5    -2.1
Canada        -1.9    -0.5    -1.3    -2.0    -2.0    -1.9
Czech Rep.    -1.2    -1.9    -0.4    -0.3     0.0    -1.1
Denmark       -1.1     1.5    -2.1    -2.1    -1.5    -1.1
Estonia       -0.2     0.8     0.4     0.7     0.4    -1.0
Finland       -2.6    -3.2    -2.7    -2.3    -1.9    -2.0
France        -4.0    -4.0    -3.5    -3.1    -2.8    -2.9
Germany       -0.1     0.3     0.7     0.3     0.7    -0.6
Greece       -13.0    -3.7    -7.2    -7.1    -6.5    -4.8
Hungary       -2.6    -2.3    -2.0    -1.9    -1.6    -2.0
Ireland       -5.7    -3.8    -2.3    -1.1    -1.5    -1.9
Italy         -2.9    -3.0    -2.6    -2.4    -2.1    -2.9
Japan         -8.5    -6.2    -5.4    -5.4    -5.7    -4.5
Lithuania     -2.6    -0.7    -0.2     0.6     0.3    -1.0
Latvia        -0.9    -1.6    -1.3    -1.7    -1.7    -1.6
Netherlands   -2.4    -2.4    -1.8    -1.8    -1.6    -2.1
Poland        -4.0    -3.3    -2.6    -1.7    -2.0    -3.2
Portugal      -4.8    -7.2    -4.4    -3.6    -3.2    -2.5
Romania       -2.1    -0.9    -0.7    -2.5    -3.3    -2.0
Slovakia      -2.7    -2.7    -3.0    -2.9    -2.4    -0.8
Slovenia     -15.0    -5.0    -2.9    -2.4    -2.2    -1.9
Spain         -6.9    -5.9    -5.1    -4.4    -2.9    -2.1
Sweden        -1.4    -1.6     0.0    -0.9    -0.9    -1.3
UK            -5.6    -5.6    -4.2    -3.7    -3.5     0.2
US            -5.5    -5.0    -4.3    -3.8    -3.2    -2.7

                Government debt (per cent of GDP, end year) (b)

               2013     2014     2015     2016     2017     2022

Australia      37.5     42.0     43.9     44.7     44.0     37.4
Austria        80.8     84.2     86.2     85.4     83.6     76.7
Belgium       105.2    106.6    106.1    105.7    102.5     96.0
Bulgaria         --       --       --       --       --       --
Canada         89.1     92.2     98.1     97.5     94.6     87.8
Czech Rep.     44.4     41.8     40.1     38.9     37.2     32.4
Denmark        44.7     44.8     40.2     41.2     40.2     39.1
Estonia          --       --       --       --       --       --
Finland        55.5     59.3     63.1     64.5     64.7     63.3
France         92.3     95.3     96.1     97.2     98.3     98.0
Germany        77.2     74.7     71.2     67.5     63.9     51.0
Greece        178.0    180.5    177.4    188.8    195.0    202.3
Hungary        76.4     75.8     75.0     76.6     76.4     70.2
Ireland       120.0    107.6     93.8     91.4     90.1     82.4
Italy         129.0    132.4    132.8    132.5    131.3    117.8
Japan         220.4    226.8    229.5    237.3    240.5    246.1
Lithuania        --       --       --       --       --       --
Latvia           --       --       --       --       --       --
Netherlands    67.9     68.2     65.1     65.1     64.4     65.2
Poland         54.6     49.9     49.3     52.2     53.2     57.0
Portugal      129.0    130.2    129.0    128.6    128.7    120.9
Romania          --       --       --       --       --       --
Slovakia         --       --       --       --       --       --
Slovenia         --       --       --       --       --       --
Spain          93.7     99.3     99.2    100.7     98.4     85.7
Sweden         39.7     44.7     43.4     42.6     42.0     39.9
UK             86.0     87.9     89.0     89.4     90.4     74.1
US            109.5    110.0    112.3    109.2    108.0     99.9

Notes: (a) General government financial balance; Maastricht
definition for EU countries, (b) Maastricht definition for EU
countries.

Table B3. Unemployment and current account balance

                      Standardised unemployment rate

              2013    2014    2015    2016    2017    2018-22

Australia      5.7     6.1     6.1     5.8     5.8       5.8
Austria        5.3     5.6     5.8     6.0     5.7       5.0
Belgium        8.5     8.6     8.5     8.3     8.3       8.1
Bulgaria      12.9    11.4     9.1     8.0     8.2       8.6
Canada         7.1     6.9     6.9     7.0     7.1       7.4
China           --      --      --      --      --        --
Czech Rep.     7.0     6.1     5.1     4.3     4.4       4.3
Denmark        7.0     6.5     6.2     6.1     6.4       5.6
Estonia        8.6     7.4     6.2     6.5     6.2       6.2
Finland        8.1     8.7     9.3     9.0     9.0       9.1
France        10.3    10.3    10.4     9.9     9.5       9.1
Germany        5.2     5.0     4.7     4.4     4.2       4.6
Greece        27.5    26.6    25.0    23.8    23.6      22.5
Hungary       10.1     7.7     6.8     5.5     5.7       6.2
Ireland       13.1    11.3     9.4     7.9     7.5       6.8
Italy         12.1    12.6    11.9    11.4    10.5      10.1
Japan          4.0     3.6     3.4     3.2     3.8       4.6
Lithuania     11.8    10.7     9.1     8.2     8.1       8.6
Latvia        11.9    10.8     9.9     9.5     9.2       9.4
Netherlands    7.3     7.4     6.9     6.3     6.1       5.6
Poland        10.3     9.0     7.5     6.3     6.1       6.5
Portugal      16.5    14.1    12.6    11.6    11.2      10.5
Romania        7.1     6.9     6.8     6.5     6.3       6.5
Slovakia      14.3    13.2    11.5    10.4     9.8       9.7
Slovenia      10.1     9.8     9.0     8.2     7.8       7.9
Spain         26.1    24.4    22.0    19.5    17.3      16.3
Sweden         8.0     7.9     7.4     7.0     6.9       7.0
UK             7.6     6.2     5.4     5.0     5.6       5.1
US             7.4     6.2     5.3     4.9     4.8       5.5

                 Current account balance (per cent of GDP)

              2013    2014    2015    2016     2017   2018-22

Australia     -3.4    -3.0    -4.8    -4.5    -3.9      -2.6
Austria        2.0     1.9     2.6     1.5     1.5       1.4
Belgium       -0.2    -0.2     0.0    -0.7    -0.2       2.0
Bulgaria       1.9     1.1     1.6     4.2     5.1       2.2
Canada        -3.2    -2.3    -3.2    -3.4    -3.5      -1.7
China          1.6     2.7     3.0     1.5    -0.3      -1.0
Czech Rep.    -0.5     0.2     0.9     2.2     1.4      -1.0
Denmark        7.1     6.2     7.0     4.4     5.2       5.5
Estonia       -0.1     1.0     2.1    -2.4    -2.8      -1.3
Finland       -1.6    -0.9     0.1    -0.5    -0.4       0.5
France        -0.8    -0.9    -0.3    -1.3    -1.3      -1.8
Germany        6.8     7.4     8.6     8.0     6.6       6.3
Greece        -2.0    -2.2    -0.1    -0.6     1.2      -0.2
Hungary        3.9     2.0     4.2     3.0     2.5       2.3
Ireland        1.6     1.2     9.2    12.5    10.2       8.2
Italy          0.9     1.8     2.2     1.6     1.9       3.0
Japan          0.9     0.8     3.3     1.7     0.6       3.4
Lithuania      1.5     3.6    -1.7     1.0    -0.6      -0.5
Latvia        -2.4    -2.0    -1.2     0.0    -1.4       0.9
Netherlands   10.1     9.5     9.2     9.7    10.2       9.3
Poland        -1.3    -2.0    -0.2    -0.5    -2.5      -4.1
Portugal       1.4     0.1     0.4     0.1    -1.3      -3.3
Romania       -1.1    -0.4    -1.1    -3.2    -3.8      -3.6
Slovakia       2.0     0.1    -1.3     0.0    -2.4      -1.1
Slovenia       5.6     7.0     7.4     6.9     9.1       6.1
Spain          1.5     1.0     1.4    -0.1     0.6       0.2
Sweden         6.0     5.3     5.8     6.6     5.4       5.6
UK            -4.4    -4.7    -5.4    -6.0    -3.2      -0.6
US            -2.2    -2.3    -2.6    -2.4    -2.8      -3.7

Table B4. United States

Percentage change

                                      2012     2013     2014     2015

GDP                                    2.2      1.5      2.4      2.4
Consumption                            1.5      1.7      2.7      3.1
Investment: housing                   13.5      9.5      1.8      8.9
          : business                   9.0      3.0      6.2      2.8
Government: consumption               -0.9     -2.5     -0.5      0.4
          : investment                -5.6     -4.8     -1.1      2.2
Stockbuilding (a)                      0.1      0.0      0.0      0.2
Total domestic demand                  2.1      1.3      2.5      3.0
Export volumes                         3.4      2.8      3.4      1.1
Import volumes                         2.2      1.1      3.8      4.9
Average earnings                       2.2      1.0      2.7      2.3
Private consumption deflator           1.9      1.4      1.4      0.3
RPDI                                   3.3     -1.5      2.7      3.5
Unemployment, %                        8.1      7.4      6.2      5.3
General Govt. balance as % of GDP     -9.0     -5.5     -5.0     -4.3
General Govt. debt as % of GDP (b)   110.5    109.5    110.0    112.3
Current account as % of GDP           -2.8     -2.2     -2.3     -2.6

                                                       Average
                                      2016     2017    2018-22

GDP                                    1.9      2.3       2.2
Consumption                            2.8      3.1       2.1
Investment: housing                    9.8      7.1       4.5
          : business                  -0.3      4.0       2.9
Government: consumption                0.4      1.3       1.7
          : investment                 3.5      1.0       1.6
Stockbuilding (a)                     -0.2      0.0       0.0
Total domestic demand                  2.1      3.0       2.2
Export volumes                        -0.7      1.6       3.6
Import volumes                         1.2      6.3       3.7
Average earnings                       3.0      3.1       3.2
Private consumption deflator           0.9      1.4       2.0
RPDI                                   3.2      2.6       1.9
Unemployment, %                        4.9      4.8       5.5
General Govt. balance as % of GDP     -3.8     -3.2      -2.8
General Govt. debt as % of GDP (b)   109.2    108.0     103.3
Current account as % of GDP           -2.4     -2.8      -3.7

Note: (a) Change as a percentage of GDP. (b) End-of-year basis.

Table B5. Canada

Percentage change

                                     2012    2013    2014     2015

GDP                                   1.7     2.2     2.5      1.1
Consumption                           1.9     2.4     2.5      1.9
Investment: housing                   5.6    -0.4     2.5      3.8
          : business                  8.1     1.7     0.1    -10.0
Government: consumption               0.7     0.3     0.3      1.7
          : investment               -3.0    -6.3     2.1      2.3
Stockbuilding (a)                    -0.3     0.6    -0.3     -0.3
Total domestic demand                 2.0     1.9     1.5      0.3
Export volumes                        2.6     2.8     5.3      3.4
Import volumes                        3.6     1.5     1.8      0.3
Average earnings                      2.4     3.2     3.2      1.6
Private consumption deflator          1.3     1.4     1.9      1.1
RPDI                                  2.8     2.8     1.3      2.3
Unemployment, %                       7.4     7.1     6.9      6.9
General Govt. balance as % of GDP    -2.5    -1.9    -0.5     -1.3
General Govt. debt as % of GDP (b)   92.0    89.1    92.2     98.1
Current account as % of GDP          -3.6    -3.2    -2.3     -3.2

                                                     Average
                                     2016    2017    2018-22

GDP                                   1.5     2.0       2.0
Consumption                           2.0     1.8       1.2
Investment: housing                   5.3     6.3       3.8
          : business                 -6.7     3.2       1.7
Government: consumption               1.5     1.9       1.8
          : investment               -0.5     2.5       1.9
Stockbuilding (a)                    -0.2     0.1       0.0
Total domestic demand                 1.0     2.4       1.6
Export volumes                        1.1     1.3       3.5
Import volumes                       -1.1     2.4       2.3
Average earnings                      1.6     1.9       2.9
Private consumption deflator          1.4     2.0       1.5
RPDI                                  0.7     0.9       1.4
Unemployment, %                       7.0     7.1       7.4
General Govt. balance as % of GDP    -2.0    -2.0      -1.8
General Govt. debt as % of GDP (b)   97.5    94.6      90.6
Current account as % of GDP          -3.4    -3.5      -1.7

Note: (a) Change as a percentage of GDP. (b) End-of-year basis.

Table B6. Japan

Percentage change

                                2012     2013     2014     2015

GDP                              1.7      1.4     -0.1      0.6
Consumption                      2.3      1.7     -0.9     -1.2
Investment: housing              3.2      8.4     -5.0     -2.7
          : business             3.6     -0.4      2.8      1.6
Government: consumption          1.7      1.9      0.1      1.2
          : investment           2.0      8.0      0.2     -1.9
Stockbuilding (a)                0.2     -0.2      0.2      0.5
Total domestic demand            2.6      1.6     -0.1      0.1
Export volumes                  -0.2      1.1      8.3      2.8
Import volumes                   5.3      3.0      7.2      0.3
Average earnings                -0.6      0.8      1.1      1.2
Private consumption deflator    -0.9     -0.2      2.0      0.2
RPDI                             0.7      0.4     -1.5      0.8
Unemployment, %                  4.3      4.0      3.6      3.4
Govt. balance as % of GDP       -8.6     -8.5     -6.2     -5.4
Govt. debt as % of GDP (b)     216.6    220.4    226.8    229.5
Current account as % of GDP      1.0      0.9      0.8      3.3

                                                 Average
                                2016     2017    2018-22

GDP                              0.3      0.5       0.6
Consumption                      0.4      0.5       1.2
Investment: housing             -1.5     -3.5      -4.2
          : business             0.9      3.1       0.8
Government: consumption          1.9      0.2      -0.3
          : investment          -2.6      2.6       0.5
Stockbuilding (a)               -0.2      0.0       0.0
Total domestic demand            0.4      0.8       0.7
Export volumes                   0.8      4.4       4.0
Import volumes                   1.6      6.7       4.9
Average earnings                 1.1      2.7       1.7
Private consumption deflator    -0.4      0.1       0.4
RPDI                             1.3      1.4       1.4
Unemployment, %                  3.2      3.8       4.6
Govt. balance as % of GDP       -5.4     -5.7      -4.8
Govt. debt as % of GDP (b)     237.3    240.5     243.6
Current account as % of GDP      1.7      0.6       3.4

Note: (a) Change as a percentage of GDP. (b) End-of-year basis.

Table B7. Euro Area

Percentage change

                              2012    2013    2014    2015

GDP                           -0.8    -0.3     0.9     1.6
Consumption                   -1.3    -0.6     0.8     1.7
Private investment            -7.9    -3.2     1.9     3.4
Government: consumption       -0.2     0.2     0.8     1.3
          : investment        -3.5     0.6    -1.1     1.2
Stockbuilding (a)             -0.9     0.1    -0.2    -0.1
Total domestic demand         -3.3    -0.7     0.8     1.8
Export volumes                 2.8     2.2     4.1     5.1
Import volumes                -0.8     1.3     4.5     5.9
Average earnings               1.9     2.0     1.1     1.1
Harmonised consumer prices     2.5     1.3     0.4     0.0
RPDI                          -1.8    -0.6     0.9     1.6
Unemployment, %               11.4    12.0    11.6    10.9
Govt. balance as % of GDP     -3.7    -3.0    -2.6    -2.1
Govt. debt as % of GDP(b)     89.6    91.4    92.3    91.0
Current account as % of GDP    1.3     2.2     2.5     3.2

                                              Average
                              2016    2017    2018-22

GDP                            1.4     1.3       1.3
Consumption                    1.7     1.3       0.8
Private investment             2.5     1.8       2.7
Government: consumption        1.4     0.7       1.1
          : investment         2.8     1.8       1.5
Stockbuilding (a)              0.4     0.0       0.0
Total domestic demand          2.2     1.3       1.2
Export volumes                 2.3     3.5       2.7
Import volumes                 3.4     3.4       2.6
Average earnings               1.4     2.2       2.8
Harmonised consumer prices     0.1     1.3       1.7
RPDI                           1.5     1.2       1.1
Unemployment, %               10.1     9.5       9.2
Govt. balance as % of GDP     -1.9    -1.5      -1.6
Govt. debt as % of GDP(b)     88.8    87.1      81.7
Current account as % of GDP    2.3     2.2       2.0

Note: (a) Change as a percentage of GDP.
(b) End-of-year basis; Maastricht definition.

Table B8. Germany

Percentage change

                              2012    2013    2014    2015

GDP                            0.6     0.4     1.6     1.4
Consumption                    0.9     0.8     1.0     2.0
Investment: housing            4.1    -0.7     3.3     1.0
          : business          -1.7    -2.2     4.3     2.0
Government: consumption        1.3     0.8     1.7     2.5
          : investment         0.9     2.2    -0.1     3.6
Stockholding (a)              -1.6     0.5    -0.3    -0.6
Total domestic demand         -0.9     0.9     1.3     1.4
Export volumes                 3.4     1.8     3.9     4.8
Import volumes                 0.1     3.2     3.7     5.4
Average earnings               3.7     2.8     2.3     2.4
Harmonised consumer prices     2.1     1.6     0.8     0.1
RPDI                           0.6     0.5     1.4     2.2
Unemployment, %                5.4     5.2     5.0     4.7
Govt. balance as % of GDP     -0.1    -0.1     0.3     0.7
Govt. debt as % of GDP (b)    79.6    77.2    74.7    71.2
Current account as % of GDP    7.1     6.8     7.4     8.6

                                              Average
                              2016    2017    2018-22

GDP                            1.7     1.5       0.9
Consumption                    1.9     2.0       0.6
Investment: housing            3.6     0.4      -0.7
          : business           3.3     3.9       0.8
Government: consumption        2.3     0.4       0.4
          : investment         7.9     2.6       0.9
Stockholding (a)               0.3     0.0       0.0
Total domestic demand          2.7     1.9       0.5
Export volumes                 2.4     3.4       3.0
Import volumes                 4.9     4.4       2.5
Average earnings               2.9     3.6       3.1
Harmonised consumer prices     0.1     1.4       1.8
RPDI                           1.9     1.6       0.9
Unemployment, %                4.4     4.2       4.6
Govt. balance as % of GDP      0.3     0.7       0.1
Govt. debt as % of GDP (b)    67.5    63.9      55.1
Current account as % of GDP    8.0     6.6       6.3

Note: (a) Change as a percentage of GDP.
(b) End-of-year basis; Maastricht definition.

Table B9. France

Percentage change

                              2012    2013    2014    2015

GDP                            0.2     0.6     0.7     1.2
Consumption                   -0.3     0.6     0.7     1.5
Investment: housing           -2.1    -0.5    -3.5    -0.8
          : business           1.0    -0.9     2.4     2.9
Government: consumption        1.6     1.5     1.2     1.4
          : investment         2.0    -0.6    -5.8    -3.9
Stockholding (a)              -0.6     0.2     0.6     0.1
Total domestic demand         -0.3     0.7     1.1     1.4
Export volumes                 2.7     1.9     3.4     6.0
Import volumes                 0.8     2.2     4.8     6.4
Average earnings               2.6     2.7     1.3     0.5
Harmonised consumer prices     2.2     1.0     0.6     0.1
RPDI                           0.5     0.4     1.6     1.2
Unemployment, %                9.8    10.3    10.3    10.4
Govt, balance as % of GDP     -4.8    -4.0    -4.0    -3.5
Govt, debt as % of GDP (b)    89.6    92.3    95.3    96.1
Current account as % of GDP   -1.2    -0.8    -0.9    -0.3

                                              Average
                              2016    2017    2018-22

GDP                            1.2     1.1       1.2
Consumption                    1.7     0.5       0.3
Investment: housing           -0.8     0.3       7.5
          : business           3.7     2.4       1.1
Government: consumption        1.6     1.3       1.4
          : investment         1.7     1.5       1.5
Stockholding (a)               0.0    -0.2       0.0
Total domestic demand          1.8     0.8       1.1
Export volumes                 2.2     4.9       3.0
Import volumes                 3.8     3.6       2.5
Average earnings               0.9     1.9       2.6
Harmonised consumer prices     0.2     1.3       1.6
RPDI                           1.5     1.0       0.6
Unemployment, %                9.9     9.5       9.1
Govt, balance as % of GDP     -3.1    -2.8      -2.8
Govt, debt as % of GDP (b)    97.2    98.3      97.9
Current account as % of GDP   -1.3    -1.3      -1.8

Note: (a) Change as a percentage of GDP.
(b) End-of-year basis; Maastricht definition.

Table B10. Italy

Percentage change

                               2012     2013     2014     2015

GDP                            -2.9     -1.8     -0.3      0.6
Consumption                    -4.0     -2.4      0.6      0.9
Investment: housing            -7.7     -4.4     -2.7     -0.2
          : business          -10.8     -7.2     -3.6      1.4
Government: consumption        -1.4     -0.3     -1.0     -0.7
          : investment         -5.4     -8.5     -3.5     -1.5
Stockbuilding (a)              -1.2      0.1      0.1      0.5
Total domestic demand          -5.6     -2.7     -0.3      1.0
Export volumes                  2.0      0.9      2.9      4.1
Import volumes                 -8.3     -2.2      3.0      5.8
Average earnings                1.1      1.6      0.3      0.5
Harmonised consumer prices      3.3      1.3      0.2      0.1
RPDI                           -5.6     -0.8      0.0      0.8
Unemployment, %                10.7     12.1     12.6     11.9
Govt. balance as % of GDP      -2.9     -2.9     -3.0     -2.6
Govt. debt as % of GDP (b)    123.3    129.0    132.4    132.8
Current account as % of GDP    -0.4      0.9      1.8      2.2

                                                Average
                               2016     2017    2018-22

GDP                             0.7      0.5       1.5
Consumption                     1.2      0.9       0.2
Investment: housing             0.6     -0.3       5.7
          : business            0.9     -3.3       6.5
Government: consumption         0.5      0.0       0.6
          : investment          1.0      0.7       0.9
Stockbuilding (a)               0.0      0.0       0.0
Total domestic demand           1.0      0.2       1.3
Export volumes                  0.3      3.8       2.7
Import volumes                  1.4      2.9       2.1
Average earnings                0.1      1.2       2.1
Harmonised consumer prices     -0.1      1.3       2.0
RPDI                            1.6      0.0       0.2
Unemployment, %                11.4     10.5      10.1
Govt. balance as % of GDP      -2.4     -2.1      -2.2
Govt. debt as % of GDP (b)    132.5    131.3     122.1
Current account as % of GDP     1.6      1.9       3.0

Note: (a) Change as a percentage of GDP.
(b) End-of-year basis; Maastricht definition.

Table B11. Spain

Percentage change

                               2012     2013     2014     2015

GDP                            -2.6     -1.7      1.4      3.2
Consumption                    -3.5     -3.1      1.2      3.1
Investment: housing            -5.4     -7.2     -1.4      2.4
          : business           -6.5     -5.4      5.6      8.5
Government: consumption        -4.5     -2.8      0.0      2.7
          : investment        -11.6     14.5      7.6      8.4
Stockbuilding (a)              -0.3     -0.2      0.2      0.1
Total domestic demand          -4.7     -3.1      1.7      3.8
Export volumes                  1.1      4.3      5.1      5.4
Import volumes                 -6.2     -0.3      6.4      7.5
Average earnings               -0.6      1.2     -0.5      1.0
Harmonised consumer prices      2.4      1.5     -0.2     -0.6
RPDI                           -5.5     -1.5      0.8      2.7
Unemployment, %                24.8     26.1     24.4     22.0
Govt. balance as % of GDP     -10.4     -6.9     -5.9     -5.1
Govt. debt as % of GDP (b)     85.4     93.7     99.3     99.2
Current account as % of GDP    -0.2      1.5      1.0      1.4

                                                Average
                               2016     2017    2018-22

GDP                             2.7      2.2       2.3
Consumption                     3.2      2.2       2.4
Investment: housing             2.9      2.7       4.4
          : business            3.9      3.8       5.5
Government: consumption         2.2      1.9       2.2
          : investment          4.0      2.6       2.3
Stockbuilding (a)               0.2      0.0       0.0
Total domestic demand           3.3      2.3       2.8
Export volumes                  1.7      2.3       1.8
Import volumes                  3.3      2.9       3.4
Average earnings                1.6      1.4       3.4
Harmonised consumer prices     -0.5      1.4       1.8
RPDI                            3.0      2.7       2.8
Unemployment, %                19.5     17.3      16.3
Govt. balance as % of GDP      -4.4     -2.9      -2.2
Govt. debt as % of GDP (b)    100.7     98.4      90.0
Current account as % of GDP    -0.1      0.6       0.2

Note: (a) Change as a percentage of GDP.
(b) End-of-year basis; Maastricht definition.

Graham Hacche, with Oriol Carreras, Simon Kirby, Iana Liadze, Jack Meaning, Rebecca Piggott and James Warren *

* All questions and comments related to the forecast and its underlying assumptions should be addressed to Simon Kirby (s.kirby@niesr.ac.uk). We would like to thank Angus Armstrong and Jagjit Chadha for helpful comments and Jessica Baker for compiling the database underlying the forecast. The forecast was completed on 27 July, 2016. Exchange rate, interest rates and equity price assumptions are based on information available to 14 July 2016. Unless otherwise specified, the source of all data reported in tables and figures is the NiGEM database and NIESR forecast baseline.

Table 1. Forecast summary

Percentage change
                                   Real GDP (a)

                                                Euro
             World     OECD    China   EU-27    Area      USA     Japan

2012           3.5      1.3     7.7    -0.4      -0.8      2.2     1.7
2013           3.3      1.2     7.7     0.3      -0.3      1.5     1.4
2014           3.4      1.9     7.3     1.4       0.9      2.4    -0.1
2015           3.1      2.1     6.9     1.9       1.6      2.4     0.6
2016           3.0      1.7     6.6     1.6       1.4      1.9     0.3
2017           3.3      1.8     6.2     1.4       1.3      2.3     0.5
2006-2011      4.0      1.3    11.0     1.1       1.0      0.9     0.3
2018-2022      3.6      2.0     5.8     1.5       1.3      2.2     0.6

                          Real GDP (a)                   World
                                                         trade
            Germany   France   Italy    UK     Canada     (b)

2012           0.6      0.2    -2.9     1.3       1.7      3.1
2013           0.4      0.6    -1.8     1.9       2.2      3.1
2014           1.6      0.7    -0.3     3.1       2.5      3.6
2015           1.4      1.2     0.6     2.2       1.1      2.5
2016           1.7      1.2     0.7     1.7       1.5      2.3
2017           1.5      1.1     0.5     1.0       2.0      4.6
2006-2011      1.7      1.0    -0.1     0.6       1.5      5.0
2018-2022      0.9      1.2     1.5     2.1       2.0      4.3

                   Private consumption deflator

                       Euro
             OECD      Area     USA    Japan   Germany

2012           1.9      1.9     1.9    -0.9       1.6
2013           1.5      1.1     1.4    -0.2       1.2
2014           1.6      0.5     1.4     2.0       0.9
2015           0.7      0.1     0.3     0.2       0.6
2016           0.9      0.2     0.9    -0.4       0.3
2017           1.6      1.2     1.4     0.1       1.3
2006-2011      1.9      1.8     2.0    -1.0       1.3
2018-2022      2.0      1.7     2.0     0.4       1.8

               Private consumption deflator

            France    Italy     UK     Canada

2012           1.4      2.7     1.9     1.3
2013           0.7      1.2     2.3     1.4
2014           0.1      0.3     1.7     1.9
2015          -0.2      0.1     0.3     1.1
2016           0.3      0.1     0.7     1.4
2017           1.2      1.3     2.6     2.0
2006-2011      1.4      2.0     2.6     1.3
2018-2022      1.6      2.0     2.3     1.5

               Interest rates (c)       Oil
                                       ($ per
                               Euro    barrel)
              USA     Japan    Area     (d)

2012           0.3      0.1     0.9    110.4
2013           0.3      0.1     0.6    107.1
2014           0.3      0.1     0.2     97.8
2015           0.3      0.1     0.1     51.8
2016           0.5     -0.1     0.0     42.2
2017           0.8     -0.4     0.0     50.4
2006-2011      2.1      0.2     2.3     79.8
2018-2022      2.4     -0.5     0.9     59.3

Notes: Forecast produced using the NiGEM model. (a) GDP growth at
market prices. Regional aggregates are based on PPP shares, 2011
reference year. (b) Trade in goods and services. (c) Central bank
intervention rate, period average. (d) Average of Dubai and Brent
spot prices.

* All questions and comments related to the forecast and its
underlying assumptions should be addressed to Simon Kirby
(s.kirby@niesr.ac.uk). We would like to thank Angus Armstrong and
Jagjit Chadha for helpful comments and Jessica Baker for
compiling the database underlying the forecast. The forecast was
completed on 27 July, 2016. Exchange rate, interest rates and
equity price assumptions are based on information available to 14
July 2016. Unless otherwise specified, the source of all data
reported in tables and figures is the NiGEM database and NIESR
forecast baseline.