The world economy.

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

World Overview

Recent developments and the global forecast

Global economic growth remains moderate and uneven. Our forecast of world GDP growth in 2015 and 2016 has been revised down, by 0.2 and 0.3 percentage points respectively, to 3.0 and 3.5 per cent. Global growth this year is now forecast to be the slowest for any year since the crisis, reflecting a trend of weakening growth in many emerging market economies as well as hesitant recoveries in the advanced economies. Expected drivers of the projected strengthening of the global expansion in the period ahead include continuing highly accommodative monetary policies and waning fiscal consolidation in most advanced economies, together with the boost to demand from the decline in oil prices since mid-2014, which in most cases has not yet been very visible in the data.

[FIGURE 1 OMITTED]

GDP growth weakened in the US and turned negative in Canada in the first quarter of 2015, partly because of special temporary factors, but also reflecting a drop in investment in the energy sector in the wake of the oil price decline. In the second quarter, growth picked up in the United States but the contraction seems to have continued in Canada. This recent underperformance of activity in North America, relative to our May projections, accounts for a large part of the downward revision of our global growth forecast for 2015; the other main contributors are downgrades for a number of emerging market economies in Asia and Latin America.

In the Euro Area, the crisis in Greece has been the main preoccupation of policymakers. The Greek economy, weighed down further by new uncertainties about policies, a recent three-week closure of banks, limits on deposit withdrawals, and controls on external payments, has weakened further, and our forecast of growth in 2015 and 2016 has been marked down, by 2.7 and 5.1 percentage points respectively, to -3.0 per cent and -2.3 per cent. With Greece representing less than 2 per cent of the Euro Area economy, contagion from Greece to other countries and financial markets has been limited, and our growth forecast for the Euro Area has been lowered only slightly. The Greek crisis and issues facing the Euro Area are discussed below and in a Note following this chapter.

In Japan, growth performance has remained mixed. Among the major emerging market economies, the moderate slowing of growth in China has continued, while in Brazil and Russia recessions have deepened.

Recent data have confirmed the May Review's finding that the threat of deflation in the advanced economies, which had been a particular concern in the Euro Area, has receded. Although still below central banks' objectives, headline inflation in most major advanced economies has risen to positive levels, and it is expected to rise further in the coming months as the oil price decline begins to drop out of 12-month comparisons. Core inflation rates have remained broadly stable and estimates of expected future inflation (from financial markets and surveys) have risen closer to targets. Inflation has remained negative, however, in several of the smaller economies in the Euro Area. In emerging market economies, inflation developments have been uneven--well above targets in Brazil and Russia, while in China annual consumer price inflation has fallen to about 1.5 per cent (half the official target) while producer prices have been declining for more than three years.

The central banks of the Euro Area and Japan have continued their programmes of large-scale asset purchases, with their benchmark short-term interest rates set at or below zero. In the United States, Federal Reserve officials have indicated that while their decisions will remain data-dependent, the first increase in the target federal funds rate from the near-zero floor where it has sat since December 2008 is likely before the end of 2015. In fact, at the Fed's mid-June policy meeting most participants indicated that they expected that two or three increases of 25 basis points would be appropriate by the end of this year, with only two out of the seventeen expecting none. Chair Yellen has emphasised that the timing of the first increase is less important than the future path of rates, and that the Fed expects this path to be gradual, with monetary policy remaining highly accommodative for some time. Our forecast is based on the assumption of one increase in 2015, in September. Among other advanced economies, central banks have lowered benchmark interest rates further since late April in Australia, Canada, Iceland, New Zealand, Norway, South Korea, and Sweden, in the last case deeper into negative territory, to -0.35 per cent. Official interest rates have also been lowered since late April in China, India, and Russia, but raised in Brazil and South Africa.

[FIGURE 2 OMITTED]

In financial markets, the most significant development since April has been a general rise in government bond yields across the advanced economies, most markedly in the Euro Area. Since late April, 10-year sovereign yields in the major countries of the Euro Area have risen by 50-70 basis points, compared with about 40-45 basis points in the US and the UK and 10 basis points in Japan. Possible explanations include upward revisions in expectations for growth and inflation--the latter being indicated also by market and survey estimates of inflation expectations, and being related, possibly, to the stabilisation and partial recovery of oil prices between March and June. Another is the possibility that yields had earlier overshot on the downside: in some cases, they had fallen to unprecedented levels, even lower than 0.1 per cent in mid-April at the 10year maturity in the case of Germany. Contagion from the Greek crisis in financial markets has been limited to a modest and temporary widening of yield spreads in the peripheral economies of the Euro Area.

Another striking development in financial markets has been the swings in Chinese equity markets. After a period of relative stability since the 2007-8 price drop, these markets began rising in July 2014, and by mid-June this year prices were 140 per cent higher than a year earlier. This surge, hardly attributable to fundamentals, seemed to be encouraged, implicitly or explicitly, by the authorities, including by several cuts in interest rates. Prices peaked and turned around in mid-June, and by early July had fallen by about one third from their peaks, to levels last seen in March. The authorities then took a number of extraordinary actions to reverse the decline, including the suspension of trading in shares of about half the companies quoted on the main markets, and restrictions on selling by brokerages to apply as long as the market remained below a certain level. These measures halted the fall in prices and led to a partial but erratic recovery in late July. Movements in other equity markets in recent months have been unremarkable.

In foreign exchange markets, the US dollar's value in late July was little changed from three months earlier in terms of the euro, the Chinese yuan, and the Indian rupee, but moderately higher against the Canadian dollar and the yen and slightly lower against the pound. The weakest major currencies in this period were the Brazilian real and the Russian rouble, both of which depreciated by 12 per cent. The recent depreciations of the Canadian dollar and the rouble seem to be related to the renewed weakness in oil prices since early June. By late July, oil prices had fallen by about 20 per cent in US dollar terms since early June, although they still stood about 5 per cent higher than the lows reached in January. A report from the International Energy Agency in early June projected robust growth in oil supplies this year, despite a slowdown in supply from non-OPEC sources. The prospective removal next year of sanctions on Iranian exports, following the international agreement reached in July with Iran on the curtailment of its nuclear programme, is a new factor weighing on prices.

Risks to the forecast and implications for policy

The risks discussed in recent issues of this Review remain relevant. The risk of deflation has waned in most advanced economies, but it is still apparent in some of the smaller European economies and also in China, and it may reappear more broadly if the renewed weakening of oil prices since June deepens. On the other hand, especially given the apparently limited demand response so far to the fall in oil prices over the past year, an upside risk to our growth forecast is a larger, lagged boost to demand than we are assuming for the period ahead. An important downside risk remains the possibility of disruptive financial market reactions to the start of the normalisation of monetary policy in the United States, even though the forewarnings have been many and loud. Further appreciation of the US dollar is one possible response to an upward move in US short-term interest rates, and this would damage the balance sheets of dollar debtors, especially corporate borrowers in emerging market economies, with likely negative consequences for demand and growth. A further strengthening of the dollar may also threaten a re-widening of global payments imbalances. The continuing weakness of economic recoveries in most cases, the fragility of balance sheets associated with continuing high levels of debt, and the toxic effects on debt burdens of weak economic growth and below-target inflation point to the need for continuing highly accommodative monetary policies, as acknowledged, for example, by the Fed.

Recent developments have highlighted two particular sets of risks, one relating to Greece and the Euro Area, and the other relating to China.

First, Greece. Our forecast assumes that the new policy programme being negotiated with Greece, supported by the associated financing arrangements, will return the Greek economy to a path of moderate recovery, and that the Euro Area will remain intact. But risks are evident both to the Greek economy and to the functioning of Europe's Economic and Monetary Union and the integrity of the Euro Area.

Risks to the implementation of Greece's policy programme arise partly from the lack of ownership of it by the government and the population. A referendum in early July rejected proposals along the lines of those now being negotiated, and during the parliamentary debate on measures that needed to be approved as a pre-condition for the current talks, the Prime Minister referred to the programme's "irrational proposals" and told the Greek Parliament, "I don't believe the measures will benefit the economy, but we are forced to adopt them". History has taught the importance of country ownership to the success of externally financed policy programmes, so the clear absence of this in Greece is not auspicious.

Another, related, problem is that agreement is still lacking on the provision of the debt relief that is needed to make Greece's debt burden sustainable. President Draghi of the ECB said on 16 July that "It's uncontroversial that debt relief is necessary, and I think that nobody has ever disputed that". Yet Germany's Finance Minister has recently said that "a debt cut is incompatible with membership of the currency union", pointing to apparent difficulties in agreeing on a form of debt relief that is compatible with the rules of the Euro Area, which dictate no bail-outs or fiscal transfers among members. Meanwhile the IMF has indicated that it will not participate in new financial assistance for Greece without substantial debt relief.

Further risks are attached to the economic results of the programme being negotiated. Assumptions about economic growth adopted in earlier Greek programmes have been disappointed by wide margins--to some extent, perhaps, because structural reforms were not implemented as assumed, or because the growth benefits of the reforms that were implemented were over-estimated, but in significant part, clearly, because assumed fiscal multipliers proved to be too small. Similar risks arise again now: in order to avoid policies that cause Greece to sink into even deeper depression - with a debt burden that becomes even more severe as the economy shrinks--the programme currently being negotiated with Euro Area institutions and the IMF will need to involve not only substantial debt relief but also a significant relaxation of targets for the primary fiscal deficit. Otherwise, Greece's exit from the Euro Area may become the only way of resolving its difficulties.

Risks to the broader Euro Area system have been highlighted by recent developments surrounding Greece, including the acrimonious negotiations between Greece and its Euro Area partners on the programme's prior actions. A particularly significant recent development has been the open discussion, for the first time among ministers and officials, of the possibility of a country's exiting the Area. Indeed, the German Finance Minister proposed that an agreed, temporary exit, for "at least the next five years" could be "a better way for Greece", and the German Chancellor has referred to a voluntary, organized "Grexit" as a "viable option". It has thus been officially acknowledged for the first time that membership of the Euro Area is not irreversible. There is clearly a risk that this will additionally destabilise the system by reducing its cohesion and confidence in its permanence.

More fundamentally, the Greek crisis has highlighted shortcomings of the Euro Area's institutional and policy arrangements, and revived doubts about whether Europe's economic and monetary union can succeed without deeper economic, fiscal, and political integration than is currently envisaged.

As President Draghi said on 16 July, "this [economic and monetary] union is imperfect. And being imperfect, [it] is fragile, [it] is vulnerable, and doesn't deliver all the benefits that it could if it were to be completed". Draghi was a co-author of the recent "Five Presidents' Report" on Completing Economic and Monetary Union (EMU) by 2025 (see Box A). This proposes a two-stage programme of action that would, most importantly, complete the banking union (by establishing a unified deposit insurance scheme and a credible common backstop for the Single Resolution Fund), establish a capital markets union, and also establish a fiscal "stabilisation function" to "better deal with shocks that cannot be dealt with at the national level alone", but which would be available only to economies that have achieved substantial progress in convergence towards "similarly resilient national economic structures". In Draghi's words, the Report provides a "rather broad roadmap", and in effect "urges member countries to reflect" on the design of the arrangements to be adopted. Therefore much remains to be done before the Report's proposals are translated into specific reforms and then implemented. And even then, as the Report acknowledges, the completed EMU it envisages would be one with no large-scale or permanent fiscal transfers among members and only limited labour mobility, so that there would still be significantly less economic integration than in other monetary unions.

One problematic feature of current arrangements that will apparently remain is the contractionary bias associated with asymmetric adjustment requirements. Countries with financing and competiveness difficulties, like Greece, are required to implement contractionary fiscal measures and structural reforms to compress domestic demand and to reduce production costs and thus achieve "internal devaluation". But countries with current account surpluses and over-competitiveness are required to do nothing. Germany is currently close to full employment with a large external current account surplus, which we project at 9 per cent of GDP this year--the largest surplus in the world in absolute terms. Full employment and a large current account surplus, together, are classically symptomatic of an undervalued currency, and if Germany had its own currency there would naturally be pressures for revaluation. Given Germany's membership in the Euro Area, this corrective mechanism does not operate. There have recently been signs that a different corrective mechanism an increase in wage inflation in Germany relative to Euro Area partners--has begun to operate, as shown in the section on Germany below. But such progress has been slow, and there is a strong case for measures in Germany to boost domestic demand and achieve "internal revaluation" by raising domestic prices and costs, especially given that domestic inflation remains close to zero. One example of such a measure would be a boost to public sector investment spending; another would be an increase in public sector wages. But Euro Area arrangements put no effective pressure on Germany to adopt such measures. With the pressure for adjustment therefore only on deficit countries for "internal devaluation", two damaging consequences follow: there is a contractionary bias to policies in the Area as a whole, and the countries adjusting may find it difficult to achieve their objectives because reducing domestic inflation below the already low levels of Euro Area partners will exacerbate the challenge of reducing their debt burdens.

Second, China. Our forecast assumes a continuing, gradual slowing of growth as the economy makes a transition from a high-growth path dependent mainly on investment and exports, which has led to the accumulation of significant excess capacity and, since 2008, large-scale debt, to a path of more moderate growth driven more by household consumption. This transition is meant to be accompanied by further market-oriented reforms, including in financial markets, for example with the elimination of ceilings on bank deposit rates. Thus in November 2013, the third plenum of the Communist Party's Central Committee pledged a "decisive" role for the market in allocating resources in the period ahead, rather than the "basic" role previously assigned.

[FIGURE 3 OMITTED]

Some recent developments have increased risks to this strategy. While official GDP data have shown growth in line with the official target for 2015 of "around 7 per cent", other indicators suggest that growth may have slowed somewhat more sharply. Meanwhile, annual consumer price inflation has slowed over the past year to 1.4 per cent, well below the official 3 per cent target; producer prices have been falling for more than three years; and the GDP deflator also fell in the year to the first quarter. Concerns about deflationary pressure seem to have been one factor leading the central bank to reduce its benchmark interest rates four times between last November and late June, by 1 percentage point in total, to unprecedented lows. But another consideration seems to have been the stock market: the authorities appear to have deliberately encouraged a rise in equity prices, partly through lower interest rates but also through the promotion of equity investment in the media, partly in order to facilitate the replacement of debt with equity finance in state-owned enterprises. The central bank's most recent interest rate cut was implemented in late June, even though equity prices were continuing to rise, far beyond levels that could be reasonably explained by fundamentals. Shortly thereafter, the market peaked and turned around, but the authorities soon took extraordinary measures to halt the decline, showing that they would not trust the market to find its own level.

Three risks are suggested by these developments. One, that the recent stock market decline may significantly reduce the growth of domestic demand, can probably be largely discounted, given the relatively short-lived surge in prices and the relatively narrow ownership of equities (involving only 6 per cent of households in early 2015). A second risk is that the recent easing of monetary conditions may slow the reduction of indebtedness and the associated dangers of financial instability. A third risk, and possibly the most serious, is that the authorities' recent interventions in the equity market, contravening the declared "decisive role" of market forces, may not only discourage participation in the equity market by increasing uncertainty about government intervention (including restrictions on the selling of stock), and thereby impede the needed substitution of equity for debt finance, but also also reduce confidence, more broadly, in the government's market-oriented reform strategy.

Prospects for individual economies

Euro Area

While policymakers and the media have been preoccupied with Greece (see Note, p. 44), modest economic growth has continued in recent months in the Euro Area as a whole while inflation has risen back to low positive rates. The continuing economic recovery is underpinned by highly accommodative monetary conditions, reduced fiscal consolidation, lower oil prices, and a 12 per cent effective depreciation of the euro between its peak in March 2014 and end-June 2015. In the first quarter of 2015, GDP grew by 0.4 per cent, to a level 1.0 per cent higher than a year earlier. Growth performance has remained mixed among member countries: output fell in the first quarter in Estonia, Finland, Greece, and Lithuania, but there were notable improvements in growth performance in Spain (to 0.9 per cent) and France (to 0.6 per cent); growth in Germany slowed to 0.3 per cent. Growth in the Area in the first quarter was driven by domestic demand, with net exports contributing negatively. More recent indicators suggest continuing modest growth: industrial production grew by 1.6 per cent in the year to May, and retail sales volume rose by 2.4 per cent in the same period. Consumer confidence, by the European Commission's estimate, has weakened slightly in recent months but in June was still close to pre-crisis peaks.

[FIGURE 4 OMITTED]

Unemployment fell to 11.1 per cent in April and May, its lowest level in three years, down from the peak of 12.1 per cent in 2013. It varies widely, from 4.7 per cent in Germany to above 20 per cent in Greece and Spain.

Consumer price inflation in June, on a 12-month basis, was 0.2 per cent, up from January's low of -0.6 per cent. The corresponding core inflation rate in June was 0.7 per cent, up from the low of 0.6 per cent in January. All-items 12-month inflation rates ranged from -2.1 per cent in Cyprus and -1.1 per cent in Greece to 0.1 per cent in Germany and 1.0 per cent in Austria.

The ECB's expanded programme of asset purchases, amounting to 60 billion [euro] a month for at least nineteen months, begun last March, has been "proceeding well" according to President Draghi of the ECB. In mid-May, he emphasised that the programme would be implemented "in full ... as announced", in response to speculation that economic recovery might lead to its curtailment.

The most striking development in financial markets in recent months has been a marked upturn in government bond yields. Between October 2014 and mid-April this year, the yield on 10-year German government bonds fell from 0.9 per cent to unprecedented lows of about 0.1 per cent, but by mid-June this yield had risen back to about 1.0 per cent, the highest level since last September, before easing somewhat over the following weeks. There have been comparable increases, of 60-80 basis points since mid-April, in bond yields in the other major Euro Area countries--larger than the rises in other advanced economies (see Overview). The rise in yields seems attributable partly to upward revisions of expectations not only of inflation--related partly to the stabilisation of oil prices in April--but also of economic growth, especially in the Euro Area, and partly to a correction of yields that markets had lowered too far (in a bond market 'bubble') following the announcement in January and initiation in March of the ECB's expanded asset purchase programme.

[FIGURE 5 OMITTED]

Box A: The EU's plan for completing Economic and Monetary Union
(EMU) by 2025

The European Commission recently published the "Five Presidents'
Report" on Completing Europe's Economic and Monetary Union. (1) The
European Council Summit on June 25-26, 2015 took note of the Report
and asked for it to be examined by the EU Council (of ministers
from national governments).

The Report puts forward "the principal steps necessary to complete
EMU at the latest by 2025". It proposes that progress must be made
on four fronts--towards a genuine Economic Union, a Financial
Union, a Fiscal Union, and a Political Union--and in two stages.
Its premises include no large-scale fiscal transfers between
members and relatively limited labour mobility.

Stage I ("Immediate Steps") would be completed by June 2017 and
would include the following:

* Economic Union: to promote economic convergence, competitiveness,
and policy coordination, (I) a Euro Area system of national
Competitiveness Authorities to track performance and policies in
the field of competitiveness; (2) a stronger Macroeconomic
Imbalance Procedure to detect imbalances and encourage structural
reforms; (3) stronger focus on employment and social performance;
(4) stronger coordination of economic policies, through a
strengthened European Semester.

* Financial Union: (A) To complete the Banking Union, (I) the
single resolution mechanism should be fully implemented through (a)
full transposition into national law by all member states of the
Bank Resolution and Recovery Directive; (b) agreement on an
adequate bridge financing mechanism for the Single Resolution Fund
by the time it becomes operational in January 2016, in case the
financing in the SRF is inadequate for a bank resolution; (c)
setting up a credible common backstop to the SRF, possibly through
a credit line from the European Stability Mechanism (ESM) to the
SRF, with any public assistance for resolution recouped over the
medium term through ex post levies on the financial industry; and
(2) there should be concrete steps towards the establishment of a
European Deposit Insurance Scheme (EDIS), which, like the SRF,
would be privately funded through fees from banks. (B) Also, Stage
I should see the launch of a Capital Markets Union.

* Fiscal Union: The current governance framework should be
strengthened through the creation of an advisory European Fiscal
Board, which would coordinate and complement the national fiscal
councils set up in the context of the EU Directive on budgetary
frameworks. The Board would provide assessments of budget
performance, to promote better compliance with fiscal rules, a more
informed public debate, and stronger coordination of national
fiscal policies.

* Political Union ("democratic accountability, legitimacy, and
institutional strengthening"): Strengthen the role of the European
Parliament; increase cooperation between the European Parliament
and national parliaments; take steps towards consolidated external
representation of the Euro Area; integrate into the framework of EU
law the Treaty on Stability, Coordination, and Governance, the Euro
Plus Pact, and the intergovernmental agreement on the Single
Resolution Fund.

Stage 2 ("Completing the EU Architecture") would be completed by
2025 at the latest and would include the following:

* Economic Union: The convergence process should become more
binding, through the adoption of agreed, common standards defined
in EU legislation that would cover labour markets, competitiveness,
the business environment, public administration, and tax policy.
Progress towards these standards would be monitored regularly.

* Financial Union: Full establishment of the EDIS and the Capital
Markets Union, including a single European capital markets
supervisor.

* Fiscal Union: Establishment of a macroeconomic (fiscal)
stabilization function for the Area, which should improve the
cushioning of macroeconomic shocks. It would rest on several
guiding principles: it should not lead to permanent transfers
between countries, or to transfers in one direction only, which is
why only economies that have achieved substantial progress in
convergence towards "similarly resilient national economic
structures" would be able to participate (see above, on Economic
Union); it should be tightly linked to compliance with the broad EU
governance framework as well as to progress in convergence toward
the common standards; and it should not be an instrument for crisis
management, which is the function of the ESM.

* Democratic accountability, legitimacy, and institutional
strengthening: the governance of the ESM should be fully integrated
within the EU treaties; and a Euro Area treasury should be
established, as the place for any collective decision- making on
fiscal policy.

Note: (I) The Report, published on June 22, 2015, was authored by
Jean-Claude Juncker, President of the European Commission, in close
cooperation with the Presidents of the European Council, the
Eurogroup of Finance Ministers, the European Central Bank, and the
European Parliament. See:
http://ec.europa.eu/priorities/economic-monetary-union/docs/
5-presidents-report_en.pdf.

In June, the European Commission published a report by the heads of the organisations responsible for the governance of the Euro Area, on a plan for completing European Economic and Monetary Union (EMU) by 2025: see Box A.

Germany

GDP growth slowed to 0.3 per cent in the first quarter of 2015 from 0.7 per cent in the final quarter of last year, but this slowing was more than accounted for by a turnaround in inventory accumulation. The growth of private consumption was steady, at 0.6 per cent, and the growth of fixed investment picked up to 1.5 per cent, shared evenly between construction--with rising house prices as well as mild weather encouraging house-building--and machinery and equipment. With import growth exceeding export growth, net exports subtracted 0.2 percentage points from GDP growth in the first quarter. Our growth forecast for 2015 as a whole is 1.6 per cent, down slightly from our May Review, followed by 2.0 per cent in 2016.

With unemployment since February at a post-unification low of 4.7 per cent, the economy is virtually at full employment. Demand for labour remains high, and vacancies have increased. Employment rose by 210,000 (0.5 per cent) in the year to May, but employment growth will be increasingly constrained by Germany's declining working-age population. UN projections indicate that the working-age population will fall by around two million over the next five years, and with the labour force participation rate already high it seems likely that employment will begin to fall unless there is increased immigration.

The tightening labour market has been reflected in a pickup in the growth of wages. The rise in nominal hourly labour costs, on a four-quarter basis (on Eurostat data), was 3.2 per cent in the first quarter of 2015, compared with 2.2 per cent for the Euro Area as a whole; this was up from 0.4 per cent in the first quarter of 2014, when the Euro Area average was 0.7 per cent. Thus not only has wage inflation risen in Germany since 2013-14, but it has risen from below the Euro Area average to above it. Given Germany's large international competitiveness advantage, reflected in its extraordinarily large current account surplus--which we forecast at 9.0 per cent of GDP in 2015--this shift in wage growth is clearly a positive development, especially in the context of the need for rebalancing in the Euro Area. Indeed, it would be beneficial if it went further.

Consumer price inflation has remained subdued, well below the ECB's objective, partly reflecting falling energy prices. In June, the 12-month inflation rate (in terms of the EU's Harmonized Consumer Price Index) dropped back to 0.1 per cent, below the Euro Area average of 0.2 per cent; and the level of prices was unchanged from last December. Core inflation (excluding energy and unprocessed food) fell back to 0.9 per cent in the year to June. We expect the rise in the HCPI to average 0.5 per cent this year, before picking up to 1.2 per cent in 2016 as the pass-through from the euro's depreciation peaks and the decline in oil prices drops out of the index.

Having achieved a fiscal surplus of 0.7 per cent of GDP in 2014, the government seems likely to achieve a similar result this year: the first quarter deficit was slightly lower than a year earlier. Fiscal performance has been helped by low interest payments and rising receipts as economic growth has expanded the tax base. Based on currently announced spending plans, we thus expect a surplus of 0.8 per cent of GDP this year, with surpluses diminishing to 0.1 per cent of GDP in the medium term. Along with the positive outlook for nominal GDP, these fiscal projections imply that the government debt/GDP ratio will decline to 70 per cent this year, 66.4 per cent in 2016, and about 60 per cent by 2018.

France

The economy grew by 0.6 per cent in the first quarter of 2015, its best quarterly growth performance for almost two years. The expansion was driven mainly by household consumption, which increased by 0.9 per cent. This partly reflected gains in purchasing power from the mild deflation, but also a weather-related increase in energy consumption. Net trade contributed negatively to growth in the first quarter, with a slowing of export growth and a significant rise in imports that partly reflected special factors. Our forecast for GDP growth in 2015 as a whole has been revised down slightly, to 1.2 per cent, with growth of 1.5 per cent expected to follow in 2016. This year and next, growth is likely to continue to be driven mainly by consumption.

Consumer price inflation (in terms of the HCPI) rose to 0.3 per cent in May and June, having been negative in the early months of this year. It is expected to pick up further through the remainder of 2015 and in 2016, as the decline in oil prices drops out of the 12-month comparison and as the depreciation of the euro over the past year feeds through to import prices. Core inflation has also risen in recent months, reaching 0.6 per cent in June, from the low of -0.2 per cent last November.

Helped by the3 depreciating euro, cheap credit and government-subsidised labour costs, average profit margins of French firms rose to 31.1 per cent of turnover in the first quarter, the highest for four years. Coupled with the government's 2.5 billion [euro] programme of tax concessions for firms that undertake industrial investment, these conditions seem favourable for rising business investment, assuming there is confidence in the growth of demand.

The labour market has continued to perform poorly, with no clear sign of a decline in unemployment--10.3 per cent in May, only slightly lower than its post-crisis peak --and with employment stagnating in the first quarter of 2015. The increase in the retirement age that came into effect last year has increased the participation rate of older workers, leaving youth unemployment at over 23 per cent. With a second increase in the retirement age coming into effect later this year, the shift in the age-structure of the workforce seems likely to continue. In the forecast period, we expect employment growth to do little better than keep pace with the labour force, despite the ramping up of government job creation programmes, so that unemployment seems likely to remain at about 10.3 per cent in 2015 before falling back slowly from 2016.

Last May, we forecast that by 2017 the government would narrowly achieve its twice-delayed deficit target of 3 per cent of GDP. However, the deficit/GDP ratio increased in the first quarter despite the unexpectedly strong growth outturn, mainly because of larger than expected costs of the CICE employment subsidy. Taking this into account, we now forecast that the 3 per cent target will not be achieved until 2018, which highlights the precariousness of the French deficit reduction plan.

Italy

In the first quarter of 2015, GDP grew for the first time in six quarters, by 0.3 per cent, to a level 0.1 per cent higher than a year earlier. This was Italy's strongest quarterly growth performance in four years, but it seems to be accounted for mainly by special factors. Unlike in 2014, when weakness in fixed investment and reduced government spending outweighed positive contributions to growth from net exports and household consumption, in the first quarter of this year growth was led by investment, with exports flat; household consumption weakened slightly. Fixed investment rose by 1.5 per cent, the largest quarterly increase since 2006, but this was mainly accounted for by a 29 per cent surge in investment in transport equipment--almost as large as the quarter's rise in GDP --apparently reflecting preparations for Expo 2015 in Milan. Other indicators, however--including a 3 per cent rise in industrial production in the year to May--point more clearly to the beginning of a recovery from Italy's prolonged recession.

We expect the contribution to growth of net trade to become positive again in the period ahead as economic conditions improve in Italy's trading partners and as the country benefits from recent limited gains in international cost competitiveness: in the year to the first quarter, hourly labour costs rose by 1.1 per cent, half the average increase in the Euro Area. Consumer price inflation has recently been close to the Euro Area average: in the twelve months to June it was 0.2 per cent, the same as in the Area as a whole, while core inflation was 0.6 per cent, slightly below the Area average.

Unemployment remains an important concern. In April and May it stood at 12.4 per cent, slightly lower than in March when it was 12.6 per cent, but most of the decline is explained by a fall in labour force participation rather than employment growth. Following implementation of key elements of the Jobs Act passed by parliament last December, the government has recently implemented a one-year social contribution exemption for firms when hiring, in an attempt to boost job creation. It will take some time for the effects of these reforms to become clear.

The fiscal deficit was 3 per cent in 2014, and the government projects a reduction to 2.6 per cent in 2015. An upside risk to this forecast is a ruling by the constitutional court that the government has to compensate pensioners for the pension freeze enacted in 2012. This would imply a deficit of 3.6 per cent for 2015 if it were paid in full this year, but the government plans to spread the payments over several years in order to avoid violating the European Commission deficit ceiling. It is still unclear whether the government will finance the payments by adjusting taxes or other expenditures, or allow the deficit to increase.

Indicators of consumer and business confidence have recently been buoyant. Government bond yields have been markedly lower than in 2014, no doubt partly reflecting the ECB's QE operations, and financing costs for the private sector have fallen as financial fragmentation in the Euro Area has declined. With fiscal policy roughly neutral, conditions therefore seem reasonably favourable for growth in domestic demand and for continuation of an albeit tepid recovery. We forecast GDP growth of 0.5 per cent this year, rising to 1.0 per cent in 2016.

Spain

The economic recovery has continued to strengthen, and employment has been rising, but unemployment remains extremely high. Consumer price inflation, on a twelve-month basis, rose to 0.1 per cent in June from a low of-1.3 per cent in January, easing fears of deflation.

GDP growth in the first quarter of 2015, at 0.9 per cent, was the fastest since 2007, and the Bank of Spain has estimated that growth was 1.0 per cent in the second quarter. Reduced oil prices, the depreciation of the euro since early 2014, easing credit conditions, falling unemployment, and economic reforms implemented since the crisis have been supporting demand and now underpin a positive outlook. We have revised our growth forecast for 2015 up to 3.0 from 2.5 per cent, with an unchanged projection of 3.1 per cent for 2016.

Domestic demand--mainly private consumption, but also investment--remained the main driver of output growth in the first quarter. The housing sector has turned around and is now contributing positively to the expansion. Net exports have continued to make a negative contribution to GDP growth but this has recently diminished, with a moderate strengthening of export growth, on a four-quarter basis, over the past year. This may be due in part to an improvement in international cost competitiveness arising from wage moderation (see figure 6). Hourly labour costs in the first quarter of this year were 1.0 per cent higher than a year earlier, compared with the 2.1 per cent increase in the Euro Area as a whole, and in March, the government introduced a reform that eliminates wage indexation in the public sector. The external current account is projected to remain in modest surplus.

Both consumer and business confidence surveys have recently been strong. Financing conditions have continued to ease, as a result of the ECB's monetary policies, the narrowing of spreads within the Euro Area, and also the bank recapitalisation programme implemented in the wake of the crisis. This has translated into increased growth of private sector credit, helping to promote investment and job creation.

Unemployment remains the second highest in the Euro Area, after Greece, but it has continued a slow decline. In May (on Eurostat data), it stood at 22.5 per cent, down from 24.7 per cent a year earlier. This is still far above pre-crisis levels of about 8 per cent.

The fiscal deficit has continued to narrow thanks to both higher tax revenues and public spending reductions resulting partly from public sector wage freezes and reduced unemployment. The government expects to reduce the deficit to 4.2 per cent of GDP in 2015 from 5.7 per cent in 2014.

[FIGURE 6 OMITTED]

United States

GDP growth weakened in the first quarter of 2015, largely because of temporary factors. Moderate growth, close to its 2014 average rate, returned in the second quarter. The expansion that began six years ago, following the recession of December 2007-June 2009, has thus continued.

GDP growth weakened in the first quarter, to 0.6 per cent at an annual rate. The main negative factors accounting for the contraction were an 11.7 per cent (annualised) drop in goods exports, apparently related to a strike in west coast ports, and a 7.4 per cent (annualised) decline in non-residential construction, reflecting a reduction of investment in the oil production sector in response to the recent decline in oil prices. But also, the growth of personal consumption was the slowest in a year. The slowing of growth in the first quarter appears to have been related partly to unusually severe winter weather in some regions. It may also partly be a statistical artifact, reflecting problems with seasonal adjustment: first-quarter growth has tended to be relatively weak in recent years. In the second quarter moderate growth returned. The advance estimate of GDP growth was 2.3 per cent, annualised. This was in spite of a 1.2 per cent (annualised) decline in industrial production. Real consumer expenditure rose by 2.9 per cent at an annual rate. Consumer confidence recently appears to have been buoyant, at close to pre-crisis levels, but there has as yet been little sign that consumer spending has been boosted by the decline in oil prices over the past year.

[FIGURE 7 OMITTED]

Labour market conditions have continued to strengthen moderately. Job creation this year has been slower than in 2014, but it has picked up since March, with the increase in non-farm payrolls in the second quarter at 221,000 a month, compared with 195,000 in the first quarter. Unemployment fell to 5.3 per cent in June, its lowest level since April 2008 and only marginally above the Federal Reserve's 5.0-5.2 per cent estimated range for the longer-run normal rate. Labour force participation declined further, however, to 62.6 per cent, its lowest level since 1977, suggesting that unemployment continues to understate true slack in the labour market. Similarly, the employment population ratio, about 59.3 per cent since the beginning of 2015, remains well below its pre-crisis peak of 63.4 per cent. There have been some indications of a modest pick-up in wage increases, although average hourly earnings in June were only 2.0 per cent higher than a year earlier. Thus the employment cost index, which includes benefits, rose by 2.6 per cent in the year to March, and the Federal Reserve Bank of Atlanta's monthly wage growth tracker has shown annual wage increases of 3.0-3.3 per cent in the first half of 2015, up from 2.3-2.4 per cent a year earlier.

Consumer price inflation has remained subdued, partly reflecting the 21 per cent effective appreciation of the US dollar between late 2013 and mid-2015 as well as the decline in global oil prices over the past year. In the year to May, the price index for personal consumption expenditure rose only 0.2 per cent, with the corresponding core inflation rate at 1.2 per cent. Inflation expectations have in recent months risen towards the Fed's longer-term objective of around 2 per cent: for example, in late July, the 5-year breakeven inflation rate was 1.5 per cent, up from a low of 1.1 per cent in January.

[FIGURE 8 OMITTED]

In these circumstances, attention has continued to be focused on the timing of the prospective normalisation of monetary policy by the Fed, including the first increase in the target federal funds rate, which has been held marginally above zero since September 2008. After its monetary policy meeting in mid-June, and again in late July, the Fed repeated its March guidance, that it anticipated that it would be "appropriate to raise the target range of the federal funds rate when it has seen further improvement in the labour market and is reasonably confident that inflation will move back to its 2 per cent objective over the medium term". It also indicated in June that the median expectation of participants in the meeting was that it would be appropriate to raise the target fed funds rate by 50 basis points by end-December, and that only two out of the seventeen participants expected that no increase would be appropriate until 2016. Chair Yellen had already stated, in late May, that "If the economy continues to improve as I expect, I think it will be appropriate at some point this year to take the initial step to raise the fed funds target and begin the process of normalising monetary policy", and she made other statements along these lines in July. The Fed has reiterated that its decisions will be data-dependent. While recent data have been mixed, low unemployment, the signs of a pick-up in wage growth, and the prospect of a rise in price inflation as the effects of the recent strength of the dollar and fall in oil prices wane, together with the likely continuing recovery of activity and decline in slack, do suggest that a first increase in the fed funds rate may become appropriate later this year, perhaps as early as September.

Canada

GDP contracted by 0.6 per cent at an annualised rate in the first quarter of 2015, reflecting both the unexpectedly severe impact on the energy production sector of the decline in oil prices and the stalling of growth in the United States. In terms of the main expenditure categories, declines in business investment and exports were the main contributors to the contraction of output. Indicators suggest that GDP also declined in the second quarter, further increasing economic slack and downward pressure on inflation. We expect economic growth to pick up in the second half of this year and forecast 1.2 per cent growth for the year as a whole, revised down from 2.0 per cent in the May Review, before increasing to 2.0 per cent in 2016 and 2.2 per cent in the medium term.

The Bank of Canada cut the overnight interest rate in mid-July by 25 basis points to 0.5 per cent--the second reduction since January--citing the increased downside risks to inflation resulting from weaker growth. In reaction to the news, the Canadian dollar fell by more than a cent against the US dollar, reaching its lowest level since 2009, about 7 per cent lower than in late April. There are concerns that recent interest rate cuts could stimulate the already over-heating housing market, resulting eventually in a sharp correction.

Consumer price inflation, on a 12-month basis, rose slightly from an 18-month low of 0.8 per cent in April to 0.9 per cent in May, partly reflecting currency depreciation. Core inflation has been around 2.2 per cent in recent months. Our forecast is for inflation to average 1.1 per cent in 2015, 1.9 per cent in 2016, and to reach the Bank's 2 per cent target in 2017.

Despite weak economic activity, unemployment has recently been stable, remaining at 6.8 per cent in June for the fifth consecutive month, close to the post-crisis low of 6.6 per cent reached last year. Employment growth slowed to 0.2 per cent in the second quarter from 0.4 per cent in the first, but the employment rate and participation rate have been stable since late last year. We expect unemployment to average 6.8 per cent in 2015 and 6.9 per cent in 2016 before falling slightly in the medium term.

Japan

The economy is continuing its recovery from the recession that followed the April 2014 increase in the consumption tax. Questions remain, however, about the strength and sustainability of the expansion, partly because of a lack of growth in real wages; about when the Bank of Japan will meet its target of 2 per cent inflation; and about limited progress with the fiscal and structural reform 'arrows' of 'Abenomics'.

In the first quarter of 2015, GDP grew by 1.0 per cent. More than half of this expansion was accounted for by an increase in business stock-building, but there was also healthy growth in private fixed investment, and private consumption increased modestly. Exports rose by 2.4 per cent but imports rose by more, and net exports contributed negatively to growth. More recent indicators of activity have been mixed, but positive overall. Industrial production has remained weak--in May it was 3.9 per cent lower than a year earlier--leading some to expect GDP data for the second quarter to show a resumed contraction. But consumer demand has strengthened: household spending grew by 4.8 per cent in real terms in the year to May. The Bank of Japan's latest Tankan survey showed that business confidence had improved in the three months to June to its highest level since before the consumption tax hike, and also that large companies planned to increase capital expenditure at the fastest pace in a decade. We forecast investment growth of 1.6 and 1.8 per cent, respectively, in 2015 and 2016.

Japan's net exports have benefitted from the sharp depreciation of the yen since late 2012--in part a result of the Bank of Japan's policy of quantitative and qualitative easing (QQE) launched in April 2013. We expect net exports to contribute positively to growth in 2015 and 2016. A key risk, however, is the possibility of a sharper than assumed slowdown in China, Japan's largest trading partner, accounting for 18 per cent of its exports (source: NiGEM).

[FIGURE 9 OMITTED]

Our forecast for GDP growth is 1.3 per cent in 2015 and 1.4 per cent in 2016, initially led by business investment and exports before becoming more balanced next year as private consumption growth strengthens. In the medium term, taking into account the expected continuing decline in the labour force, we expect GDP growth of around 0.8 per cent per annum.

Unemployment fell to 3.3 per cent in April, its lowest level in eighteen years, and was unchanged in May. Another indication of a tight labour market is that the ratio of job vacancies to applicants reached its highest level in 23 years in May. Nevertheless, real wages have continued to decline, falling in May for the 25th consecutive month, though at a reduced rate of only 0.1 per cent. We expect that the continuing tightness of the labour market, together with the government's exhortations to employers, will lead to real wage gains in the period ahead that will help to boost consumption.

The 12-month rate of core consumer price inflation (excluding only seasonal food) was 0.1 per cent in May. The Bank of Japan now expects to achieve its 2 per cent inflation goal, originally set for around April 2015, "around the first half of fiscal 2016"--that is, by September next year. Despite below-target inflation, which partly reflects the decline in global oil prices, the Bank has kept its monthly asset purchases, under its QQE programme, at [yen] 80 trillion since last October. The June 2015 Tankan survey reported that companies expected inflation to reach 1.4 per cent over the coming year, 1.5 per cent at the three-year horizon, and 1.6 per cent over the coming five years. Tankan inflation expectations have been relatively stable and seemingly at odds with wage developments. We project that inflation will remain subdued this year at around 0.4 per cent before picking up to 1.0 per cent in 2016, still well below the official target.

The government still aims to achieve primary budget balance by 2020. In June, it announced a new economic strategy aimed partly at this objective. It is based largely on the assumption that the policies of 'Abenomics' will raise nominal GDP growth to an average of 3 per cent over the next five years. With the exception of the already mandated second rise in the consumption tax from 8 to 10 per cent, set for April 2017, no fiscal policy moves were outlined. The assumed average annual growth of nominal GDP compares with our forecast of around 2 per cent for the period 2015-20. Our forecast implies a budget deficit of around 4.9 per cent of GDP in 2020.

Box B. The impact of a Chinese 'hard landing'

By Graham Hacche, Simon Kirby and Iana Liadze

The Chinese economy is now the largest in the world, in terms of
GDP valued at purchasing power parity. Even in terms of GDP valued
at market exchange rates, China is still one of the world's largest
economies, with an expanding middle class, which has achieved
enormous gains in living standards in recent decades. A free market
economy in many respects, but subject to heavy state intervention
and regulation in key sectors, China is a highly open economy, from
a trade perspective: the ratio of total trade (the sum of exports
and imports) to GDP is about 80 per cent, more than two and a
halftimes larger than in the US.

The increased importance and openness of the Chinese economy
heighten any concerns about the outlook for its economy and any
potential 'hard landing' as it makes the transition to a path of
slower and more balanced growth. In recent years, such concerns
have alternately risen and dissipated as annual growth has declined
gradually from double digits to about 7 per cent. However, worries
over Chinese growth prospects have recently re-surfaced. Over the
past year, expectations for output growth in the medium term have
been lowered: our forecast for average annual GDP growth for
2017-21 is just above 6 per cent, while the IMF's projection for
2016-20 is 6.3 per cent. And some data have suggested a sharper
slowing than shown by official GDP data. These concerns have
recently been reinforced by turmoil on the Chinese stock market.
The latest developments are discussed in more detail in the world
overview as well as the China section of this review.

This box illustrates the possible effects of a 'hard landing' in
China on the global economy. Using the National Institute's global
economic model, NiGEM, we have incorporated elements of the Bank of
England's macro scenario from its 2015 stress test for the UK
banking sector to guide the size and duration of the 'hard landing'
scenario (Bank of England, 2015). Under the Bank's scenario, a
sharp correction in asset prices is assumed to weigh on domestic
demand, and real GDP growth slows to 1.7 per cent in the year to
the final quarter of 2015. We deviate from the assumptions
underpinning the Bank of England's scenario and assume the Renminbi
continues to be pegged to the US dollar.

Our forecast baseline assumes a continuing, gradual slowing of GDP
growth reaching 6.9 and 6.7 per cent this year and next. In our
'hard landing' scenario, a shock to domestic demand, which starts
in 2016, roughly halves our baseline projection for output growth
in 2016. As the deterioration in economic conditions is assumed to
happen fast, domestic demand is reduced significantly in the first
four quarters (by 3.9 per cent in each quarter) and then for the
next 16 quarters is allowed to return to our baseline projection
slowly. Figure Bl illustrates the effect on China's GDP and
inflation. Compared to our base projection GDP is reduced by an
average of 3.5 per cent in the first two years of the shock, and a
negative impact from the shock disappears towards the end of the
fourth year.

[FIGURE B1 OMITTED]

[FIGURE B2 OMITTED]

The impact on world GDP is almost immediate, reflecting the fall in
Chinese GDP and its share in global output (figure B2). Inflation
responds more slowly, reflecting varying price and labour market
rigidities across different economies. This is also due to the
limited price response in China given its regulated financial and
monetary system. The effect is transitory as other components of
global demand adjust. However, the ability of advanced economies to
offset the drop in global demand through monetary policy is heavily
constrained by policy rates being already at or close to lower
bounds. Furthermore, with many countries currently trying to
stimulate demand in a deflationary/disinflationary environment the
possibility of imported deflation from China would be of concern.

[FIGURE B3 OMITTED]

[FIGURE B4 OMITTED]

Figures B3 and B4 decompose the effects of a rapid Chinese slowdown
among the three major advanced economies. Direct effects vary
depending on the importance of China as a destination for the
economy's exports; for example China is fourth most important
destination for US goods exports and the second most important for
Japan. Secondary effects, such as through changes in the terms of
trade, and such characteristics as the oil intensity of output,
alongside any monetary policy response, will also play a role in
respective economies' adjustments to the demand shock.

As figure B3 illustrates, the negative impact on output in Japan in
the first year is about twice as large as in the Euro Area, which
itself is three times larger than in the US. This mainly reflects
the different shares of exports to China. Within the Euro Area the
smallest and most open economies are affected most by a reduction
in Chinese domestic demand. Among the largest Euro Area member
countries Germany's GDP is affected the most. The US experiences a
faster rebound in GDP than do the Euro Area or Japan; in the second
year, the impact from the shock on US output has already turned
positive with respect to the baseline. The reduction in world
demand leads to lower oil prices which benefit the US more through
its higher oil intensity of output. At the same time there is
greater space for monetary policy to become more accommodative
(reversing the assumed increases in interest rates that are assumed
in our baseline to start in September 2015) leading to lower real
long-term interest rates and hence a lower user cost of capital
than on our baseline. This supports a stronger rebound in private
investment. In both Japan and the Euro Area, by contrast, interest
rates still close to zero limit the scope for further monetary
easing. Of course, one potential avenue for both the ECB and the
Bank of Japan would be to expand their balance sheets more
aggressively than is currently planned through larger-scale
quantitative easing, which we have not assumed.

References

Bank of England (2015), 'Stress testing the UK banking system: key
elements of the 2015 stress test', available at: http://www.
bankofengland.co.uk/financialstability/Documents/stresstesting/2015/
keyelements.pdf.

China

Real GDP growth was stronger than expected, at 7.0 per cent, in the year to the second quarter of 2015, unchanged from the year ending in the first quarter. Growth therefore seems to have stabilised close to the official target of "around 7 per cent" for this year. Various stimulus measures introduced by the government and central bank in recent months to cushion weakening growth seem to have been effective. Annual growth in fixed-asset investment, largely driven by infrastructure projects, appears to have stabilised in the first half of the year. There have also been tentative signs of improvement in the property market: property sales jumped in June and the pace of the fall in property prices in the 70 largest cities has slowed. Based on recent developments, and given the government's evident readiness to take action to ensure that its growth target is met, we have revised up marginally our forecast for GDP growth this year, to 6.9 per cent. Our forecast assumes a continuing, gradual, slowing of growth for 2016 and the medium term as the economy makes a transition from a high-growth path dependent mainly on investment and exports to a path of more moderate growth driven more by household consumption.

Consumer price inflation has remained low, even though there was a slight pick-up in June to 1.4 per cent, on a 12-month basis, from 1.2 per cent in May. This compares with the official target of 3 per cent. Producer prices, meanwhile, have continued falling: they were 4.8 per cent lower in June than a year earlier--the 40th consecutive 12-month drop (figure 10). This decline has been due in part to the weakness of global commodity prices, but overcapacity in the Chinese economy has also played a role, and the risk of deflation is not to be dismissed. Indeed, the People's Bank has repeatedly referred to the dangers of deflationary pressures facing the economy, as well as the challenging growth outlook. The Bank reduced its benchmark interest rates by 25 basis points on 11 May--the third reduction in six months--and again on 29 June, lowering its one-year deposit rate on the latter occasion to an all-time low of 2.0 per cent. Also in May, it took a further step in liberalising interest rates by raising the limit on the margin between its deposit rate and banks' deposit rates to 150 per cent from 130 per cent. In mid-May, in another measure supporting economic activity, an official directive disallowed financial institutions from reducing or delaying funding to local government projects started before end-2014. The directive implicitly highlights the challenges arising from the debt built up by local governments since 2008.

[FIGURE 10 OMITTED]

There have been marked swings in equity prices in recent months. The market began to rise in mid-2014, but a boom, fuelled partly by expansionary monetary policy and increased margin lending, can be traced back to last November, when the People's Bank lowered its benchmark rates for the first time since 2012. The market reached a peak on 12th June, with the Shanghai composite index at 5166, almost 120 per cent higher than last October and 12 per cent higher than in late April. A sell-off then caused prices to fall sharply, to a low of 3507 on 8 July, largely reversing the gains made since March. In response to the downturn, the authorities took a series of measures aimed at stabilising the market, including the end-June interest rate cuts, restrictions on short-selling, a halt to initial public offerings, the suspension of trading in companies accounting for about half the market, the provision of liquidity assistance to brokerages to finance share purchases, and an agreement with brokerages that they would not sell shares as long as the Shanghai composite index was below 4500. These measures halted the fall in prices, and led to a partial but erratic recovery.

These equity price movements are unlikely to have a major effect on the economy in the short term for several reasons: the price decline only reversed a rise that was too recent to have been likely to have had a significant effect on spending plans; the stock market in China is small relative to the size of the economy, with capitalisation, relative to GDP, less than half of that of the US; and stocks represent only about 15 per cent of households' assets. However, there may be, in the longer term, negative consequences of the market instability and the government's intervention. The fact that the authorities were not willing to allow the market to find its own level, even though a significant correction seemed unavoidable, may raise uncertainty about the use of such intervention in future. This may reduce investor confidence in the functioning of the market and the liquidity of stocks, increase uncertainty about market movements, and thus deter participation both by investors and potential issuers of stock. After the Chinese market collapsed in 2007, its performance remained poor for almost seven years. This sort of response now could be even costlier, as it could hinder progress towards more equity financing and market-oriented reforms when the government is seeking to rebalance the economy and wean it from overreliance on debt finance.

India

GDP growth picked up to 7.5 per cent in the year to the first quarter of 2015, primarily driven by private consumption and business investment, which grew by 7.9 and 4.1 per cent respectively. We expect domestic demand, led by private consumption, to remain the main driver of growth throughout the remainder of 2015 and in 2016, with net exports making a negative contribution this year, partly reflecting weakening growth elsewhere in Asia, before becoming broadly neutral in 2015. We forecast GDP growth of 7.2 and 7.2 per cent in 2015 and 2016, respectively.

[FIGURE 11 OMITTED]

Consumer price inflation, on a 12-month basis, has remained stable at around 5 per cent since falling sharply last year. In June, it picked up to 5.4 per cent from 5.1 per cent in May, with a recent dry spell that led to a fall in food production putting some upward pressure on prices. With inflation recently having been consistent with the Reserve Bank's short-term objective of inflation below 6 per cent by January 2016, the Bank in early June lowered its benchmark interest rate by 25 basis points to 7.25 per cent--the third such cut since January.

Given the importance of the agricultural sector to the Indian economy, an important downside risk to our central projection is the possibility, suggested by weather forecasts, that an 'El Nino' weather event will cause below-average rainfall in the monsoon season, between June and September. Gadgil and Gadgil (2006) estimate that episodes of drought in the Indian economy tend to reduce GDP by between 2 and 5 per cent. It would also put upward pressure on prices. Such a scenario could test the credibility of the RBI's inflation targeting mandate as in order to contain rising inflation it might have to tighten monetary policy in a weakening economy.

India's economic growth has significant upward potential in the medium to longer term, depending on the implementation of key structural reforms. Reforms already introduced by the Modi government elected in May 2014, including the privatisation of mining activities and the raising from 26 to 49 per cent of the investment limit for foreign firms in insurance companies, should stimulate investment. However, the government's attempt to introduce a uniform goods and services tax, to replace a plethora of local and state taxes, suffered a parliamentary setback in May, and reforms such as the land acquisition bill, which seeks to make it easier for the government to acquire private land for the purpose of industrialisation, remain unpopular. The likelihood of further significant reforms in the near future has therefore become less clear.

Brazil

Brazil continues to face a broad range of economic difficulties, including weak activity and rising unemployment; above-target inflation that has risen sharply this year; a depreciating currency; political resistance, amid corruption investigations, to fiscal measures to address the public sector deficit; and a widening external current account deficit that has arisen partly from a marked deterioration in the country's terms of trade (see figure 12).

Brazil's growth performance has weakened markedly over the past five years. GDP contracted by 0.2 per cent in the first quarter of 2015. Domestic demand fell by 0.7 per cent in the first quarter, with declines in all its main components. Exports picked up following the sharp depreciation of the real in the second half of last year, but the weakness of the prices of primary commodities has limited the benefit of the depreciation; roughly half of Brazil's exports are raw materials. The real has depreciated further in recent months: in terms of the US dollar, its value in late July was about 30 per cent lower than a year earlier.

Consumer price inflation, on a 12-month basis, has risen sharply this year from about 6.5 per cent--the top of the Central Bank's target range--to 8.9 per cent in June. The Central Bank forecasts 9 per cent inflation, on a 12-month basis, by end-2015. The recent rise in inflation is explained partly by adjustments in regulated prices, especially for energy, in late 2014 and early this year, after the removal of a cap that had been put in place in an attempt to boost growth. But unregulated prices have also been rising by more than the inflation target, partly owing to the depreciation of the currency. In further efforts to reduce inflation to its target, the Central Bank raised its benchmark Selic interest rate by 50 basis points in late April, and again in early June and late July, to 14.25 per cent. A widening output gap should put downward pressure on price rises: unemployment has increased sharply this year, reaching 6.7 per cent in May, up from 4.3 per cent last December.

[FIGURE 12 OMITTED]

In the wake of last year's primary fiscal deficit--the first such deficit in many years--the new government formed in January set targets of primary surpluses of 1.2 and 2.0 per cent of GDP for 2015 and 2016, but in late July these targets were lowered to 0.15 and 0.7 per cent, because of underperformance of tax revenues. Measures that have been implemented to achieve fiscal adjustment include reductions in energy and credit subsidies, the elimination of certain corporate tax breaks, cuts in unemployment and pension benefits, and other spending reductions. In an effort to boost badly needed infrastructure investment, the government announced in June a five-year concession programme for private enterprises. The programme is small, however, in relation to the slump in total investment. In light of recent developments, we now forecast a contraction in GDP of 0.8 per cent in 2015 (larger than the 0.1 per cent contraction projected in May), followed by slight growth of 0.3 per cent next year.

Russia

The economy has continued to contract, with demand and activity compressed both by reduced oil prices and by international economic sanctions, which in June were extended for a further six months, to the end of January 2016. The sanctions, a response to Russia's actions since February 2014 relating to Ukraine, target Russia's state finance, energy and defence sectors and restrict Russians' access to international capital markets. Russia has recently extended for a year its retaliatory ban on certain western food imports.

GDP fell by 1.3 per cent in the first quarter of 2015--the largest of three consecutive quarterly declines. Growth in exports and a sharp drop in imports, reflecting the depreciation of the rouble since 2013 as well as the weakness of domestic demand, limited the extent of the contraction. More recent indicators generally point to further contraction in the second quarter, although unemployment fell back from the peak of 5.9 per cent reached in March to 5.4 per cent in June--still higher than the post-transition lows below 5 per cent reached last summer. We are forecasting a GDP drop of 3.2 per cent in 2015 as a whole, followed by a smaller decline of 1.1 per cent in 2016 and, assuming resolution of the Ukraine situation, 3.8 per cent annual growth over the medium term. Underlying this forecast is our assumption that oil prices will recover to about $60 a barrel in 2016 and $63 on average over 2017-21.

[FIGURE 13 OMITTED]

The stabilisation of oil prices between March and June helped to stabilise Russia's economic and financial position, but their renewed weakness more recently has been accompanied by renewed financial pressure. The rouble's exchange value, which reached a low of about 73 roubles to the US dollar last December--about half of its value before the eruption of the crisis in Ukraine --rose to about 49 roubles to the dollar in mid-May before weakening again to about 57 roubles to the dollar in late July. Between mid-May and late July, the Central Bank intervened in the foreign exchange market to replenish its depleted international reserves. By end-June, however, its reserves, at $362 billion, were only $6 billion higher than the low reached at the end of April, and $148 billion below their level at the end of 2013. In mid-June, partly reflecting reduced downward pressure on the rouble at that time, the Central Bank lowered its benchmark interest rate by 100 basis points to 11.5 per cent--the fourth rate cut this year.

Consumer price inflation, which peaked at 16.9 per cent on a twelve-month basis in March, fell to 15.3 per cent in June as rises in the costs of food and housing eased and weak consumer demand limited price increases. We forecast that inflation will average 15.3 per cent in 2015 before waning to 8.1 per cent in 2016 and then converging towards the Central Bank's 4 per cent target for 2017. The Central Bank has indicated that further interest rate reductions will depend on further declines in inflation.

REFERENCE

Gadgil, G. and Gadgil, S. (2006), 'The Indian monsoon, GDP and agriculture', Economic and Political Weekly, pp. 4887-4895.

Appendix A: Summary of key forecast assumptions

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 model, NiGEM. The NiGEM model has been in use at NIESR for forecasting and policy analysis since 1987, and is also used by a group of about 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 the NiGEM model are available on http://nimodel.mesr. 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 in the Euro Area. Policy rates in major advanced economies are expected to remain at extremely low levels at least throughout 2015. Since the beginning of this year the Reserve Bank of Australia cut its benchmark interest rate by 50 basis points, in two steps. The People's Bank of China and the Indian central bank reduced their interest rates by 75 basis points in three stages, over the same period. The Bank of Korea has continued to lower its policy rate, reducing it by 100 basis points in four steps since the beginning of 2014. The central bank of New Zealand stopped tightening monetary policy and cut the benchmark rate by 25 basis points in June 2015, for the first time since 2011. In the previous three months, the Central Bank of Turkey left its policy rate unchanged, after cutting it by 250 basis points over five rounds since May 2014. Since the end of 2014, the Romanian Central Bank has reduced interest rates by 100 basis points in four steps, while the National Bank of Hungary has brought them down in five rounds by a total of 75 basis points. Since the start of 2015, the central banks of Norway and Poland have lowered their policy rates by 25 and 50 basis points, respectively. Over the course of this year, the Swedish National Bank cut its policy rate by 35 basis points to -0.35 per cent in three rounds. Switzerland and Denmark left their benchmark interest rates unchanged after lowering them at the turn of this year. While the central Bank of Switzerland cut them by 25 basis points to -0.75 per cent, the Central Bank of Denmark reduced them by 15 basis points to just 5 basis points above zero. With downward pressure on the rouble easing, the Central Bank of Russia has reduced interest rates by 550 basis points in four stages since the beginning of 2015. The Bank of Canada lowered its benchmark interest rate further by 25 basis points in July 2015 after cutting it by 25 basis points in January, which marked the first change in the target rate since 2009. In contrast, the Central Bank of Brazil has tightened monetary policy in response to inflationary and financial market pressures, increasing its benchmark rates by 200 basis points in four steps, so far, in 2015. (2)

Policymakers in the US and UK are expected to begin to raise interest rates in the second half of 2015 and the first quarter of 2016, respectively, pre-empting rate rises in the Euro Area by at least five quarters. For the US, this is broadly consistent with the interest rate path signalled by the Federal Open Market Committee (FOMC). The Federal Reserve (Fed) ended its 'QE3' programme of asset purchases in October 2014. The timing of increases in the Fed's short-term interest rates from the current 0-1/4 per cent range, where it has stood since December 2008, remains uncertain. After its monetary policy meeting in mid-June, the Fed repeated its March guidance that it anticipated that it would be "appropriate to raise the target range of the federal funds rate when it has seen further improvement in the labour market and is reasonably confident that inflation will move back to its 2 per cent objective over the medium term". (3) It also indicated that the median expectation of participants in the meeting was that it would be appropriate to raise the target Fed funds rate by 50 basis points by end-December 2015, and that only two of the seventeen participants expected that 'no increase' would be an appropriate stance until 2016. Chair Yellen has emphasised that the timing of the first increase is less important than the future path of rates, and that the Fed expects this path to be gradual, with monetary policy remaining highly accommodative for some time.

In contrast, the central banks of the Euro Area and Japan have continued with their programmes of large-scale asset purchases. The ECB and the Bank of Japan (BoJ) continued to expand their balance sheets. On 9 March, the Euro Area's central banks began the ECB's expanded asset purchase programme, announced on 22 January 2015. The programme involves asset purchases of 60 billion [euro] a month, for at least nineteen months, which in aggregate is equivalent to at least 10 per cent of Euro Area nominal GDP. According to President Draghi of the ECB, the programme has been 'proceeding well'. In mid-May, he emphasised that it would be implemented "in full ... as announced", in response to speculation that economic recovery might lead to its curtailment.

In October last year, the BoJ surprised financial markets by unexpectedly expanding its asset purchase programme by about 30 per cent. The programme envisaged an increment of about [yen] 80 trillion added to the to the monetary base annually, up from an existing [yen] 60-70 trillion, by purchasing increasingly large quantities of Japanese government bonds as well as stocks and real-estate funds. This additional step, according to the governor of the BoJ, illustrates their firm determination to end deflation.

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 last year. 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 and remained at around 100 basis points. Government bond yields in the US, UK and the Euro Area have picked up after reaching extremely low levels at the beginning of the year. Expectations for bond yields for 2015 are higher than expectations formed just three months ago, for the US, Euro Area and the UK, while for Japan they are broadly unchanged. While the expectations for yields in the US and UK are marginally higher, by about 20 basis points, expectations of yields in the Euro Area have increased by more--by approximately 40 basis points.

[FIGURE A1 OMITTED]

[FIGURE A2 OMITTED]

Sovereign risks in the Euro Area have been a major macroeconomic issue for the global economy and financial markets over the past four 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. In June 2014, as foreshadowed in preceding weeks by its officials, the ECB announced a number of measures aimed at providing additional monetary accommodation and at supporting bank lending to the private sector, with the ultimate aim of increasing aggregate demand and raising inflation nearer to the target of "below, but close to, 2 per cent", which was further strengthened by the announcement and then commencement of its expanded asset purchase programme of March 2015. (4)

Sovereign spreads have remained stable, in most cases, from late July 2014, the most notable exception being a marked widening of Greek spreads. This reflects initial uncertainty over Greece's fiscal stance and debt repayment since the recent formation of a government dominated by a political party elected on an anti-austerity manifesto and lately by the heightened risk of Greece leaving the Euro Area and by the accompanying recent three-week closure of the domestic banking system and the imposition of controls on external payments. In our forecast, we have assumed spreads over German bond yields continue to narrow in all Euro Area countries, and that this process resumes in Greece by the end of this year. The implicit assumption underlying the forecast is that the current composition of Euro Area membership persists.

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 since the second half of 2013, illustrated by the stability of these spreads in the US, Euro Area and the UK. Our forecast assumption for corporate spreads is that they gradually converge towards their long-term equilibrium level from 2015.

[FIGURE A3 OMITTED]

[FIGURE A4 OMITTED]

Nominal exchange rates against the US dollar are generally assumed to remain constant at the rate prevailing on 15 July 2015 until the end of March 2016. After that, they follow a backward-looking uncovered-interest parity condition, based on interest rate differentials relative to the US. We have modified this assumption for China, assuming that the exchange rate target continues to follow a gradual appreciation against the US$, of about 2 per cent annually from end2015 to 2017. Figure A4 plots recent history as well as our forecast of the effective exchange rate indices for Canada, the Euro Area, Japan, UK, Russia and the US. Reflecting relative cyclical positions and associated expectations of monetary policy developments, the US dollar has appreciated by about 8 per cent against most other major currencies in effective terms since the end of the fourth quarter of 2014; however fast appreciation of the US dollar at the beginning of 2015 has eased in recent months. In effective terms, the rate of US dollar appreciation in July is marginally higher than the rate in the preceding three months. The most notable exception to the US dollar's appreciation has been the movement of the Russian rouble. The rouble's exchange value, which reached a low of about 73 roubles to the US dollar last December--about half of its value before the eruption of the crisis in Ukraine--rose to about 49 roubles to the dollar in mid-May before weakening again to about 57 roubles to the dollar in late July.

[FIGURE A5 OMITTED]

Our oil price assumptions for the short term are based on those of the US Energy Information Administration (EIA), published in July 2015. The EIA use information from forward markets as well as an evaluation of supply conditions, and these are illustrated in figure A5. After a steep decline from mid-2014, the oil price bottomed out in the first quarter of this year and had been recovering until mid-May 2015. However, there has been renewed weakness in oil prices since early June with prices reaching levels last seen in the first quarter of 2015. Overall, current expectations for the position of oil prices at the end of this year have fallen by about 20 per cent, compared to expectations formed just three months ago. The EIA projects around a 5 1/2 per cent increase in oil prices, on average, in 2016, which leaves oil prices around $48 lower than their nominal level in mid-2014.

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. Global share prices had performed well since 2013, irrespective of a short-lived drop--a reaction to the QE tapering signals emanating from the Federal Reserve in summer 2013--and continued to increase in most countries during the first half of 2014. 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 this year, especially in the Euro Area economies, partly supported by the wide-scale asset purchase programme introduced by the ECB in March 2015. However, lately, the performance of share prices has been disappointing, with stocks giving back some of their recent gains. The most significant gains since the end of last year were observed in Ireland, Denmark, Slovak Republic and Germany. The suspension of share trading on the Greek stock market in July has allowed prices to stabilise temporarily in Greece. At the time of writing, equity prices there have fallen by about 13 per cent since the end of 2014.

[FIGURE A6 OMITTED]

Fiscal policy assumptions for 2015 follow announced policies as of 8 July 2015. 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. Government spending is expected to decline as a share of GDP between 2014 and 2015 as well as 2015 and 2016 in the majority of Euro Area countries reported in the table. Recent policy announcements in Portugal, Spain, Italy and elsewhere, as well as the election of an anti-austerity government in Greece, suggest that the commitment to fiscal austerity in Europe may be waning. (5) 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. (2013).

NOTES

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

(2) Interest rate assumptions are based on information available for the period to 15 July 2015 and do not include the 25 basis point cut by the Central Bank of New Zealand, or the 25 basis point increase by the Central Bank of South Africa on 23 July 2015 and the 50 basis point increase by the Central Bank of Brazil on 30 July 2015.

(3) The same message was repeated again after the monetary policy meeting at the end of July.

(4) The public sector purchase programme was added to the asset-backed securities purchase programme (ABSPP) and the covered bond purchase programme (CBPP3), both of which were launched in 2014.

(5) At the time of writing the magnitude of fiscal austerity that is the outcome of negotiations of a third bailout package are unclear, but likely to be large.

REFERENCE

Barrell, R., Holland, D. and Hurst, I. (2013), 'Fiscal multipliers and prospects for consolidation', OECD Journal, Economic Studies, 2012, pp. 71-102.

Table A1. Interest rates

Per cent per annum

                Central bank intervention rates

             US    Canada   Japan   Euro    UK
                                    Area

2011        0.25    1.00    0.10    1.25   0.50
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        0.33    0.66    0.10    0.05   0.50
2016        1.31    0.85    0.10    0.05   0.81
2017-2021   3.26    2.98    0.44    1.06   2.19
2013   Q1   0.25    1.00    0.10    0.75   0.50
2013   Q2   0.25    1.00    0.10    0.60   0.50
2013   Q3   0.25    1.00    0.10    0.50   0.50
2013   Q4   0.25    1.00    0.10    0.37   0.50
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   0.33    0.58    0.10    0.05   0.50
2015   Q4   0.50    0.50    0.10    0.05   0.50
2016   Q1   0.87    0.50    0.10    0.05   0.63
2016   Q2   1.17    0.75    0.10    0.05   0.75
2016   Q3   1.46    0.96    0.10    0.05   0.88
2016   Q4   1.75    1.18    0.10    0.05   1.00

                10-year government bond yields

            US    Canada   Japan   Euro   UK
                                   Area

2011        2.8    2.8      1.1    3.9    3.1
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        2.2    1.7      0.4    1.2    1.9
2016        2.9    2.4      0.7    1.8    2.5
2017-2021   3.8    3.6      1.3    2.9    3.5
2013   Q1   1.9    1.9      0.7    2.7    2.0
2013   Q2   2.0    2.0      0.7    2.5    1.9
2013   Q3   2.7    2.6      0.8    2.8    2.7
2013   Q4   2.7    2.6      0.6    2.7    2.8
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   2.3    1.6      0.5    1.4    2.0
2015   Q4   2.5    1.9      0.5    1.5    2.2
2016   Q1   2.7    2.1      0.6    1.6    2.3
2016   Q2   2.8    2.3      0.6    1.7    2.4
2016   Q3   3.0    2.5      0.7    1.8    2.5
2016   Q4   3.1    2.7      0.8    1.9    2.7

Table A2. Nominal exchange rates

                      Percentage change in effective rate

             US    Canada   Japan   Euro   Germany   France   Italy
                                    Area

2011        -3.0     2.1      7.0    0.9     0.5       1.0     1.3
2012         3.4     0.9      2.2   -1.9    -2.0      -2.0    -1.6
2013         2.9    -3.1    -16.7    2.9     2.8       3.0     3.7
2014         4.2    -5.4     -5.0    2.0     1.8       1.8     3.3
2015        11.9    -8.4     -7.2   -3.4    -3.9      -3.8    -3.0
2016         0.8    -0.7     -0.4    0.1     0.0       0.1     0.2
2013   Q1    1.2    -3.0    -12.0    1.2     1.3       1.2     1.2
2013   Q2    1.4    -0.2     -5.7    0.1     0.2       0.1     0.1
2013   Q3    2.0     0.3      2.9    2.0     1.6       2.2     3.0
2013   Q4   -0.1    -3.0     -2.0    0.9     0.9       0.9     1.1
2014   Q1    1.6    -3.8     -1.5    0.8     0.9       0.7     1.1
2014   Q2   -0.9     2.4      0.1   -0.1    -0.2       0.0     0.2
2014   Q3    1.5    -1.0     -1.0   -0.8    -0.8      -0.8    -0.7
2014   Q4    4.7    -3.1     -6.6   -0.4    -0.5      -0.7    -0.3
2015   Q1    6.2    -6.9     -0.4   -2.1    -2.5      -2.5    -1.9
2015   Q2    0.7     3.0     -1.3   -0.9    -1.0      -0.6    -0.9
2015   Q3    1.4    -3.0     -0.6    0.2     0.2       0.1     0.3
2015   Q4    0.0    -0.1     -0.1    0.0     0.0       0.0     0.0
2016   Q1   -0.1     0.0     -0.1    0.0     0.0       0.0     0.0
2016   Q2    0.0     0.1      0.2    0.1     0.1       0.1     0.2
2016   Q3    0.0     0.1      0.3    0.2     0.1       0.2     0.2
2016   Q4    0.0     0.1      0.3    0.2     0.2       0.2     0.2

                    Bilateral rate per US $

        UK    Canadian    Yen    Euro    Sterling
                 $

2011   -0.2    0.995      79.8   0.719    0.624
2012    4.2    0.997      79.8   0.778    0.631
2013   -1.2    1.039      97.6   0.753    0.640
2014    7.9    1.112     105.8   0.754    0.607
2015    6.9    1.259     121.8   0.902    0.648
2016    2.0    1.270     122.9   0.905    0.639
2013   -3.9    1.025      92.3   0.757    0.645
2013    0.3    1.032      98.8   0.765    0.651
2013    1.9    1.035      98.9   0.755    0.645
2013    3.0    1.064     100.4   0.735    0.618
2014    2.6    1.111     102.7   0.730    0.604
2014    1.4    1.083     102.1   0.729    0.594
2014    1.6    1.100     104.0   0.755    0.599
2014   -0.5    1.153     114.6   0.801    0.632
2015    2.8    1.262     119.1   0.888    0.660
2015    2.2    1.229     121.4   0.904    0.653
2015    2.8    1.271     123.3   0.908    0.640
2015    0.1    1.272     123.4   0.908    0.640
2016    0.0    1.272     123.4   0.908    0.640
2016    0.0    1.271     123.1   0.906    0.639
2016    0.0    1.270     122.8   0.904    0.638
2016    0.0    1.268     122.4   0.901    0.638

Table A3. Government revenue assumptions

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

              2014   2015   2016   2014   2015   2016

Australia     14.5   14.9   14.9   25.7   25.7   25.7
Austria       31.6   32.0   32.2   21.8   21.8   21.8
Belgium       35.4   35.1   35.1   21.7   21.7   21.7
Canada        21.8   21.6   21.8   20.3   20.8   20.8
Denmark       41.1   43.0   42.1   32.8   32.8   32.8
Finland       32.6   32.8   32.4   23.1   23.1   23.1
France        30.9   31.0   31.5   32.7   32.7   32.7
Germany       28.9   28.9   28.5   19.4   19.4   19.4
Greece        25.3   24.7   24.7   13.5   13.5   13.5
Ireland       25.9   25.9   25.9   9.8    9.8    9.8
Italy         29.0   28.7   28.7   26.5   26.5   26.5
Japan         22.9   22.9   22.9   29.6   29.6   29.6
Netherlands   32.6   33.2   33.1   8.4    8.4    8.4
Portugal      22.0   20.6   20.6   20.1   20.1   20.1
Spain         24.7   24.7   24.3   15.8   15.8   15.8
Sweden        26.4   26.3   25.4   23.1   23.1   23.1
UK            22.6   22.7   22.8   14.6   13.3   13.1
US            18.8   19.2   19.1   28.8   29.0   29.0

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

              2014   2015   2016

Australia     30.5   30.9   31.0
Austria       42.2   42.3   42.0
Belgium       43.9   44.7   43.7
Canada        35.3   35.8   35.6
Denmark       50.9   52.2   50.9
Finland       46.8   47.3   47.1
France        46.1   45.1   45.2
Germany       41.3   40.9   40.6
Greece        40.4   40.6   39.1
Ireland       28.5   28.5   28.0
Italy         43.8   43.6   43.0
Japan         33.2   33.7   33.8
Netherlands   40.2   40.4   39.6
Portugal      39.0   38.8   38.6
Spain         37.1   36.8   35.8
Sweden        44.8   44.1   44.1
UK            35.4   35.4   35.8
US            30.4   30.7   30.6

Notes: (a)T he 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)

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

              2014   2015   2016   2014   2015   2016

Australia     32.7   32.5   32.2   2.0    2.0    1.9        2017
Austria       42.3   42.7   42.3   2.4    2.1    1.8         --
Belgium       44.2   44.3   43.7   3.0    2.7    2.3        2013
Canada        33.9   34.7   34.5   3.1    2.9    2.7        2013
Denmark       48.2   47.9   47.3   1.5    1.4    1.2        2013
Finland       48.7   48.7   47.4   1.2    1.1    1.0        2015
France        48.0   47.4   47.3   2.1    1.8    1.6        2018
Germany       38.8   38.8   38.5   1.8    1.4    1.1         --
Greece        40.8   39.4   38.5   3.2    3.2    2.9        2015
Ireland       28.3   27.2   26.7   4.3    4.0    3.8        2015
Italy         41.9   41.8   41.1   4.9    4.6    4.2        2015
Japan         39.2   38.4   38.0   2.1    2.0    1.8         --
Netherlands   41.1   40.4   40.0   1.4    1.2    1.0        2013
Portugal      38.3   37.8   37.3   5.1    4.6    4.0        2016
Spain         39.3   38.4   36.7   3.5    3.3    3.0        2017
Sweden        45.9   44.8   44.3   0.9    0.8    0.7         --
UK            36.3   35.1   34.2   2.0    1.7    1.9        2017
US            31.7   31.6   30.9   3.7    3.1    3.0        2018

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

                  2012   2013   2014   2015   2016   2017-21

Australia         3.6    2.1    2.7    2.3    2.7      3.0
Austria (a)       1.0    0.1    0.4    0.9    2.2      1.9
Belgium (a)       0.1    0.3     1.1   0.9    1.8      1.4
Bulgaria (a)      0.4    0.9    1.5     1.1   0.3      1.6
Brazil            1.8    2.7    0.2    -0.8   0.3      2.5
China             7.7    7.7    7.4    6.9    6.7      6.2
Canada            1.9    2.0    2.4    1.2    2.0      2.2
Czech Rep.        -0.8   -0.5   2.0    3.7    1.7      2.9
Denmark (a)       -0.7   -0.5    1.1   1.6    1.8      1.7
Estonia (a)       4.7    1.6    2.1    1.5    3.2      3.5
Finland (a)       -1.4   -1.3   0.0    0.3    1.8      2.0
France (a)        0.2    0.7    0.2    1.2    1.5      1.6
Germany (a)       0.6    0.2    1.6    1.6    2.0      1.4
Greece (a)        -6.6   -4.0   0.7    -3.0   -2.3     1.5
Hong Kong         1.7    3.1    2.5    2.5    2.5      2.6
Hungary (a)       -1.5   1.7    3.5    2.9    3.3      1.4
India             5.1    6.4    7.1    7.2    7.2      6.9
Indonesia         6.0    5.6    5.0    4.3    4.0      5.0
Ireland (a)       -0.3   0.2    4.8    3.0    3.6      2.8
Italy (a)         -2.8   -1.7   -0.4   0.5    1.0      2.1
Japan             1.7    1.6    -0.1   1.3    1.4      0.8
Lithuania (a)     3.9    3.2    3.0    1.1    3.1      2.5
Latvia (a)        4.8    4.8    2.5    2.5    3.6      2.3
Mexico            3.8    1.7    2.1    2.5    2.9      3.6
Netherlands (a)   -1.1   -0.4   1.0    1.9    1.7      1.2
New Zealand       2.9    2.5    3.3    2.9    2.7      3.2
Norway            2.5    0.8    2.2    1.4    2.0      2.0
Poland (a)        1.9    1.7    3.5    3.2    4.2      3.5
Portugal (a)      -4.0   -1.6   0.9    1.3    1.7      2.0
Romania (a)       0.7    3.2    2.8    3.6    2.4      3.2
Russia            3.4    1.2    0.6    -3.2   -1.1     3.8
Singapore         3.4    4.4    2.9    1.8    4.1      2.4
South Africa      2.2    2.2    1.5    2.8    4.0      3.7
S. Korea          2.3    2.9    3.3    2.2    3.7      4.3
Slovakia (a)      1.6    1.4    2.4    3.1    3.5      1.5
Slovenia (a)      -2.5   -1.0   2.5    2.3    3.0      1.8
Spain (a)         -2.1   -1.2   1.4    3.0    3.1      2.2
Sweden (a)        0.0    1.3    2.4    2.5    2.9      3.2
Switzerland        1.1   1.9    2.0    0.8    1.6      2.1
Taiwan            2.1    2.2    3.8    2.7    3.2      3.9
Turkey            2.1    4.2    2.9    2.9    3.3      4.3
UK (a)            0.7    1.7    3.0    2.5    2.4      2.6
US                2.3    2.2    2.4    2.4    2.8      2.9
Vietnam           5.2    5.3    5.9    5.3    6.1      4.8
Euro Area (a)     -0.8   -0.3   0.9    1.3    1.8      1.7
EU-27W            -0.5   0.1    1.3    1.7    2.0      2.0
OECD              1.3    1.4    1.8    2.0    2.4      2.5
World             3.4    3.4    3.4    3.0    3.5      3.9

                            Annual inflation (a) (per cent)

                  2012   2013   2014   2015   2016   2017-21

Australia         2.5    2.6    2.4    1.5    2.4      2.4
Austria (a)       2.6    2.1    1.5    0.8    1.4      2.5
Belgium (a)       2.6    1.2    0.5    0.3    0.9      2.3
Bulgaria (a)      2.4    0.4    -1.6   -1.5   0.3      3.6
Brazil            5.4    6.2    6.3    8.8    5.6      3.7
China             2.7    2.6    2.0     1.1   1.2      2.6
Canada            1.3    1.3    1.9     1.1   1.9      2.1
Czech Rep.        3.5    1.4    0.4    -0.2   0.1      1.4
Denmark (a)       2.4    0.5    0.3    0.5    1.9      1.3
Estonia (a)       4.2    3.2    0.5    0.0    0.6      1.5
Finland (a)       3.2    2.2    1.2    -0.2   0.7      2.0
France (a)        2.2    1.0    0.6    0.1    0.6      1.7
Germany (a)       2.1    1.6    0.8    0.5    1.2      2.0
Greece (a)        1.0    -0.9   -1.4   -1.3   2.4      0.4
Hong Kong         3.2    2.7    2.7    2.2    2.0      2.4
Hungary (a)       5.7    1.7    0.0    -0.5   1.4      2.7
India             9.7    10.1   7.2    4.9    6.0      5.1
Indonesia         4.3    6.4    6.4    6.5    4.8      5.1
Ireland (a)       1.9    0.5    0.3    0.1    1.4      2.2
Italy (a)         3.3    1.3    0.2    -0.3   0.8      2.2
Japan             -0.8   -0.3   2.0    0.4    1.0      0.6
Lithuania (a)     3.2    1.2    0.2    0.1    0.7      1.5
Latvia (a)        2.3    0.0    0.7    0.5    2.4      2.2
Mexico            4.1    3.8    4.0    3.8    3.0      3.8
Netherlands (a)   2.8    2.6    0.3    -0.1   0.9      1.3
New Zealand       0.7    0.5    0.8    0.8    1.9      2.5
Norway            1.2    2.8    2.3    2.4    2.8      2.3
Poland (a)        3.7    0.8    0.1    -0.8   1.0      1.9
Portugal (a)      2.8    0.4    -0.2   -0.2   0.6      2.4
Romania (a)       3.4    3.2    1.4    0.9    0.6      1.3
Russia            5.1    6.8    7.8    15.3   8.1      4.0
Singapore         4.6    2.3    1.0    0.0    2.2      2.3
South Africa      6.3    5.5    5.9    3.5    4.6      4.8
S. Korea          2.2    1.3    1.3    0.7    2.2      2.6
Slovakia (a)      3.7    1.5    -0.1   -0.1   2.8      2.7
Slovenia (a)      2.8    1.9    0.4    -1.0   0.0      3.7
Spain (a)         2.4    1.5    -0.2   -0.4   0.7      2.1
Sweden (a)        0.9    0.4    0.2    0.7    1.7      1.0
Switzerland       -0.9   -0.4   -0.1   -0.7   0.9      2.1
Taiwan            1.2    0.3    0.7    -0.7   0.6      1.8
Turkey            8.9    7.5    8.9    8.1    7.8      6.8
UK (a)            2.8    2.6    1.4    0.0    1.0      2.0
US                1.8    1.2    1.3    0.3    1.6      2.2
Vietnam           9.1    6.6    4.1    1.4    3.1      5.8
Euro Area (a)     2.5    1.3    0.4    0.1    0.9      2.0
EU-27W            2.6    1.5    0.6    0.0    1.0      1.9
OECD              1.9    1.4    1.5    0.7    1.7      2.3
World             4.4    4.7    4.6    3.7    3.3      3.4

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)

              2012   2013    2014   2015   2016   2021

Australia     -3.0   -1.3    -4.2   -3.6   -3.1   -2.1
Austria       -2.2   -1.3    -2.4   -2.5   -2.1   -1.7
Belgium       -4.1   -2.9    -3.2   -2.2   -2.3   -1.6
Bulgaria      -0.7   -0.9    -2.8   -2.8   -2.4   -1.1
Canada        -3.1   -2.7    -1.6   -1.7   -1.7   -1.8
Czech Rep.    -3.9   -1.2    -2.0   -2.1   -2.0   -1.6
Denmark       -3.7   -1.1    1.2    2.9    2.5    -0.4
Estonia       -0.2   -0.2    0.6    0.7    0.4    -1.0
Finland       -2.1   -2.5    -3.2   -2.5   -1.3   -0.9
France        -4.8   -4.1    -4.0   -4.1   -3.8   -2.5
Germany       0.1     0.1    0.7    0.8    1.0    -0.5
Greece        -8.7   -12.3   -3.6   -1.9   -2.3   -2.2
Hungary       -2.3   -2.5    -2.6   -2.6   -1.9   -1.8
Ireland       -8.1   -5.8    -4.1   -2.8   -2.4   -0.2
Italy         -3.0   -2.9    -3.0   -2.8   -2.3   -2.0
Japan         -8.7   -9.0    -8.2   -6.6   -6.0   -4.8
Lithuania     -3.1   -2.6    -0.7   -0.5   -0.7   -1.3
Latvia        -0.8   -0.7    -1.4   -1.6   -1.6   -1.5
Netherlands   -3.9   -2.2    -2.3   -1.2   -1.4   -1.7
Poland        -3.7   -4.0    -3.2   -3.7   -3.4   -3.2
Portugal      -5.6   -4.8    -4.5   -3.6   -2.7   -2.2
Romania       -2.9   -2.2    -1.5   -1.4   -1.6   -2.6
Slovakia      -4.2   -2.6    -2.9   -2.2   -2.0   -0.7
Slovenia      -4.0   -14.9   -4.9   -3.5   -2.9   -1.8
Spain         -7.5   -7.0    -5.7   -4.9   -3.9   -2.4
Sweden        -0.9   -1.4    -1.9   -1.5   -0.8   -1.1
UK            -8.3   -5.7    -5.8   -3.6   -3.2   0.2
US            -9.0   -5.7    -5.0   -3.9   -3.3   -2.5

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

              2012    2013    2014    2015    2016    2021

Australia     37.1    37.6    42.2    43.9    44.5    44.0
Austria       81.4    80.9    84.5    84.5    82.6    73.2
Belgium       103.9   104.4   106.6   109.2   107.8   94.1
Bulgaria        --      --      --      --      --      --
Canada        94.6    91.7    91.7    92.7    90.1    80.6
Czech Rep.    44.6    45.0    42.6    43.5    44.6    42.5
Denmark       45.6    45.0    45.2    41.1    37.0    28.4
Estonia         --      --      --      --      --      --
Finland       52.9    55.8    59.3    61.6    61.5    53.6
France        89.6    92.2    95.5    97.6    98.1    93.8
Germany       79.5    77.3    74.9    70.3    66.4    50.1
Greece        156.8   175.1   177.4   186.9   186.9   173.4
Hungary       78.5    77.3    76.9    76.4    73.6    66.9
Ireland       121.8   123.2   109.7   106.2   102.5   83.2
Italy         123.2   128.6   132.0   133.9   133.0   110.2
Japan         217.1   222.8   228.6   222.9   223.7   229.1
Lithuania       --      --      --      --      --      --
Latvia          --      --      --      --      --      --
Netherlands   66.5    68.6    68.8    68.8    68.1    65.5
Poland        54.4    55.7    50.1    50.2    50.6    52.5
Portugal      125.8   129.7   130.2   132.3   132.1   116.0
Romania         --      --      --      --      --      --
Slovakia        --      --      --      --      --      --
Slovenia        --      --      --      --      --      --
Spain         84.4    92.1    97.7    99.1    97.0    85.2
Sweden        36.5    38.7    43.8    43.2    42.1    38.6
UK            85.8    87.3    89.3    90.2    88.9    72.3
US            109.3   107.2   107.2   107.3   105.9   93.7

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

                 2012   2013   2014   2015   2016   2017-21

Australia         5.2    5.7    6.1    6.1    5.9     5.8
Austria           4.9    5.4    5.6    5.3    4.6     5.0
Belgium           7.7    8.4    8.5    8.5    8.4     7.5
Bulgaria         12.3   12.9   11.4    9.9    9.8     9.7
Canada            7.4    7.1    6.9    6.8    7.0     6.4
China             --     --     --     --     --      --
Czech Republic    7.0    7.0    6.1    6.0    6.2     4.5
Denmark           7.6    7.0    6.6    6.3    5.9     5.5
Estonia           9.9    8.6    7.3    6.8    7.1     7.1
Finland           7.7    8.2    8.7    9.2    8.2     7.4
France            9.8   10.3   10.2   10.3   10.3     9.2
Germany           5.4    5.2    5.0    4.7    4.5     4.6
Greece           24.5   27.5   26.5   26.4   27.3    23.7
Hungary          11.0   10.1    7.7    7.3    6.9     6.8
Ireland          14.7   13.1   11.3    9.8    9.7     8.8
Italy            10.6   12.1   12.6   12.2   11.5    10.9
Japan             4.3    4.0    3.6    3.2    3.4     3.9
Lithuania        13.4   11.9   10.7    8.8    9.1     9.6
Latvia           15.0   11.8   10.8    9.6   10.0    10.4
Netherlands       5.8    7.3    7.4    6.9    6.7     5.5
Poland           10.1   10.4    9.0    7.8    6.7     5.7
Portugal         15.8   16.4   14.1   12.7   10.9    10.5
Romania           6.9    7.1    6.8    7.1    6.9     6.6
Slovakia         14.0   14.3   13.2   12.0   12.2    12.9
Slovenia          9.0   10.1    9.7    9.3    8.6     8.6
Spain            24.8   26.1   24.5   22.4   19.6    17.8
Sweden            8.0    8.0    7.9    7.3    6.9     7.5
UK                8.0    7.6    6.2    5.6    5.5     5.2
US                8.1    7.4    6.2    5.4    5.2     5.7

                  Current account balance (per cent of GDP)

                 2012   2013   2014   2015   2016   2017-21

Australia        -4.4   -3.4   -2.8   -1.4   -0.6     0.1
Austria           1.5    1.0    0.8    2.8    2.6     2.7
Belgium          -1.9   -0.2    1.4    1.1    0.0     4.0
Bulgaria         -0.9    1.9    0.8    1.4    4.1     4.3
Canada           -3.3   -3.0   -2.1   -3.6   -2.8    -0.1
China             2.5    1.9    2.1    1.6   -0.1    -1.1
Czech Republic   -1.6   -0.5    0.6    2.5    3.4    -0.1
Denmark           5.8    7.2    6.3    6.3    5.8     9.4
Estonia          -1.9   -1.1   -0.1    3.9    2.4    -0.6
Finland          -1.2   -0.9   -1.5   -1.0   -2.3    -2.1
France           -1.5   -1.4   -1.0   -1.5   -0.7    -0.6
Germany           7.2    6.8    7.8    9.0    8.6     8.8
Greece           -2.3    0.6    0.8    0.2   -0.2    -0.6
Hungary           1.8    4.0    4.1    4.0    4.5     5.2
Ireland           4.1    6.2   10.6   10.8    5.1     6.9
Italy            -0.4    0.9    1.9    2.9    3.6     6.4
Japan             1.0    0.8    0.5    1.5    2.0     4.8
Lithuania        -1.2    1.6    0.1   -0.4    0.5     2.5
Latvia           -2.5   -2.4   -3.1   -2.4   -1.0     1.0
Netherlands      10.9   10.8   10.2    7.0    6.7     7.5
Poland           -3.6   -1.3   -1.1    0.9    1.0    -1.6
Portugal         -2.0    0.5   -1.0    0.0   -0.6    -1.4
Romania          -4.4   -0.9   -0.5   -1.0   -0.4     0.3
Slovakia          2.2    1.5    0.1    2.2    2.5     0.5
Slovenia          2.7    5.6    5.8    4.5    6.6     5.4
Spain            -1.2    1.4    0.8    1.4    1.5     2.0
Sweden            5.8    7.3    5.3    3.6    1.3    -0.9
UK               -3.7   -4.5   -5.9   -5.7   -5.6    -4.0
US               -2.8   -2.2   -2.2   -2.6   -2.7    -3.7

Table B4. United States

Percentage change

                           2011    2012    2013    2014

GDP                         1.6     2.3     2.2     2.4
Consumption                 2.3     1.8     2.4     2.5
Investment : housing        0.5    13.5    1 1.9    1.6
           : business       7.7     7.2     3.0     6.3
Government : consumption   -2.7    -0.6    -1.3     0.4
           : investment    -4.5    -4.7    -4.9    -2.5
Stockbuilding (a)          -0.1     0.1     0.0     0.0
Total domestic demand       1.6     2.2     1.9     2.5
Export volumes              6.9     3.3     3.0     3.2
Import volumes              5.5     2.3     1.1     4.0
Average earnings            2.0     2.1     1.1     2.2
Private consumption         2.5     1.8     1.2     1.3
  deflator
R.PDI                       2.7     3.2    -0.2     2.5
Unemployment, %             8.9     8.1     7.4     6.2
General Govt, balance      -10.7   -9.0    -5.7    -5.0
  as % of GDP
General Govt, debt         105.9   109.3   107.2   107.2
  as % of GDP (b)
Current account            -3.0    -2.8    -2.2    -2.2
  as % of GDP

                           2015    2016    Average
                                           2017-21

GDP                         2.4     2.8      2.9
Consumption                 3.0     2.9      2.8
Investment : housing        6.6     7.5      5.5
           : business       5.3     7.2      4.5
Government : consumption    0.5     0.8      1.5
           : investment     0.0     1.5      2.1
Stockbuilding (a)           0.1     0.0      0.0
Total domestic demand       3.0     3.2      2.9
Export volumes              1.5     4.6      4.4
Import volumes              5.5     6.5      4.1
Average earnings            2.5     2.4      3.5
Private consumption         0.3     1.6      2.2
  deflator
R.PDI                       3.5     2.6      2.5
Unemployment, %             5.4     5.2      5.7
General Govt, balance      -3.9    -3.3     -2.7
  as % of GDP
General Govt, debt         107.3   105.9    98.6
  as % of GDP (b)
Current account            -2.6    -2.7     -3.7
  as % of GDP

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

Table B5. Canada

Percentage change

                           2011   2012   2013   2014

GDP                        3.0    1.9    2.0    2.4
Consumption                2.3    1.9    2.5    2.7
Investment : housing       1.7    5.7    -0.4   2.7
           : business      12.4   8.4    2.2    0.3
Government : consumption   0.8    1.2    0.4    0.2
           : investment    -7.1   -4.8   -1.6   -2.7
Stockbuilding (a)          0.7    -0.2   0.3    -0.3
Total domestic demand      3.2    2.2    1.9    1.4
Export volumes             4.6    2.6    2.0    5.4
Import volumes             5.7    3.7    1.3    1.8
Average earnings           3.6    2.5    2.6    3.3
Private consumption        2.1    1.3    1.3    1.9
  deflator
RPDI                       2.1    2.6    2.3    1.2
Unemployment, %            7.5    7.4    7.1    6.9
General Govt, balance      -3.8   -3.1   -2.7   -1.6
  as % of GDP
General Govt, debt         91.1   94.6   91.7   91.7
  as % of GDP (b)
Current account            -2.7   -3.3   -3.0   -2.1
  as % of GDP

                           2015   2016   Average
                                         2017-21

GDP                        1.2    2.0      2.2
Consumption                1.8    1.4      1.1
Investment : housing       3.4    2.3      3.1
           : business      -5.5   -1.6     1.1
Government : consumption   0.2    1.0      1.9
           : investment    3.1    1.2      2.0
Stockbuilding (a)          0.1    -0.1     0.0
Total domestic demand      0.9    1.0      1.4
Export volumes             2.0    6.3      5.1
Import volumes              1.1   3.0      2.9
Average earnings           1.8    1.7      3.5
Private consumption         1.1   1.9      2.1
  deflator
RPDI                       1.9    0.5      1.3
Unemployment, %            6.8    7.0      6.4
General Govt, balance      -1.7   -1.7    -1.7
  as % of GDP
General Govt, debt         92.7   90.1    83.8
  as % of GDP (b)
Current account            -3.6   -2.8    -0.1
  as % of GDP

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

Table B6. Japan

Percentage change
                              2011    2012    2013    2014

GDP                           -0.4     1.7     1.6    -0.1
Consumption                    0.3     2.3     2.1    -1.3
Investment : housing           5.1     3.2     8.7    -4.9
           : business          4.1     3.6     0.6     3.6
Government : consumption       1.2     1.7     1.9     0.3
           : investment       -7.7     2.0     7.9     3.8
Stockbuilding (a)             -0.2     0.2    -0.4     0.1
Total domestic demand          0.5     2.6     1.9    -0.1
Export volumes                -0.4    -0.2      1.1    8.4
Import volumes                 5.9     5.3     3.0     7.4
Average earnings               0.9    -0.6     1.0     1.0
Private consumption           -0.8    -0.8    -0.3     2.0
  deflator
RPDI                           0.7     0.7     2.4    -0.3
Unemployment, %                4.6     4.3     4.0     3.6
Govt, balance as % of GDP     -8.8    -8.7    -9.0    -8.2
Govt, debt as % of GDP (b)    207.6   217.1   222.8   228.6
Current account as % of GDP    2.2     1.0     0.8     0.5

                              2015    2016    Average
                                              2017-21

GDP                            1.3     1.4       0.8
Consumption                    0.3     0.9       0.8
Investment : housing          -3.4     3.9       2.4
           : business          2.5     1.5       0.3
Government : consumption       0.4     0.0       0.2
           : investment       -0.1     0.8       0.4
Stockbuilding (a)              0.4     0.0       0.0
Total domestic demand          1.0     0.9       0.7
Export volumes                 8.5     7.5       3.6
Import volumes                 6.2     5.5       3.3
Average earnings               0.9     1.8       1.4
Private consumption            0.4     1.0       0.6
  deflator
RPDI                           2.1     0.6       0.9
Unemployment, %                3.2     3.4       3.9
Govt, balance as % of GDP     -6.6    -6.0      -5.0
Govt, debt as % of GDP (b)    222.9   223.7    227.1
Current account as % of GDP    1.5     2.0       4.8

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

Table B7. Euro Area

Percentage change

                              2011   2012   2013   2014

GDP                           1.7    -0.8   -0.3   0.9
Consumption                   0.2    -1.3   -0.6   1.0
Private investment            4.9    -7.3   -2.9   2.1
Government : consumption      -0.2   -0.1   0.2    0.6
           : investment       -5.6   -4.8   0.8    -3.3
Stockbuilding (a)             0.1    -0.4   0.0    -0.1
Total domestic demand         0.9    -2.6   -0.7   0.9
Export volumes                6.8    2.9    2.1    3.7
Import volumes                4.6    -0.6   1.3    4.0
Average earnings              1.6    1.7    1.5     1.1
Harmonised consumer prices    2.7    2.5    1.3    0.4
RPDI                          0.1    -1.8   -0.6    1.1
Unemployment, %               10.2   11.4   12.0   11.6
Govt, balance as % of GDP     -4.1   -3.6   -2.9   -2.4
Govt, debt as % of GDP (b)    86.0   89.4   91.2   92.2
Current account as % of GDP   0.1    1.2    1.8    2.1

                              2015   2016   Average
                                            2017-21

GDP                           1.3    1.8      1.7
Consumption                   1.6    1.2      0.9
Private investment            1.5    2.7      3.7
Government : consumption      1.0    0.4      1.2
           : investment       0.1    1.6      1.7
Stockbuilding (a)             0.2    0.0      0.0
Total domestic demand         1.6    1.3      1.5
Export volumes                4.2    6.0      3.8
Import volumes                4.5    5.3      3.6
Average earnings              1.3    1.6      3.2
Harmonised consumer prices    0.1    0.9      2.0
RPDI                          1.7    1.0      1.2
Unemployment, %               11.0   10.4     9.7
Govt, balance as % of GDP     -2.1   -1.7    -1.4
Govt, debt as % of GDP (b)    91.0   89.1    81.1
Current account as % of GDP   2.7    2.7      3.3

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

Table B8. Germany

Percentage change

                              2011   2012   2013   2014

GDP                           3.7    0.6    0.2    1.6
Consumption                   2.3    0.6    0.9    1.2
Investment : housing          10.3   4.3    0.8    3.8
           : business         7.1    -2.1   -1.4   3.8
Government : consumption      0.7    1.2    0.7    1.2
           : investment       3.5    0.9    1.3    -0.6
Stockbuilding (a)             -0.5   -0.1   0.2    -0.3
Total domestic demand         2.4    0.5    0.9    1.4
Export volumes                8.2    3.5    1.7    3.7
Import volumes                7.3    0.4    3.2    3.4
Average earnings              2.6    3.7    2.7    2.1
Harmonised consumer prices    2.5    2.1    1.6    0.8
RPDI                          1.9    0.5    0.4    1.5
Unemployment, %               5.8    5.4    5.2    5.0
Govt, balance as % of GDP     -0.9   0.1    0.1    0.7
Govt, debt as % of GDP (b)    78.0   79.5   77.3   74.9
Current account as % of GDP   6.0    7.2    6.8    7.8

                              2015   2016   Average
                                            2017-21

GDP                           1.6    2.0      1.4
Consumption                   2.4    2.4      0.8
Investment : housing          1.3    2.0      0.7
           : business         2.1    4.4      0.8
Government : consumption      1.8    0.5      0.6
           : investment       -0.4   1.0      0.8
Stockbuilding (a)             0.3    0.0      0.0
Total domestic demand         2.4    2.3      0.8
Export volumes                4.4    5.4      4.4
Import volumes                5.0    6.6      3.6
Average earnings              2.3    3.0      3.5
Harmonised consumer prices    0.5    1.2      2.0
RPDI                          2.5    1.9      1.1
Unemployment, %               4.7    4.5      4.6
Govt, balance as % of GDP     0.8    1.0      0.1
Govt, debt as % of GDP (b)    70.3   66.4    56.0
Current account as % of GDP   9.0    8.6      8.8

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

Table B9. France

Percentage change
                              2011   2012   2013   2014

GDP                           2.1    0.2    0.7    0.2
Consumption                   0.3    -0.2   0.5    0.6
Investment : housing          1.0    -2.1   -1.5   -5.3
           : business         4.8    0.8    -0.2   2.2
Government : consumption       1.1   1.6    1.7    1.5
           : investment       -4.4   1.8    0.2    -6.9
Stockbuilding (a)             0.9    -0.5   -0.2   0.0
Total domestic demand         1.8    -0.1   0.3    0.4
Export volumes                7.1    2.6    1.8    2.4
Import volumes                6.5    0.8    1.8    3.9
Average earnings              2.1    2.7    1.6    1.0
Harmonised consumer prices    2.3    2.2    1.0    0.6
RPDI                          0.5    0.5    0.3    1.7
Unemployment, %               9.1    9.8    10.3   10.2
Govt, balance as % of GDP     -5.1   -4.8   -4.1   -4.0
Govt, debt as % of GDP (b)    85.2   89.6   92.2   95.5
Current account as % of GDP   -1.0   -1.5   -1.4   -1.0

                              2015   2016   Average
                                            2017-21

GDP                           1.2    1.5      1.6
Consumption                   1.6     1.1     1.2
Investment : housing          -4.1   -0.5     7.8
           : business         1.0    2.4      2.1
Government : consumption      1.8    1.4      1.6
           : investment       -0.5   2.2      1.9
Stockbuilding (a)             0.2    -0.1     0.0
Total domestic demand         1.4    1.2      1.8
Export volumes                5.4    5.5      3.8
Import volumes                5.9    4.5      4.1
Average earnings              1.6    2.3      3.3
Harmonised consumer prices    0.1    0.6      1.7
RPDI                          1.3    1.0      1.3
Unemployment, %               10.3   10.3     9.2
Govt, balance as % of GDP     -4.1   -3.8    -2.7
Govt, debt as % of GDP (b)    97.6   98.1    96.0
Current account as % of GDP   -1.5   -0.7    -0.6

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

Table B10. Italy

Percentage change

                              2011    2012    2013    2014

GDP                            0.7    -2.8    -1.7    -0.4
Consumption                    0.0    -4.0    -2.8     0.3
Investment : housing          -6.5    -7.7    -6.8    -4.2
           : business          1.5    -10.3   -5.2    -1.2
Government : consumption      -1.8    -1.2    -0.3    -1.0
           : investment       -5.6    -8.4    -6.9    -3.5
Stockholding (a)               0.2    -1.2     0.2     0.0
Total domestic demand         -0.5    -5.6    -2.6    -0.6
Export volumes                 6.1     2.0     0.7     2.4
Import volumes                 1.2    -8.3    -2.2     1.7
Average earnings                1.1    0.0     0.6     0.5
Harmonised consumer prices     2.9     3.3     1.3     0.2
RPDI                          -0.5    -5.5    -1.0     0.0
Unemployment, %                8.4    10.6    12.1    12.6
Govt, balance as % of GDP     -3.5    -3.0    -2.9    -3.0
Govt, debt as % of GDP (b)    116.4   123.2   128.6   132.0
Current account as % of GDP   -3.1    -0.4     0.9     1.9

                              2015    2016    Average
                                              2017-21

GDP                            0.5     1.0      2.1
Consumption                    0.2     0.2      0.4
Investment : housing           0.2     2.9      7.9
           : business          0.4     2.3      7.2
Government : consumption       0.2    -0.2      0.9
           : investment        2.3     2.3      1.5
Stockholding (a)               0.1     0.1      0.0
Total domestic demand          0.6     0.6      1.7
Export volumes                 3.5     5.5      4.0
Import volumes                 3.9     4.5      3.0
Average earnings               0.7    -0.2      2.4
Harmonised consumer prices    -0.3     0.8      2.2
RPDI                           1.2    -0.8      0.5
Unemployment, %               12.2    11.5     10.9
Govt, balance as % of GDP     -2.8    -2.3     -1.6
Govt, debt as % of GDP (b)    133.9   133.0   117.6
Current account as % of GDP    2.9     3.6      6.4

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

Table B11. Spain

Percentage change
                              2011    2012    2013   2014

GDP                           -0.6    -2.1    -1.2   1.4
Consumption                   -2.0    -2.9    -2.3   2.4
Investment : housing          -12.8   -9.0    -7.6   -1.8
           : business          2.9    -3.8    -8.1   11.3
Government : consumption      -0.3    -3.7    -2.9   0.1
           : investment       -11.3   -16.0   15.4   -3.7
Stockbuilding (a)              0.0    -0.1    0.0    0.1
Total domestic demand         -2.7    -4.3    -2.7   2.3
Export volumes                 7.4     1.2    4.3    4.2
Import volumes                -0.8    -6.3    -0.5   7.6
Average earnings               0.5    -0.6    0.9    -0.7
Harmonised consumer prices     3.1     2.4    1.5    -0.2
RPDI                          -0.7    -5.4    -0.9   2.3
Unemployment, %               21.4    24.8    26.1   24.5
Govt, balance as % of GDP     -8.5    -7.5    -7.0   -5.7
Govt, debt as % of GDP (b)    69.2    84.4    92.1   97.7
Current account as % of GDP   -3.6    -1.2    1.4    0.8

                              2015   2016   Average
                                            2017-21

GDP                           3.0    3.1      2.2
Consumption                   3.1    2.1      1.2
Investment : housing          2.0    2.9      7.6
           : business         8.7    6.1      7.0
Government : consumption      0.3    -0.2     1.8
           : investment       0.4    2.1      2.3
Stockbuilding (a)             -0.1   0.0      0.0
Total domestic demand         2.7    2.1      2.6
Export volumes                6.1    8.5      2.0
Import volumes                5.3    5.8      3.0
Average earnings              1.6    -0.1     3.6
Harmonised consumer prices    -0.4   0.7      2.1
RPDI                          2.4    1.8      1.1
Unemployment, %               22.4   19.6    17.8
Govt, balance as % of GDP     -4.9   -3.9    -2.7
Govt, debt as % of GDP (b)    99.1   97.0    88.6
Current account as % of GDP   1.4    1.5      2.0

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 Kanya Paramaguru for compiling the database underlying the forecast and Jonathan Portes for helpful comments and discussion. The forecast was completed on 28 July, 2015. Exchange rate, interest rates and equity price assumptions are based on information available to 15 July 2015. 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)

            World   OECD   China   EU-27   Euro   USA   Japan
                                           Area

2011         4.2    1.9     9.5     1.8    1.7    1.6   -0.4
2012         3.4    1.3     7.7    -0.5    -0.8   2.3    1.7
2013         3.4    1.4     7.7     0.1    -0.3   2.2    1.6
2014         3.4    1.8     7.4     1.3    0.9    2.4   -0.1
2015         3.0    2.0     6.9     1.7    1.3    2.4    1.3
2016         3.5    2.4     6.7     2.0    1.8    2.8    1.4
2005-2010    4.1    1.4    11.1     1.1    1.0    1.2    0.6
2017-2021    3.9    2.5     6.2     2.0    1.7    2.9    0.8

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

2011          3.7      2.1      0.7    1.6    3.0      6.3
2012          0.6      0.2     -2.8    0.7    1.9      2.7
2013          0.2      0.7     -1.7    1.7    2.0      2.9
2014          1.6      0.2     -0.4    3.0    2.4      3.3
2015          1.6      1.2      0.5    2.5    1.2      3.9
2016          2.0      1.5      1.0    2.4    2.0      6.3
2005-2010     1.2      0.9     -0.1    0.9    1.6      4.9
2017-2021     1.4      1.6      2.1    2.6    2.2      5.0

                  Private consumption deflator

            OECD   Euro   USA   Japan   Germany
                   Area

2011        2.3    2.3    2.5   -0.8      1.9
2012        1.9    1.9    1.8   -0.8      1.5
2013        1.4    1.1    1.2   -0.3      1.3
2014        1.5    0.4    1.3    2.0      0.9
2015        0.7    0.1    0.3    0.4      0.6
2016        1.7    0.9    1.6    1.0      1.2
2005-2010   2.0    1.7    2.1   -0.9      1.3
2017-2021   2.3    2.0    2.2    0.6      2.0

               Private consumption deflator

            France   Italy    UK    Canada

2011         1.8      2.9    3.4     2.1
2012         1.4      2.7    2.1     1.3
2013         0.8      1.1    1.9     1.3
2014         0.0      0.2    1.5     1.9
2015         0.2     -0.1    -0.1    1.1
2016         0.6      0.8    0.9     1.9
2005-2010    1.4      1.9    3.0     1.3
2017-2021    1.7      2.2    2.0     2.1

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

2011        0.3    0.1    1.2     108.5
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      56.6
2016        1.3    0.1    0.1      59.7
2005-2010   2.6    0.2    2.5      70.4
2017-2021   3.3    0.4    1.1      62.9

Notes: Forecast produced using the NiGEM model, (a) GDP growth at
market prices. Regional aggregates are based on PPP shares, 201 I
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 Kanya Paramaguru
for compiling the database underlying the forecast and Jonathan
Portes for helpful comments and discussion. The forecast was
completed on 28 July, 2015. Exchange rate, interest rates and
equity price assumptions are based on information available to 15
July 2015. Unless otherwise specified, the source of all data
reported in tables and figures is the NiGEM database and NIESR
forecast baseline.