The world economy.

Hacche, Graham ; Baker, Jessica ; Carreras, Oriol 等

World Overview

Recent developments and the global forecast

Recent developments have left our global growth forecast little changed from three months ago. We still expect the outturn for world GDP growth this year to be 3.0 per cent, the slowest annual expansion since the financial crisis, while our growth forecast for 2016 has been revised down marginally, to 3.4 per cent. This short term outlook reflects hesitant recoveries in the advanced economies and, in the emerging market economies, both trends of weakening growth and, in some significant cases, macroeconomic and financial stress. The moderate pickup in global growth next year will be helped partly by continuing highly accommodative monetary policies in the advanced economies and the boost to global demand provided by lower oil prices. We expect growth to strengthen further, to 4.1 per cent, in 2017, as recoveries take hold in some key emerging market economies, before levelling off at 3.9 per cent in the medium term, slightly below average growth in the decade before the financial crisis.

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Recent months have been marked, especially during August, by increased turbulence in global equity markets, weakness in a number of emerging market currencies, and declines in primary commodity prices. These developments seem largely attributable to concerns about weakening growth and financial vulnerabilities in a number of emerging market economies, especially China. Continuing strong supply was another factor contributing to further declines in oil prices in August, although these have since been largely reversed following indications of production cuts and inventory depletion in the United States. Speculation about the Federal Reserve's monetary policy decisions, particularly the one taken on 17 September, was another factor destabilising financial markets at times over the past three months.

Weakness in oil and other commodity prices has halted increases in consumer price inflation rates in the advanced economies, which remain well below targets; indeed they have fallen back to a little below zero in some cases, including the Euro Area and Japan. Meanwhile, negative producer price inflation remains widespread. Stubbornly low domestic price and wage inflation contributed to the Federal Reserve's decisions in September and October not to raise the target federal funds rate from close to zero. Along with other recent developments, it also contributed to the announcement by the European Central Bank in late October that it would consider in December further reductions in its benchmark interest rates (including its deposit rate, which is already negative) as well as further expansions and extensions of its asset purchase programme. There has also been speculation about an expansion or extension of the Bank of Japan's asset purchase programme. In our forecast, we assume no such action by the ECB or Bank of Japan, although we do assume that the Fed raises its target federal funds rate by 25 basis points this December. Annual inflation in the advanced economies is projected to turn up in the coming months following the stabilisation of oil and other commodity prices, but to remain short of central banks' targets at least through 2016.

The only changes in official benchmark interest rates among the major economies since late July have been in China and India. In China, rates were reduced in late August and again in late October by 25 basis points; the first cut helped to bring a further plunge in equity prices to a halt. In India, benchmark rates were cut by 50 basis points in late September. Asset purchase programmes have continued to be implemented as planned by the ECB and Bank of Japan. Government bond yields have declined by 10-30 basis points since late July in most advanced economies, reflecting declines in inflation and related adjustments of expectations about monetary policy actions. Among the major emerging market economies, sovereign bond yields have also fallen by about 20 basis points in China and India, but they have risen by about 260 basis points in Brazil, reflecting currency weakness and associated expectations of higher short-term inflation. Sovereign bond yields in Russia have fallen by about 50 basis points since late July: they rose in August as oil prices fell, but subsequently retreated as oil prices recovered.

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With little change in interest differentials, exchange rates among the currencies of the major advanced economies have been relatively stable since late July: the US dollar has depreciated by 3 per cent against the yen, but appreciated by 1-3 per cent against the euro, the pound sterling and the Canadian dollar. The US dollar has also appreciated by about 2Vi per cent against the renminbi, following a change in China's exchange rate arrangement (see section below on China) and by 2 per cent against the Indian rupee and the Russian rouble. The dollar has appreciated more sharply against the currencies of some commodity-exporting emerging market economies such as Brazil (18 per cent). In trade-weighted terms (on the Bank of England's index), the value of the US dollar in late October was about 1 per cent lower than in late July but 23 per cent above its trough of October 2013.

Following their partial recovery between March and mid-June, oil prices weakened again through August, apparently in response, at least in part, to news indicating resilient US production. Prices reached 6 1/2-year lows in late August before turning up following new reports of declining US output. In late October, prices were still about 3 per cent lower than in late July, and projections from the International Energy Agency of a marked slowdown in demand growth in 2016 and increased production from Iran, likely to outweigh the expected decline in US output, suggest little upside potential to prices in the near term. Non-oil commodity prices have also weakened in recent months, although they have turned up since late September. In mid-October, the Economist all-items index, in US dollar terms, was 3 per cent lower than in late July and 15 per cent lower than a year earlier. The sub-index for industrial raw materials, more cyclically sensitive than that for food, was 2 per cent lower than in late July but 20 per cent lower than a year earlier.

Equity prices globally fell sharply in mid-to-late August, with the US market, for the first time in four years, falling by more than 10 per cent--thus qualifying as a 'correction' by the conventional definition. Prices subsequently stabilised and partly recovered. The triggers for the global equity decline seem to have been turmoil in the Chinese equity market--with the authorities attempting to impede the correction, after it had encouraged the boom--and speculation about the purpose and implications of a change in China's exchange arrangement, though this in fact led to only a small change in the exchange value of the renminbi (see section on China, below). Weakening global growth and geopolitical uncertainties also weighed on markets during the period.

Risks to the forecast and implications for policy

A development preoccupying governments in Europe in recent months has been the influx of large numbers of refugees and other migrants--exceeding half a million, up to September--from areas of conflict in the Middle East and North Africa. Aside from social and political issues, such immigration, to the extent that it is permanent, will add to the labour force and to potential output in the medium term, adding, according to some estimates, about 1/4 percentage point to the potential annual growth rate of output in the Euro Area over a number of years. In this way, it will compensate for some of the loss to the Area's potential growth that is occurring because of ageing populations, particularly in such countries as Germany and Italy. In the short term, there will be fiscal burdens involved in the provision of social services and infrastructure for the migrants, amounting perhaps also to about 1/4 per cent of Euro Area GDP, which is likely to boost GDP growth in the Area by a similar amount. Both the medium-term boost to potential output growth and the short-term fiscal implications with the associated boost to demand and activity are difficult to assess precisely in the current evolving situation. We have made some preliminary adjustment to our forecast for Germany, but the effects of the immigration form a risk to our growth projections, which may be more upside than downside. The immigration also has uncertain implications for imbalances in the Euro Area: see the section below on the Euro Area.

One set of risks given prominence in the August Review the dangers relating to the financial difficulties of Greece and the policy programme then being negotiated with its European partners--has since receded. In mid-August, it was confirmed that negotiators had reached agreement in principle on a 3-year fiscal and structural reform programme to be supported by 86 billion [euro] of financing from the European Stability Mechanism (ESM), and on 20 August the ESM made the first disbursement, of 13[euro] billion. The agreement targets a primary budget deficit of 0.5 per cent of GDP in 2015, with primary surpluses in the following three years of 0.5, 1.75, and 3.5 per cent of GDP respectively. On 20 September, a general election gave the government a new mandate to implement the programme, and our forecast assumes that it will be implemented successfully. Although Greece's short-term financing difficulties have been resolved, and while there has been some legislative progress in implementing the policy programme, to some extent the risks outlined in the August Review remain. This is reflected in the fact that although Greece's sovereign spreads relative to Germany have recently been narrower, at about 7-8 percentage points, than the 10-12 per cent levels that applied for much of the time between March and July, they have remained elevated.

Other risks relating to the Euro Area that have been discussed in recent issues of this Review remain relevant. Recent elections in Portugal have provided further evidence of popular and political reaction to policies of fiscal contraction. With the formation of a minority government there in late October, there is increased uncertainty about policies that may further damage the cohesion of the Euro Area as well as Portugal's economic prospects. Meanwhile, there has been no significant progress in recent months in taking the steps necessary to complete the monetary union that were set out in last June's 'Five Presidents' Report' (see August Review, Box A, F17). In fact, the German authorities have recently emphasised their opposition to a common system of deposit insurance, which is an element missing from the Area's banking union.

Recent developments suggest that certain other risks may have increased.

First, persistently low inflation. With headline consumer price inflation having again fallen below or close to zero in the advanced economies, and producer price indices continuing to decline in a much broader group of countries, the risk of persistent below-target inflation, or even deflation, has increased. Falls in inflation in recent months appear to stem largely from renewed weakness in oil and other commodity prices, where, to be sure, there are upside as well as downside risks, related partly to geopolitical developments; indeed, commodity prices have turned up somewhat since late September. But also wages have remained stagnant in most advanced economies, rising by about 2 per cent or less in the US, the Euro Area and Japan--rates of increase difficult to reconcile with 2 per cent price inflation targets even on pessimistic assumptions about the growth of labour productivity. Moreover, the growth of demand and activity has generally remained sluggish despite several years of exceptional monetary stimulus.

With regard to monetary policy, one implication is that it is important that central banks approaching normalisation, including the Fed, continue to maintain a 'data-dependent' approach to interest rate decisions. And in the current context, it makes sense for them to focus more on actual and expected wage and price developments than on such indicators of potential inflationary pressure as lower unemployment, whose relationship to inflation is unreliable. Another implication is that both the ECB and the Bank of Japan should be open to expanding their asset purchase programmes, and also to reducing interest rates, as the ECB has acknowledged. A further implication of the risk of persistently low inflation and weak growth is that, with monetary policy close to its expansionary limits, governments should reconsider the scope for fiscal expansion, especially productive investment financed by borrowing at the exceptionally low costs that are available.

A second set of risks relates to the economic transition and slowdown in China. Slowing growth in China has had significant global repercussions in recent years, including on commodity prices, global trade, and global industrial production, with emerging-market exporters of primary products having been particularly hard-hit. Understandably, financial markets have become highly sensitive to data on, and developments in, the Chinese economy, which is estimated to have become the largest in the world for the first time last year, in terms of GDP valued at purchasing power parity. The market reaction to China's exchange rate move in August, which in the event amounted to only a 2 1/2 per cent devaluation against the US dollar, turned out to be an over-reaction, but it reflected reasonable concerns.

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One concern was that the economic slowdown might be understated by official GDP data. The view appears to have grown among many, though not all, respected China watchers, that actual economic growth has fallen short of the official estimates by a margin that may have widened to 3 percentage points a year or more as the slowdown has proceeded. This view is discussed further in the section below on China, and in Box B.

Another set of concerns behind August's market reaction relates to China's external financial position. China's current account surplus has narrowed substantially in recent years--from about 10 per cent of GDP in 2007 to 2 per cent in 2014. And over the past year there have been substantial capital outflows and a significant (exceeding 10 per cent) decline in China's foreign exchange reserves. Also by August, the renminbi had appreciated significantly (by about 10 percent) in trade-weighted terms over the previous 18 months, as the US dollar, to which it was effectively pegged, appreciated against other major currencies. In these circumstances, a concern seemed to be that the government might seek to support activity through the external sector by means of a significant currency depreciation. Such a policy would be likely to conflict with the government's aim of bringing about a transition to an economy less dependent on investment and exports and more dependent on consumption. But the transition strategy also involves a gradual, measured, slowing of the economy--an objective that might be considered to be at risk.

Looking ahead, therefore, risks include the possibility that the Chinese economy does indeed slow by more than our projections indicate, perhaps because of a sharper decline in investment than we assume, and that the government responds by taking action, including support of investment through additional credit expansion, and also currency depreciation, that could both increase China's financial vulnerabilities, given its levels of debt, and have damaging repercussions abroad.

Prospects for individual economies

Euro Area

The Area's modest economic recovery, with GDP growth of about 1 1/2 per cent a year, has continued in recent months, but inflation has stopped rising, remaining well below the ECB's objective. It has therefore become more likely that further action to increase the degree of monetary accommodation, through a further cut in interest rates, or an extension or expansion of the ECB's asset purchase programme, will be needed for the inflation target to be met in a reasonable time period.

GDP grew by 0.4 per cent in the second quarter of 2015 to a level 1.5 per cent higher than a year earlier. The main contributors to second quarter growth were net exports, boosted by the depreciation of the euro since late 2013, and consumer spending; both fixed and inventory investment fell. Expansions were notably strong in Spain (1.0 per cent) and Greece (0.9 per cent), but more modest in Germany (0.4 per cent) and Italy (0.3 per cent), while output in France was flat. More recent indicators suggest continuing modest growth in the Area as a whole, with activity weaker in manufacturing than in services: retail sales volume in August was 2.3 per cent higher than a year earlier, while industrial production rose by 0.9 per cent in the same period, having been broadly flat since February. The composite PMI for the third quarter indicates GDP growth similar to that of the previous three months.

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Unemployment in the Area fell to 11.0 per cent in July and August, its lowest level since February 2012 and 1.1 percentage points below its peak of early 2013. Less than one quarter of the rise in the unemployment rate from its pre-crisis trough of 7.2 per cent in early 2008 to its 2013 peak has thus been retraced in a little over two years. Unemployment rates in August continued to vary widely, ranging from 4.5 per cent in Germany to 10.8 per cent in France, 11.9 per cent in Italy, 22.2 per cent in Spain, and 25.2 per cent in Greece. Employment grew by 0.8 per cent in the year to the second quarter, but remains 2.2 per cent below its early 2008 peak.

The rise in inflation from the negative rates reached at the end of 2014 and early this year has been partly reversed since May, owing in part to the renewed weakness of oil and other primary commodity prices. Consumer price inflation (in terms of the Harmonised Index of Consumer Prices (HICP)) in the year to September was-0.1 per cent, down from May's peak of 0.3 per cent. Core inflation was 1.0 per cent in September, broadly unchanged since May. As the ECB's chief economist noted in late August, recent developments have increased the downside risk to the early achievement of a sustainable inflation path towards the medium-term objective of 'below but close to 2 per cent'.

In early September, the ECB published revised staff projections of GDP growth and inflation for 2015-17. The growth projections were revised down from June for each year, by 0.1-0.2 percentage points, mainly because of weaker demand from emerging markets, and the inflation projections were also revised down, by 0.1-0.4 percentage points largely owing to lower oil prices.

The ECB has continued to implement its expanded asset purchase programme of 60[euro] billion a month. This was begun last March and is due to continue at least until September 2016. In early September 2015, against the background of its revised economic projections, increased downside risks to the growth and inflation outlook, and recent turbulence in financial and commodity markets, the ECB emphasised, following a meeting of its Governing Council, that it stood ready to adjust the size, composition and duration of the asset purchase programme if such action was warranted by developments. It also announced that the limit of 25 per cent on the proportion of any security issue purchased by the Eurosystem (the 'issue share limit'), intended to prevent the Eurosystem from acquiring a blocking minority power of any security, was being raised to 33 per cent, subject to case-by-case verification that a blocking minority would not result.

Box A. Constraints on expansion of the ECB's asset purchase programme

by Jessica Baker and Jack Meaning

From 9 March 2015 the ECB began implementing an
expansion of its asset purchase programme (APP), by adding to its
asset-backed securities programme and covered bond purchase
programme a new public sector purchase programme (PSPP), to include
securities issued by Euro Area members' central governments, public
agencies and certain international organisations (see February
Review, F19, and May Review, F16). Combined purchases under the
expanded programme, amounting to 60 billion [euro] a month, are to
continue until at least September 2016, with approximately 75 per
cent being made in the government debt market.

After the meeting of the Governing Council of the ECB on 22 October
2015 President Draghi indicated that its policy stance would be
re-examined at its December meeting and that the "size, composition
and duration" of its asset purchase programme could be adjusted
should the outlook for inflation warrant.

The ECB's ability to effectively expand the PSPP is, however
subject to a number of constraints:

First, purchases of securities under the PSPP are allocated across
member countries on the basis of the ECB's 'capital key', i.e. by
the shares of the corresponding national central banks in the
capital of the ECB (excepting Greece which is not currently a
participant in PSPP).

Second, under the 'issuer limit' the ECB's holdings of a particular
member state's securities cannot exceed 33 per cent of the total
outstanding. This limit also covers the existing portfolios of
bonds held by the ECB as part of the Securities Market Programme
(SMP). There is also an 'issue share limit' of 33 per cent (raised
from 25 per cent in September) on the proportion purchased of any
security issue.

Third, to be eligible for PSPP, securities must not only have a
residual maturity at the time of purchase of 2-30 years but they
must also have a yield in excess of the ECB's deposit facility
rate, currently -0.2 per cent.

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The guidance of the capital key implies that the scope for
expanding the APP will be constrained by the issuer limit for
countries which have a low volume of outstanding debt relative to
their capital key share. Figure AI shows the Eurosystem's holdings
of government debt, as a percentage of the maximum imposed by the
issuer limit. Based on our current forecast for outstanding debt
and total holdings under the PSPP as of the ECB's current horizon
for APP (September 2016), the issuer limit will bind in Estonia,
Lithuania, Luxembourg and Latvia

The share of German bunds held by the Eurosystem is projected to stand
at 15 per cent. This is higher than it would otherwise be because
Germany is projected to run a surplus in the intervening period,
decreasing the available volume of securities outstanding. Moreover,
the 15 per cent estimate understates the potential problem because
around 50 per cent of German government securities are currently
disqualified by the third constraint as they yield lower than -0.2
per cent interest. This is true for a growing swathe of Euro Area
government securities and as yields fall, which may be considered a
successful outcome of the policy itself, then the pool from which
the ECB can draw will diminish further. This increases the
likelihood that the issuer limit will prove binding if the PSPP is
increased.

A further reduction in the ECB's deposit rate would ease this
constraint, as would a widening of the range of securities accepted
under the PSPP to include, for example, private corporate
securities.

After its next, late October, meeting, the ECB went further, stating that depending on a review of developments at its December meeting, it would be "willing to act by using all the instruments available within its mandate if warranted in order to maintain an appropriate degree of monetary accommodation", thus adding a further reduction in its interest rates to the actions that would be considered. It reiterated that "the asset purchase programme provides sufficient flexibility in terms of adjusting its size, composition and duration". The programme is, however, constrained in a number of ways: see Box A.

The recent influx of refugees and other migrants from the Middle East and North Africa may affect economic imbalances among member countries of the Area in various ways. To the extent that the immigration is concentrated in Germany, there is likely to be an associated fiscal expansion there, arising from the provision of social services and infrastructure for migrants, larger than the immigration-induced expansion in any other member country. Apart from providing a welcome boost to growth in the Euro Area, this should promote a beneficial narrowing of imbalances among member countries. On the other hand, the relative increase in labour supply in Germany may put downward pressure on wages there, which would be counter-productive as far as the need to reduce relative labour costs in deficit countries, relative to Germany, is concerned. A recent welcome development in the Euro Area has been a pickup in wages in Germany relative to other member countries --in the year to the second quarter, labour costs rose by 3.1 per cent, more than in any other EU country outside eastern Europe--and there is a danger that this corrective mechanism will be halted. But it is difficult, as yet, to assess how these forces will play out.

Germany

Moderate growth has continued, with GDP expanding by 0.4 per cent in the second quarter of 2015, and expected to accelerate slightly to 0.5 per cent growth in the third. Our growth forecast for 2015 as a whole is unchanged from August at 1.6 per cent, while for 2016 it has been revised down marginally to 1.9 per cent.

Domestic demand has been taking an increasingly important role in generating growth. Net exports are expected to contribute marginally to growth this year, but for the remainder of our forecast period import growth will outpace that of exports. Within domestic expenditure, consumer spending is expected to rise by roughly 2 per cent both this year and next, buoyed by strong nominal wage growth and low consumer price inflation. Investment contracted in the second quarter, largely in the construction sector. However, this followed two quarters of strong growth and the change in private sector investment in the year to the second quarter still exceeded 2 per cent. Uncertainty surrounding global demand and the fallout from the Volkswagen scandal may weigh on investment in the near term, but nevertheless business investment is projected to expand by 2 per cent this year and by 4 per cent in 2016.

The recent influx of migrants into Germany affects our forecast. So far in 2015, half a million asylum seekers have arrived in Germany and the number seems likely to exceed 800,000 by the end of the year. This will lead to a significant increase in government spending to provide housing, healthcare and other services for the migrants, at an estimated cost of around 7bn [euro]. Of this, just under half was provisioned for by the government at the start of the year, so the additional expenditure amounts to roughly 4bn [euro]. It seems likely that this can be absorbed without higher taxation while still allowing the government to run fiscal surpluses this year and next, though smaller than we expected in August. Debt continues to fall as a percentage of GDP throughout our forecast, reaching around 70 per cent of GDP this year and 67 per cent in 2016.

In the short term, the impact of this migration on the labour market will be limited. Processing asylum applications takes time and Germany has strict laws prohibiting work while an application is under consideration. However, work by IfW-Kiel, based on the demographics of refugees and plausible asylum acceptance and participation rates, suggests that there could be around 200,000 more people in the labour force by the end of 2016. This could prove timely, as labour force growth in Germany has been slowing significantly in recent quarters. With the participation rate already high, it is likely that domestic demographic changes would have led to the beginning of a decline in the labour force this year.

The recent revelations surrounding Volkswagen may act as a near-term drag on the German economy. The company has already announced that it will reduce its annual investment by roughly 1.5bn [euro] in the next few years to provision for future fines and costs. This will hit GDP directly and there may also be second-round effects if it leads the company to be less innovative. The magnitude of the eventual fines is uncertain, but they are likely to involve a significant balance of payments cost as they will be paid mainly overseas. There is also a risk that the demand for VW products will wane, and that reputational damage could afflict the German motor industry more broadly. The car industry accounts for 17 per cent of German exports and is either directly or indirectly connected to one in seven jobs in Germany. The consequences also stretch beyond Germany's own borders, with much of the VW supply chain based in economies such as the Czech Republic and Hungary.

Consumer price inflation, on a 12-month basis, fell back below zero in September, to -0.2 per cent, after six months of modest price gains. It has recently been held down by declines in the prices of oil and other commodities. Annual core inflation in September was 1 per cent, still below the ECB's inflation target for the Euro Area, but suggesting that underlying inflationary pressures have been stable. Average consumer price inflation in 2015 is expected to be 0.2 per cent. The depreciation of the euro since early 2014 is expected to continue passing through to German prices next year, and the increasing tightness of the labour market and ensuing wage pressure will also add to inflationary momentum. We therefore expect inflation to begin to increase to 0.7 per cent in 2016 and 0.9 in 2017, still below the Euro Area target.

The labour market has become increasingly tight. Unemployment declined to a new post-unification low of 4.5 per cent in August, the lowest unemployment rate in the Euro Area. It is projected to remain around this level this year and next, before rising somewhat in 2017 and the medium term. The tightness of the labour market has been reflected in an increase in the growth of hourly labour costs, to 3.1 per cent in the year to the second quarter, up from 2.1 per cent in the year to the second quarter of 2014.

France

After GDP growth of 0.7 per cent in the first quarter of 2015--the strongest quarterly growth in almost two years--the economy stagnated in the second quarter. This outcome fell short of the 0.3 per cent growth we had assumed in our August forecast, and although we expect some of the difference to be made up in the second half of the year, we have revised down our growth forecast for 2015 as a whole marginally, to 1.1 per cent.

The deceleration of activity in the second quarter was due to a general weakening of growth in domestic demand. In a turnaround from the first quarter, net exports contributed positively to growth as exports accelerated and import growth slowed: export volume grew by 2 per cent from the previous quarter, but this reflected strong sales of aeronautical and naval goods and services, which may have a significant transitory component. Household consumption increased only slightly in the second quarter and the growth of business fixed investment also weakened; in fact total fixed investment fell, with both households and the government investing less.

Unemployment has risen further in recent months, reaching 10.8 per cent in August. The growth of consumption has been supported by increases in real wages for those in work rather than significant increases in employment. Real wage increases, in turn, have resulted more from low price inflation than strong increases in nominal wages. Real personal disposable incomes are expected to grow by 1.3 per cent this year, and 1.6 per cent next year, as somewhat higher growth in nominal wages and employment outweighs a mild increase in inflation.

Harmonised consumer price inflation, on a 12-month basis, has softened slightly in recent months to 0.1 per cent in September, mainly reflecting the weakness of oil and other commodity prices. Prices are also expected, as in the August Review, to be broadly flat in 2015 on average. The projected profile of inflation through 2017 is now somewhat shallower than in August, consistent with the forecast for the Euro Area as a whole.

The government's budget for 2016, announced at the end of September, includes spending cuts amounting to 16 billion [euro], offset by changes in income and corporation tax rates and thresholds aimed at stimulating growth and employment. The net effect on our forecast of the budget deficit next year, 3.5 per cent of GDP, is negligible, but for 2017 our forecast is that the government will meet its deficit target of 3 per cent of GDP, though by a fine margin.

Italy

Italy's tepid economic recovery, which resumed in the first quarter of 2015 with GDP growth of 0.4 per cent, following five quarters of contraction or stagnation, continued in the second quarter with growth of 0.3 per cent. While growth in the first quarter was driven by an increase in fixed investment that was due to temporary factors, household consumption was the main driver in the second, rising by 0.4 per cent, its highest growth rate for almost five years. Our forecast is that GDP growth will continue at a modest rate through 2016, with annual average growth of 0.7 per cent this year and 0.9 per cent next year, before picking up to 2.0 per cent in 2017 as investment gains momentum.

The forecast expansion is expected to be underpinned by consumer spending and boosted by a recovery in business investment. Consumer confidence indicators have recently risen to 13-year highs, and the government's budget for 2016, outlined in mid-October, aims to encourage private consumption through measures to ease the tax burden, including a cut in the tax on the ownership of primary residences. The budget also contains measures to boost investment: a cut in the corporate tax rate, relatively high in Italy; tax reliefs for building renovation; and tax credits for machinery investment. Fixed investment has been declining in recent years although it picked up in the first quarter of this year on account of a surge in investment in transport equipment related to Expo 2015 in Milan. In the second quarter, total fixed investment fell back as this surge reversed and as construction also declined. Growth in investment seems likely to have resumed in the third quarter at a modest pace, and we expect such growth to continue in the forecast period.

Net exports contributed negatively to GDP growth in both the first and second quarters, by 0.4 and 0.2 percentage points of GDP respectively. We expect the contribution to become positive in the period ahead as economic conditions improve among Italy's trading partners and as the country benefits from recent gains in international cost competitiveness: in the year to the second quarter, hourly labour costs fell by 0.4 per cent, while in the Euro Area as a whole they rose by 1.6 per cent.

To help address the legacy of non-performing loans accumulated by banks--about 10 per cent of total outstanding loans--the government in August enacted measures to speed up bankruptcy procedures and to allow tax deductions for loan write-downs and losses. Such measures are important partly because they should improve the supply of credit to households and firms. Indeed, recent data indicate that the decline in bank lending to the private sector has flattened out.

Unemployment, which peaked at 13.0 per cent in November last year, has fallen quite sharply since June, from 12.5 per cent to 11.9 per cent in August. The decline over the past year reflects not only an increase in employment but also a decline in labour force participation, and the weakness of the labour market remains a cause for concern. The government has decided to extend for another year, albeit at a lower rate, a reduction of social security levies introduced in 2015 for firms that increase employment.

Consumer price inflation, on a 12-month basis, has risen in recent months from the negative rates seen in the early months of the year but, at 0.2 per cent in September, it has remained well below the ECB's target for the Euro Area. The core rate has also risen in recent months, reaching 0.9 per cent in September.

The budget deficit was 3.0 per cent of GDP in 2014, and the government's estimate for 2015 is a deficit of 2.6 per cent. For 2016, the government originally projected a deficit of 1.8 per cent of GDP, but a combination of new spending items, the unfreezing of public sector salaries, and tax cuts have caused its estimate to be revised up to around 2.2 per cent. The deficit target for 2017 is 1.1 per cent of GDP.

Spain

Economic growth has remained significantly stronger, but unemployment has remained much higher, than Euro Area averages. In the second quarter of 2015, GDP rose by 1.0 per cent from the preceding quarter, and in the third quarter the Bank of Spain estimates that growth was 0.8 per cent, sustained by domestic demand with a neutral contribution from net exports. We expect that average growth for 2015 will turn out at 3.1 per cent, a marginal increase from the August Review, but have revised down our projection of growth next year to 2.6 per cent, with the benefits of the fall in global oil prices and the depreciation of the euro diminishing.

Domestic demand remained the main driver of GDP growth in the second quarter, with increases in all of its main components except government consumption. Recent buoyant indicators of consumer and business confidence, together with strong growth in employment, suggest that this pattern is continuing in the second half of the year. Net trade subtracted 0.2 percentage points from growth in the second quarter. Exports have benefitted from the depreciation of the euro over the year to last March and from an improvement in cost competitiveness relative to Euro Area partners arising from wage moderation: hourly labour costs in Spain rose by 0.4 per cent in the year to the second quarter, compared with 1.6 per cent in the Euro Area as a whole. But the strong growth of domestic demand has also been pulling in imports.

Consumer price inflation, in terms of the all-items index, has been negative, on a 12-month basis, for most of the past year. In September it was -0.9 per cent, with electricity and transportation accounting for most of the fall, reflecting pass-through of the decline in global energy prices. However, core inflation has risen steadily from negative levels over the past year, to reach 0.8 per cent in September, easing to some extent fears of deflation.

Employment growth was strong in the second quarter of this year, with more than 400,000 finding jobs. This has translated into a further fall in unemployment, but nevertheless it remains extremely high, at 22.2 per cent in August (on Eurostat data). It has thus fallen by about 4 percentage points from its early 2013 peak of 26.3 per cent. This is less than a quarter of the fall needed to return unemployment to its pre-crisis, early 2007, low of 7.9 per cent. About 62 per cent of the currently unemployed have been without work for more than a year. And most of the newly employed lack job security; about three-quarters of jobs created recently have been on temporary contracts.

The government ended 2014 with a deficit of 5.8 per cent of GDP, only 0.1 percentage point higher than budgeted, this difference being accounted for mainly by downward revisions to GDP data. The government maintains that it will deliver a 4.2 budget deficit this year and a deficit of 2.8 per cent in 2016, as agreed with the European Commission. Recently, however, the Commission has cast doubt on the feasibility of the 2016 target, and general elections taking place in December may increase the risk of missing it.

Greece

The economy surprisingly expanded strongly in the second quarter of 2015. Real GDP increased by 0.9 per cent compared with three months earlier, driven by a 1 per cent increase in private consumption and an almost 4 per cent increase in government consumption.

Some of this strength probably reflected the bringing forward of expenditure motivated by the concerns about the sustainability of the Greek banking system at that time as well as general policy and economic uncertainty. Given the financial controls imposed since July and the dampening impact of July's VAT increase, we continue to expect a significant fall in GDP in the third and fourth quarters of this year with growth resuming only in the second quarter of 2016.

[FIGURE 5 OMITTED]

Greece has experienced declines in average consumer prices since the start of 2013. The rate of 12-month consumer price inflation is expected to be zero in the fourth quarter of this year. In 2016 we expect a spell of modest inflation. This is simply a consequence of the announced changes to VAT in the second half of 2015. Underlying pressures remain deflationary, as the counterfactual scenario shows in figure 5. Indeed, as the increase in VAT drops out of the calculation by 2017, we project headline prices to resume falling.

United States

Unemployment has fallen further in recent months, to within the Federal Reserve's estimated range for its normal longer-term level. But other indicators suggest a wider margin of slack, and the growth of output and employment has weakened somewhat in 2015. Moreover, there has been only limited evidence of inflation picking up toward the Fed's target of 2 per cent. Thus the Fed has still not begun to raise the target federal funds rate from near zero, where it has remained since December 2008.

After the marked slowdown of economic growth in the first quarter of 2015, the expansion has resumed, but apparently at a somewhat slower underlying pace than the 2.4 per cent average growth rate of 2014. In the second quarter, GDP rose by 3.9 per cent at an annual rate, with all major categories of expenditure, including net exports, contributing positively. However, growth from the fourth quarter of 2014 to the second quarter of this year was only 2.3 per cent, annualised, partly reflecting the first quarter's weak expansion of 0.6 per cent. More recent indicators suggest a further weakening of growth. Industrial production in August was 0.9 per cent higher than a year earlier, while retail sales in the third quarter (unadjusted for price changes) were 2.3 per cent higher than a year earlier. After our forecast was finalised, data for the third quarter were released showing growth of 1.5 per cent at an annual rate, somewhat weaker than we were assuming.

Employment growth has also slowed this year. The increase in non-farm payrolls in the third quarter was the smallest three-month increase for three years; and in the first nine months of 2015 the increase in non-farm jobs was 17 per cent less than in the corresponding period of 2014. However, unemployment fell to 5.1 per cent in August and September, its lowest level since April 2008 and within the Federal Reserve's range estimate of longer-run normal unemployment, which is 4.9-5.2 per cent, revised in September from 5.0-5.2 per cent. Other indicators, however, suggest that there may be more slack in the labour market than the unemployment data suggest: they include the labour force participation rate, which fell to 62.4 per cent in September, its lowest level in 38 years.

Also, there has been no sign of any significant pickup in wage growth. The annual growth in average hourly earnings was steady at 2.2 per cent throughout the third quarter, towards the upper end of the range of 1.7-2.3 per cent observed over the past six years. The employment cost index, which includes benefits as well as wages, decelerated in the second quarter, and its increase in the twelve months to June was 2.0 per cent, down from 2.6 per cent in the year to March.

There have also been few indications of a significant pickup in price inflation. A measure of inflation that has recently been close to the Fed's target has been the 12-month increase in the core consumer prices index: in September, this was 1.9 per cent, its highest level in a year. But the 12-month increase in the overall CPI in September was zero. In any event, the Fed's target refers to the 12-month change in the broader price index for personal consumption expenditures: this fluctuated in the narrow range of 0.2-0.3 per cent in the first eight months of 2015--in August it was 0.3 per cent--while the corresponding core rate fluctuated in the 1.2-1.3 per cent range in the same period. The 12-month change in producer prices has been negative since February: it was -0.5 per cent in September. Moreover, market-based measures of inflation expectations have declined significantly in recent months: thus the five-year breakeven inflation rate, having risen from 1.1 per cent at the beginning of the year to about 1.7 per cent in the second quarter, has fluctuated around 1.2 per cent since mid-August.

Against this background, the Fed announced on 17 September that it had decided to leave the target federal funds rate unchanged, repeating its June guidance that it expected that it would be appropriate to take such action "when it has seen some 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". Thirteen out of the seventeen participants in the meeting still expected that it would be appropriate to implement the initial increase in the rate before the end of 2015, down from fifteen participants at the June meeting. The median expectation of the appropriate rate at the end of 2016 and 2017 was lowered in each case by 25 basis points relative to the June meeting. Chairman Yellen explained that the FOMC's assessment had been revised because of heightened uncertainties abroad and a slight downward revision of inflation projections. On 28 October, the FOMC again left rates unchanged. Our forecast incorporates an assumption that the first increase in the target federal funds rate, of 25 basis points, will occur at the December FOMC meeting.

Canada

Economic growth has resumed since mid-year after a mild recession in the first half accounted for by a contraction in the energy sector. GDP fell by 0.1 per cent in the second quarter following a contraction of 0.2 per cent in the first. The decline in oil prices led to a rapid drop in investment in the energy sector--and a fall in exports of energy products. Business fixed investment declined by 3.8 per cent in the first half of 2015 compared to the second half of 2014, with nonresidential construction--mainly in the energy sector down by 7.8 per cent. It is also possible that uncertainty surrounding the parliamentary elections on 19 October caused some firms to postpone investment. Meanwhile household consumption has been sluggish, growing by 0.7 per cent in the first half of this year, reflecting falling real incomes and low consumer confidence.

Official monthly GDP estimates show that growth resumed in June and July, with increases of 0.4 and 0.3 per cent respectively, and in our forecast we assume that positive growth returned in the third quarter. We project GDP growth of 0.9 per cent in 2015 as a whole, followed by 2.1 per cent in 2016 as net exports benefit from the recent depreciation of the Canadian dollar and the US economy gains momentum. With regard to business investment, the Bank of Canada's Autumn 2015 Business Outlook Survey reports that intentions to increase spending have become more widespread, with 40 per cent of firms planning to increase investment in machinery and equipment over the next twelve months, compared to 26 per cent planning to lower spending.

In the wake of the recent recession, unemployment has risen from the post-crisis low of 6.6 per cent reached at the beginning of this year to 7.1 per cent in September, its highest level since March 2014. However, according to the Business Outlook Survey, 41 per cent of businesses surveyed are planning to increase employment over the next twelve months, outnumbering the 13 per cent that plan to decrease employment. We expect unemployment to average 7.2 per cent in 2016 before falling back to 6.9 per cent in 2017 and 6.8 per cent in the medium term.

Domestic inflation has recently been subject to the partly offsetting influences of weak economic activity and declining global oil and other commodity prices on the one hand and the depreciation of the Canadian dollar--by about 16 per cent in trade-weighted terms between mid-2014 and September 2015--on the other. Consumer price inflation, on a 12-month basis, has risen from the 0.8 per cent low reached in April to 1.3 per cent in September, while the core rate over the past year has remained slightly above the 2 per cent mid-point of the 1-3 per cent target range, easing to 2.1 per cent in September. The Bank of Canada's benchmark interest rate has been unchanged at 0.5 per cent since the July cut of 25 basis points. We expect that average inflation, in terms of the consumer expenditure deflator, will pick up from 1.2 per cent this year to 1.6 per cent in 2016-17 before converging on the Bank of Canada's target in the medium term.

High consumer debt remains a cause for concern. Data from Statistics Canada indicate that household credit market debt reached a record 165 per cent of disposable income in the second quarter of 2015. Much of this borrowing has been used for housing finance, which makes households vulnerable to declines in income and employment, increases in interest rates, and falls in house prices.

Japan

After strong GDP growth, of 1.1 per cent, in the first quarter of 2015, the economy contracted by 0.3 per cent in the second. The fall in GDP was driven mainly by declines in private consumption and exports, although there was also a drop in business fixed investment; the contraction was attenuated by increases in housing and inventory investment and by a drop in imports. The slowing of economic growth among Asian emerging markets, including China, and continuing weak growth in wages seem to have contributed to the weakness of demand and activity.

More recent indicators of activity have been mixed. On the positive side, household spending has picked up in recent months, with a 2.9 per cent increase, in real terms, in the year to August. Also, PMIs for both manufacturing and services indicate modest expansion in the third quarter. On the other hand, industrial production has remained stagnant, declining by 0.4 per cent in the year to September. The Bank of Japan's Tankan Survey for September gave mixed indications of the changes in business sentiment in the previous three months. On balance, it seems likely that the contraction in the second quarter has not been sustained and that modest growth resumed in the third quarter. Taking into account the second quarter contraction, which we had not forecast, as well as other developments, we have revised down our GDP growth forecast for this year to 0.7 per cent and left it unchanged at 1.4 per cent in 2016.

[FIGURE 6 OMITTED]

Even though the broadest measures of annual consumer price inflation have declined in recent months to around zero, underlying inflation, excluding energy prices, has picked up. The 12-month change in the 'all-items' index of consumer prices has fallen further in recent months, to 0.2 per cent in August, and the corresponding change in the 'core' index, which excludes only fresh food, was -0.1 per cent. But with energy as well as food excluded, the 12-month 'core core' inflation rate in August rose to 0.8 per cent (see figure 6). The unofficial 'UTokyo' daily price index, which monitors supermarket prices, indicates an upward trend in inflation continuing through the third quarter but more recently flattening off at an annual rate of about 1.4 per cent. Our forecast of inflation remains largely unchanged from the August Review, at 0.4 per cent this year, increasing to 0.9 per cent in 2016,2017 and the medium term, thus remaining significantly short of the authorities' 2 per cent objective on the assumption of unchanged policy.

Unemployment edged up slightly in August to 3.4 per cent from 3.3 per cent in July, which was its lowest level in eighteen years. Despite the tightness of the labour market, wage growth has increased only modestly, to 0.5 per cent in the year to August. Given the currently lower rate of price inflation, this at least suggests that the trend apparent since mid-2013 of falling real wages has been reversed, which should be supportive of consumption and inflation.

One possible explanation for the puzzle of weak wage growth is the duality of the labour market, in that regular workers are afforded significantly higher levels of job security than non-regular workers, which may offset the incentives for job mobility arising from wage differences. If this is the case, further tightening of the labour market is most likely to put upward pressure on the wages of the lower paid and less protected non-regular workers. Aoyagi and Ganelli (2013) argue that reducing labour market duality by lowering the protection of regular workers and increasing that of non-regular workers could lead to improvements in total factor productivity and the growth of wages and the economy as a whole.

The economic contraction in the second quarter and continuing weak inflation relative to target have increased speculation that the Bank of Japan will increase the rate of asset purchases of its QQE programme. The view of the Bank of Japan remains that the economy is improving, that inflation is picking up, and furthermore, that such additional stimulus may have only a short-term inflationary effect. Another point to note is that there may be constraints on asset purchases. Arslanalp and Botman (2015) suggest that given the current rate of purchases the Bank of Japan will be forced to taper its purchases during 2017-18 as imbalances emerge in the government securities market, but it seems that this issue could be addressed by choosing to purchase different assets, whether these be longer-dated government bonds or private assets, or by extending the securities lending facility to deal with collateral constraints as they arise.

With regard to fiscal policy, the need remains for specific measures to be identified to put government debt on a downward path in the medium to longer term. This does not preclude the use of stimulus to boost growth in the short term, and there have been recent indications that the government will introduce a supplementary budget to this effect in November.

Progress with structural reforms--the "third arrow" of 'Abenomics'--has remained mixed. There have been significant advances in such areas as corporate governance, agriculture, and energy, but little action in the reform of labour markets or immigration. In late September, Prime Minister Abe announced that the programme of reforms was entering a second stage ('Abenomics 2.0'), with three goals: a strong economy, support for families, and social security, but policies remain to be specified.

China

There has been increased concern in financial markets in recent months about the slowing of economic growth in China and its global repercussions, amid uncertainty about the accuracy of official data for GDP. The four-quarter growth rate of GDP was 6.9 per cent in the third quarter of 2015, following 7.0 per cent increases in both the first and second quarters, in line with the authorities' growth objective of 'around 7 per cent' for 2015 as a whole. Sharp swings and volatility in equity prices in recent months, together with an adjustment to the exchange rate arrangement in August, added to fears that the government was having difficulty containing risks associated with the rebalancing of the economy, and renewed worries about a possible 'hard landing'. Meanwhile the People's Bank has reduced the benchmark interest rate and reserve requirement twice since late August.

Several private research groups have released their own estimates of Chinese GDP growth, constructed on the basis of a variety of activity indicators. These include monthly trade data showing imports (in nominal domestic currency terms) 17.7 per cent lower in September 2015 than a year earlier, and exports 1.1 per cent lower; weakening growth of industrial production, to 5.8 per cent in the year to September; recent weak PMIs indicating contraction in manufacturing, and also such activity proxies as electricity use and freight movements. Some of these private estimates have put recent annual GDP growth at around 4-5 per cent. Other observers, however, have questioned these estimates, largely on the grounds that they overstate the importance in the economy of manufacturing, and underestimate the importance of services; they see little evidence that the economy has slowed significantly from the pace of about 7 per cent officially reported in recent quarters. These observers point, for example, to the buoyancy of consumer spending (with retail sales in nominal terms up by 10.9 per cent in the year to September, not much below the 11.6 per cent increase recorded in the year to September 2014) as well as wage and employment growth. The differences between official and independent estimates are discussed further in Box B. Our forecast is based on the official estimates.

The implications of a more abrupt weakening of growth in China were examined in Box B of our August 2015 Review.

There has been a notable divergence between consumer and producer price inflation in recent months. Consumer price inflation, on a 12-month basis, rose to 1.6 per cent in September 2015 from a low of 0.8 per cent in January; the official target is 3 per cent by the end of the year. Producer price inflation, meanwhile, negative since early 2012, fell further to -5.9 per cent in August and September, the largest 12-month drop in almost six years.

The turbulence in equity markets discussed in the August 2015 issue of the Review has recently diminished. Between early July and mid-August, markets seemed to be stabilising around a level about 25 per cent below the peaks reached in early June, but in late August, following a change in the exchange rate arrangement that surprised the markets (see below) a new plunge led to a further drop of about 25 per cent. The decline stopped when the People's Bank announced reductions in official interest rates (the fifth since last October) and reserve requirements, effective on 26 August. In September and October, amid continuing volatility, prices stabilised around a level about 35 per cent below the peaks of early June, but still about 40 per cent above the levels of October 2014, before the officially encouraged market surge began. In late October, the People's Bank lowered its benchmark rates by a further 25 basis points, with its one-year deposit rate down to 1.5 per cent. It also lowered the required reserve ratio by a further 50 percentage points, to 17.5 per cent. At the same time, in a further step to liberalise the financial system, the People's Bank removed the ceiling on deposit rates for commercial banks and rural credit cooperatives.

On 11 August, the People's Bank announced a change in the exchange rate arrangement for the renminbi: the currency would continue to trade in a daily 2 per cent band, but each day's central parity would be set by the preceding day's closing market rate rather than, as previously, by an officially preset target rate. The People's Bank said that this move was intended to "enhance the market orientation and benchmark status of the renminbi". (The latter phrase may refer partly to the IMF's current consideration of whether the renminbi should be added to the SDR basket of currencies.) At the time of the change, the exchange rate in terms of the US dollar had been virtually constant, at 6.20 renminbi per dollar, since March this year, and broadly stable around that level for a year before that. This stability of the currency against the dollar, which had been appreciating against most other major currencies since late 2013, had been maintained despite reductions in official interest rates, through official intervention in the foreign exchange market, which had contributed to a decline in China's foreign exchange reserves from an all-time (and all-country) high of $3,993 billion in June 2014 to $3,651 billion at the end of July 2015. It had also involved an appreciation of the renminbi in trade-weighted terms, by 10.6 per cent (on BIS estimates) between March 2014 and July 2015. It was therefore not surprising that in the days immediately following the change in arrangement, the currency depreciated against the dollar, though only by about 3 per cent.

[FIGURE 7 OMITTED]

Box B. China's GDP growth: official versus alternative
estimates

By Graham Hacche, Iana Liadze and Jack Meaning

The
slowdown in Chinese economic growth has attracted significant
attention in recent months, with much of the focus on estimates of
real GDP. While the official figures state that China's GDP grew by
7 per cent in the year to the second quarter of 2015, many
observers, sceptical of the data released by the National
Statistics Bureau for a variety of reasons, have produced
alternative estimates suggesting that true economic growth has been
slower. In a recent survey of eleven economists by Bloomberg, the
median estimate of GDP growth in the year to the second quarter was
6.3 per cent and estimates collated by the Financial Times ranged
from just under 4 to about 6.7 per cent, figure Bl. However, the
validity and significance of these alternative measures may have
been overplayed somewhat. For a start, many of the estimates are
within the bounds of statistical error around the official estimate
and are plausibly within the scope of future revisions.

Second, the alternative measures themselves seem to be based on an
imperfect characterisation of the Chinese economy. Perhaps the best
known alternative indicator, the Li Kequiang Index, named after an
official who is now the Chinese Premier, uses information on
electricity consumption, volume of rail freight, and bank credit
and currently implies growth in the year to the second quarter of
around 3.0 per cent. But the usefulness of this index as a proxy
for GDP relies on the central importance of industrial activity,
and is likely to have diminished in recent years as the structure
of the economy has changed, with industry diminishing in importance
relative to services. As figure B2 illustrates, around 2012, the
services sector overtook industry as the major driver of economic
growth, and it has continued to increase its share of GDP in line
with China's strategy of rebalancing its economy away from
investment and exports towards private consumption, and away from
industry towards services. Hence, indicators based mainly on
industrial activity are likely to have become increasingly
inaccurate representations of activity in the economy as a whole.

Third, even if the alternative estimates of GDP growth were
correct, the implications for global growth should not be
overstated. If the slowdown of Chinese growth has been occurring
for any prolonged period, then its impact on other economies will
already have been reflected in their own data, which on the whole
have not been questioned. Thus the only impact on global growth of
the 'corrected' Chinese data would emanate from the 'correction' to
Chinese GDP itself. Even if the GDP estimates have been wrong by 2
percentage points, that would imply that just about 0.35 percentage
points should be deducted from world GDP growth over the past year.

The data and projections provided in this Review assume that the
official GDP estimates are broadly accurate. Looking forward,
prospects for China's growth are broadly unchanged. Growth in the
medium to longer term will be determined by such processes as
demographic change, the evolution of productivity and the economy's
ability to restructure from an export- and investment-driven
economy to a more consumption-based one. As detailed in our
forecast, we expect these factors to weigh down on Chinese growth
in the medium term as the expansion slows. However, even with this
deceleration, China is expected to contribute an average of 30 per
cent of world GDP growth over the next five years.

[FIGURE B.1 OMITTED]

[FIGURE B.2 OMITTED]

In late August, the renminbi appreciated slightly, but since early September its rate against the US dollar has settled at about 6.36. The People's Bank has apparently continued intervening to support the currency: official reserves fell in August by a further $94 billion--the largest monthly decline, in US dollar terms, on record and by $43 billion in September. There is therefore little evidence to support the view expressed by some observers that the change in arrangement signified a move by the authorities towards competitive depreciation to boost weakening growth. Nor does it seem that the change in arrangement has, as yet, been implemented in such a way as to give China a flexible exchange rate: what has actually happened is a 2Vi per cent devaluation of the renminbi against the US dollar, following a period of effective appreciation. The IMF welcomed the change in arrangement for allowing a larger role for market forces, and reaffirmed its May assessment that the renminbi is no longer undervalued.

With China's external current account in surplus (by 2.3 per cent of GDP in 2015), the decline of foreign exchange reserves since June 2014--amounting to $479 billion or 12 per cent to the end of September--implies large-scale net capital outflows. In the official balance of payments statistics, these appear mainly as 'errors and omissions', indicating that they are mainly unidentified private flows.

Our baseline forecast assumes continuing progress towards a 'smooth landing', with the rebalancing of the economy--towards consumption from exports and investment, and towards services from industrial production--continuing, along with implementation of the associated reforms, and with growth slowing gradually further, from 6.9 per cent this year to 6.6 per cent in 2016, 6.4 per cent in 2017, and 5.9 per cent in the medium term. However, the path seems likely to be uneven, with the government continuing to intervene when necessary and feasible to help achieve this objective and reduce related risks.

Finally, it may be worth considering what the consequences might be if the authorities were to allow a significant depreciation of the renminbi. To illustrate one such possibility, we simulated a 10 per cent permanent devaluation of the renminbi (implicitly assumed to be brought about by sterilised intervention in the foreign exchange market) using the National Institute's global economic model, fiimulation results (presented in figure 7) illustrate that even though the short-term impact of a 10 per cent devaluation on output is positive, in the long run the price level in China rises by an equal percentage and leaves real GDP and the current account balance unchanged compared to the baseline. (The increase in nominal GDP is assumed to be accommodated by the money supply.) In the very short run there is a J curve effect: the current account balance initially worsens, as renminbi prices of imports rise and prices of exports fall with volumes responding only slowly. As volumes respond, the current account balance improves, but only for a transitory period before the eventual rise in domestic prices eliminates the improvement in competitiveness. An increase in domestic price pressure continues until a real equilibrium is achieved. Unless there is a structural change, the new equilibrium, which in our simulation is achieved after about five years, is characterised by the same balance of saving and investment as in the pre-devaluation equilibrium, hence resulting in the current account balance remaining unchanged.

India

The economy has grown at a relatively steady annual rate of about 7 per cent since mid-2013. In the second quarter of 2015, GDP growth, on a four-quarter basis, dipped to 7.0 per cent from 7.5 per cent in the first, with a slowing in the growth of domestic demand outweighing an improvement in net exports. Recent indicators suggest continued robust expansion. Thus industrial production rose by 6.4 per cent in the year to August, its highest annual growth rate since 2011. Taking recent developments into account, together with the substantial benefits to the economy from the decline in global oil prices, we have raised our growth projections for 2015 and 2016 slightly, to 7.6 and 7.7 per cent respectively.

Consumer price inflation has fallen significantly from its peaks of 10-11 per cent in 2013. The 12-month rate picked up somewhat in September 2015, to 4.4 per cent, but it remained below the Reserve Bank's target for January 2016 of below 6 per cent and its subsequent target of 5 per cent for March 2017. Wholesale prices have stabilised since the spring after a decline that began late last year, but in September they were still 4.5 per cent lower than a year earlier. In late September, the Reserve Bank surprised markets by reducing its benchmark rate by 50 rather than 25 basis points, to 6.75 per cent. This was the fourth cut in 2015, taking the cumulative fall to 125 basis points for the year. The Reserve Bank explained the move by referring to progress in meeting its inflation target, the weakening of global activity and commodity prices, and still-low domestic industrial capacity utilisation. Inflation is expected to rise further in the coming months as commodity prices stabilise, and we forecast average consumer price inflation of 4.3per cent in 2015, 5.4 per cent in 2016, and 4.5 per cent in 2017.

In recent years the performance of the balance sheets of publicly owned banks, the largest component of India's banking sector, has deteriorated badly. As reported by the Reserve Bank's Financial Stability Report, the ratio of stressed assets to total assets for these banks increased to 13.5 per cent in March 2015 from just over 6 per cent in March 2011. This increase seems attributable mainly to reduced profitability in the steel production sector resulting from weaker global prices and loans to stalled infrastructure projects. While the economy's robust growth and low interest rates should help ameliorate these balance sheet problems, a sustainable solution will require a return of profitability to both sectors. In the case of loans for infrastructure projects, some signs are not encouraging. What was planned as a key reform of the Modi government, the land acquisition bill, which was intended to make it easier to purchase land for infrastructure projects, was abandoned in early August in favour of a more limited plan for individual provinces to pass their own bills, which seems unlikely to simplify the national pattern of regulations. In any event, it is likely to take time for these banks to repair their balance sheets, during which the problem is likely to weigh on investment growth as these banks shift towards safer assets.

Lack of progress with structural reforms was also apparent in recent months in the abandonment of legislation to introduce a national consumption tax to replace an array of provincial taxes.

Brazil

The economy has continued to contract, with both private consumption and investment in decline. The country also continues to face a wider range of economic difficulties--not only ballooning unemployment, but also high inflation following a marked depreciation of the national currency over the past year, less favourable terms of trade in the wake of commodity price declines, and a government weakened by corruption allegations and having difficulty reining in the growing budget deficit.

In the first and second quarters of 2015, GDP fell by 0.7 and 1.9 per cent, respectively. Private consumption fell by 3.6 per cent over the two quarters and private fixed investment by a little over 10 per cent. The slump in the first half of the year was attenuated by an improvement in the trade balance accounted for mainly by a drop in imports stemming from the weakness of domestic demand but also partly by a modest pickup in exports fuelled by the currency depreciation. More recent indicators suggest that the economic contraction continued in the third quarter. Industrial production in August was 9.0 per cent lower than a year earlier, and PMIs through September indicate continued declines in activity, more pronounced in services than in manufacturing. Indicators of consumer and business confidence have recently fallen to historic lows. Unemployment reached a five-year high of 7.6 per cent in August.

In late September, the real fell to an all-time low against the US dollar, but following a statement by the Central Bank Governor that he was willing to use "all instruments available" to stem the currency's decline, the exchange rate rallied somewhat. In late October, in terms of the US dollar, the value of the real was about 13 per cent lower than at the time of our August Review, and 36 per cent lower than in October 2014.

Twelve-month consumer price inflation rose sharply from 6.4 per cent at the end of last year to about 9.6 per cent in July, but has since stabilised, easing to 9.5 per cent in September. The increase in inflation since last year is accounted for partly by the removal of a cap on administered prices, which rose by 16 per cent in the year to July, but it also reflects a strong rise in unregulated prices related to the depreciation of the real. The Central Bank's benchmark interest rate has been 14.25 per cent since it was raised by 50 basis points at the end of July. The Central Bank expects inflation to fall to around 514 per cent in 2016 as the increases in administered prices fade away. We are sceptical about such a large drop, and forecast average inflation of 6.5 per cent in 2016, equal to the upper limit of the Central Bank's 2.5-6.5 per cent target range.

With regard to fiscal policy, the new government formed at the beginning of this year, after the presidential election of October 2014, initially committed itself to primary surpluses of 1.2 per cent and 2.0 per cent of GDP for 2015 and 2016 respectively, following the first primary deficit in over a decade in 2014. Subsequently, however, as the economic situation worsened, the government lowered the 2015 target twice: first in July, to a primary surplus of 0.15 per cent of GDP, and then in October, to a primary deficit of 0.85 per cent of GDP. Reflecting the country's fiscal and economic difficulties, in September S&P lowered its sovereign rating for Brazil from investment grade to junk status, putting further pressure on a budget that is already facing large interest payments.

In light of recent developments, we have adjusted our growth forecast down, and now expect contractions in GDP of 2.9 per cent in 2015 and 0.6 per cent in 2016, before growth resumes in 2017.

Russia

The economy fell deeper into recession in the second quarter of 2015, with GDP 4.6 per cent lower than a year earlier, following a drop of 2.2 per cent in the first quarter on a four quarter basis. There have, however, been signs in recent months that activity has begun to stabilise. Thus while industrial production in September was 3.7 per cent lower than a year earlier, it increased in each month between July and September. PMIs for manufacturing have also indicated a slowing in the contraction of activity, while retail sales, as well as PMIs for services, have indicated moderate growth in recent months. Nevertheless, the data outturn and the fact that oil prices have been lower than expected in recent months have led us to revise our GDP forecast downwards. We now expect GDP to fall by 4.2 per cent in 2015 as a whole before rising by 0.2 per cent in 2016. Growth is expected to accelerate in 2017, to 3.2 per cent, reaching an average of 4.3 per cent in 2018-22. The possibility that global oil prices may fail to recover as assumed poses a significant downside risk to our forecast.

Partly reflecting international sanctions, Russia's trade surplus has narrowed significantly in recent months, reaching a five-year low in August. Nevertheless, one factor likely to boost growth in the period ahead is the benefit to net exports from the sharp depreciation of the rouble since mid-2014. With falling oil prices, the rouble fell back between May and August this year to the lows against the US dollar that were reached last January. The subsequent pick-up in oil prices boosted the currency, but by late October, the rouble's value in terms of the US dollar was still about 20 per cent lower than in May. There seems to have been little official intervention in the foreign exchange market in recent months: official reserves have been broadly unchanged since February.

Consumer price inflation on a twelve-month basis, having peaked in March at 16.9 per cent, has since fallen only slightly, to 15.7 per cent in September. Although month-to-month increases in prices have moderated more significantly, high inflation, as well as pressures on the rouble, has continued to constrain the Central Bank's ability to ease monetary policy. Its key interest rate, which peaked last December and January at 17 per cent, was lowered by a further 50 basis point to 11 per cent in early August but has since been unchanged. Our forecast is for consumer price inflation to average 15.9 per cent in 2015 and 10.3 per cent in 2016 before stabilising around the Central Bank's 4 per cent target in 2017 and the medium term.

Despite the economic recession, unemployment has fallen in recent months, from a peak of 5.9 per cent in March to 5.2 per cent in September. This low level--less than half the rate in the Euro Area--reportedly reflects, in part, a reluctance on the part of firms to dismiss employees, preferring instead to cut hours worked and give staff unpaid holidays. Another factor that may have been protecting employment is falling real wages: with nominal wage increases falling short of price inflation, real wages fell by 9.2 per cent in the year to July.

REFERENCES

Aoyagi, C. and Ganelli, G. (2013), 'The path to higher growth: does revamping Japan's dual labor market matter?', IMF working paper, No. 13/202.

Arslanalp, S. and Botman, D. (2015), 'Portfolio rebalancing in Japan: constraints and implications for quantitative easing', IMF working paper, No. 15/186.

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

The forecasts for the world and the UK economy reported in this Review are produced using the National Institute's 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. Where term premia do exist, we assume they gradually diminish over time, such that long-term interest rates in the long run are simply the forward convolution of short-term interest rates. Policy rates in major advanced economies are expected to remain at extremely low levels at least throughout 2015. The Reserve Bank of Australia left its benchmark interest rate unchanged after cutting it by 50 basis points in two rounds in the first half of 2015. After reducing its interest rates by 25 basis points in June 2015, for the first time since 2011, the central bank of New Zealand lowered them further by 50 basis points in two rounds, in July and September. The People's Bank of China and the Indian central bank have reduced their interest rates by 100 basis points in four stages since the beginning of this year. The Bank of Korea reduced its policy rate by 100 basis points in four steps between August 2014 and June 2015 and left it unchanged since. For the past eight months, the Central Bank of Turkey left its policy rate unchanged. This follows a spell around the middle of 2014, where the interest rate was reduced by 250 basis points. 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 by 75 basis points over five rounds. Since the start of 2015, the central banks of Norway and Poland have lowered their policy rates by 50 basis points. While the central bank of Norway cut its benchmark rate in two steps, the central bank of Poland lowered its rate in March and has left it unchanged since. 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. At the turn of this year the Central Bank of Switzerland cut its benchmark rate by 25 basis points to -0.75 per cent, while the Central Bank of Denmark reduced them by 15 basis points to just 5 basis points above zero. Both central banks have left them unchanged since. The Central Bank of Russia has reduced interest rates by 600 basis points to 11 per cent in five stages since the beginning of 2015. The Bank of Canada lowered its benchmark interest rate by a further 25 basis points in July 2015, after cutting it by 25 basis points in January. These are the first changes by the Bank of Canada since 2009. In contrast, the Central Bank of Brazil and the South African Reserve Bank tightened monetary policy in response to inflationary and financial market pressures this year. The South African Reserve Bank increased its benchmark rate by 25 basis points in July. The Central Bank of Brazil has increased its benchmark rate by 200 basis points to 14.25 per cent, in a series of steps this year. (2)

Policymakers in the US and UK are expected to begin to raise interest rates in the fourth quarter of 2015 and the first quarter of 2016, respectively, pre-empting rate rises in the Euro Area by at least six quarters. For the US, this is broadly consistent with the interest rate path signalled by the Federal Open Market Committee (FOMC) at its meeting on 17 September. 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. The Fed announced on 17 September that it had decided to leave the target federal funds rate unchanged, repeating its June guidance that it expected to take action "when it has seen some 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". Thirteen out of the seventeen participants in the meeting still expect that it would be appropriate to implement the initial increase in the rate before the end of 2015, down from fifteen participants at the June meeting. The median expectation of the appropriate rate at the end of 2016 and 2017 was lowered in each case by 25 basis points relative to the June meeting. Chairman Yellen explained that the FOMC's assessment had been revised because of heightened uncertainties abroad and a slight downward revision to inflation projections.

The expectation of the first rate change of the Monetary Policy Committee (MPC) of the Bank of England is based on our view of how the economy will evolve over the next few years. While financial markets currently expect the MPC to raise rates first towards the end of 2016, we think a much earlier move is more likely. Our forecast is for a reasonable pace in the growth of demand, while the rate of CPI inflation is projected to be marginally above target in 2018. These factors suggest to us that a modest increase in the first quarter of 2016 would be consistent with the modal outlook for the UK economy.

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. 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 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.

[FIGURE A1 OMITTED]

[FIGURE A2 OMITTED]

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 has widened, reaching a maximum of about 150 basis points (in absolute terms) at the beginning of March 2015. Since then the margin has narrowed, remaining at around 100 basis points. After reaching extremely low levels at the beginning of the year, government bond yields in the US, UK and the Euro Area picked up in the summer, but some of those gains have since reversed. Current expectations for bond yields for the end of 2015 are lower than those formed just three months ago, for the US, the Euro Area, the UK, and Japan. While the expectations for yields in the US, UK and the Euro Area are lower, by about 35-45 basis points, expectations of yields in Japan have decreased by less--by approximately 20 basis points.

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, 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. (3)

Sovereign spreads have remained stable, in most cases, from late July 2014, the most notable exception being a marked widening of Greek spreads. This reflected initial uncertainty over Greece's fiscal stance and debt repayment since the formation of a government dominated by a political party elected on an anti-austerity manifesto followed by the heightened risk of Greece leaving the Euro Area and by the accompanying three-week closure of the domestic banking system, the associated withdrawal limits imposed upon on Greeks' bank accounts and the imposition of controls on external payments in summer 2015. The dangers relating to Greece's financial difficulties and the policy programme being negotiated with its European partners have since receded. In mid-August, it was confirmed that negotiators had reached agreement in principle on a 3-year fiscal and structural reform programme to be supported by 86 billion [euro] of financing from the European Stability Mechanism (ESM). On 20 August the ESM made the first disbursement, of 13 billion [euro]. 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 OMITTED]

[FIGURE A4 OMITTED]

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, the Euro Area and the UK. Our forecast assumption for corporate spreads is that they gradually converge towards their long-term equilibrium level from 2015.

Nominal exchange rates against the US dollar are generally assumed to remain constant at the rate prevailing on 15 October 2015 until the end of June 2016. After that, they follow a backward-looking uncovered-interest parity condition, based on interest rate differentials relative to the US. Figure A4 plots the recent history as well as our forecast for the effective exchange rate indices for Brazil, 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 10 per cent against most other major currencies in effective terms since the end of the fourth quarter of 2014; however the rapid appreciation of the US dollar at the beginning of 2015 has eased and, in trade-weighted terms, the value of the US dollar in October was broadly unchanged from the value in the third quarter. The most notable exceptions to the US dollar's appreciation have been the relative movements of the Brazilian real and 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 and has since weakened again, currently hovering at around 60 roubles to the dollar. The Brazilian real has depreciated significantly since the end of 2014 losing, in effective terms, about 33 per cent of its nominal value between mid 2014 and October 2015.

[FIGURE A5 OMITTED]

Our oil price assumptions for the short term are based on those of the US Energy Information Administration (EIA), published in October 2015. The EIA uses information from forward markets as well as an evaluation of supply conditions, and these are illustrated in figure A5. Oil prices declined steeply between mid-2014 and the beginning of 2015. Following a partial recovery between March and mid-June, oil prices weakened again through August. Prices reached 6 1/2-year lows in late August before turning up again. By late October, they had returned almost to the levels of late July, but projections from the EIA suggest little further upside potential in prices in the near term. Overall, current expectations for the position of oil prices at the end of this year have fallen by about 10 per cent, compared to the expectations formed just three months ago. The EIA projects around an 8 per cent increase in oil prices, on average, in 2016, which leaves oil prices around $50 lower than their nominal level in mid-2014.

[FIGURE A6 OMITTED]

Our equity price assumptions for the US reflect the expected return on capital. Other equity markets are assumed to move in line with the US market, but are adjusted for different exchange rate movements and shifts in country-specific equity risk premia. Figure A6 illustrates the key equity price assumptions underlying our current forecast. Global share prices had performed well between 2013 and the second half of 2014, irrespective of a short-lived drop--a reaction to the QE tapering signals emanating from the Federal Reserve in summer 2013. However, concerns about weak growth and low inflation seem to have induced a fall in share prices in many countries in the second half of 2014, with the scale of the drop varying significantly between economies. Share prices in many countries rose again in the first half of 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. Equity prices globally fell sharply in mid-to-late August, most notably in China. Even though prices have subsequently stabilised and even partly recovered, share prices in some countries still remain as much as 15 per cent lower compared to the second quarter of this year. The largest falls in equity prices over this period were observed in Slovenia, Greece, Romania and Bulgaria.

Fiscal policy assumptions for 2015 follow announced policies as of 9 October 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, which is expected to decline as a share of GDP between 2015 and 2016 in the majority of Euro Area countries reported in the table. 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 October 2015 and do not include the 25 basis point cut by the People's Bank of China on 23 October, 2015.

(3) 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.

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 Area     UK

2012             0.25     1.00      0.10       0.88      0.50
2013             0.25     1.00      0.10       0.56      0.50
2014             0.25     1.00      0.10       0.16      0.50
2015             0.27     0.65      0.10       0.05      0.50
2016             1.05     0.68      0.10       0.05      0.81
2017             2.20     1.52      0.10       0.12      1.31
2018-22          3.43     3.27      0.57       1.34      2.59
2014       Q1    0.25     1.00      0.10       0.25      0.50
2014       Q2    0.25     1.00      0.10       0.23      0.50
2014       Q3    0.25     1.00      0.10       0.13      0.50
2014       Q4    0.25     1.00      0.10       0.05      0.50
2015       Q1    0.25     0.81      0.10       0.05      0.50
2015       Q2    0.25     0.75      0.10       0.05      0.50
2015       Q3    0.25     0.54      0.10       0.05      0.50
2015       Q4    0.33     0.50      0.10       0.05      0.50
2016       Q1    0.62     0.50      0.10       0.05      0.63
2016       Q2    0.90     0.50      0.10       0.05      0.75
2016       Q3    1.19     0.75      0.10       0.05      0.88
2016       Q4    1.48     0.97      0.10       0.05      1.00
2017       Q1    1.77     1.19      0.10       0.05      1.13
2017       Q2    2.06     1.41      0.10       0.05      1.25
2017       Q3    2.35     1.63      0.10       0.12      1.37
2017       Q4    2.64     1.85      0.10       0.25      1.50

                         10-year government bond yields

                  US     Canada    Japan    Euro Area     UK

2012              1.8      1.9      0.8        3.2        1.8
2013              2.3      2.3      0.7        2.7        2.4
2014              2.5      2.2      0.6        1.9        2.5
2015              2.1      1.5      0.4        1.0        1.8
2016              2.5      2.0      0.5        1.4        2.2
2017              3.1      2.8      0.8        1.9        2.8
2018-22           3.8      3.7      1.5        3.1        3.7
2014       Q1     2.8      2.5      0.6        2.5        2.8
2014       Q2     2.6      2.4      0.6        2.1        2.7
2014       Q3     2.5      2.2      0.5        1.7        2.6
2014       Q4     2.3      2.0      0.4        1.3        2.1
2015       Q1     2.0      1.4      0.3        0.8        1.6
2015       Q2     2.2      1.6      0.4        1.0        1.9
2015       Q3     2.2      1.5      0.4        1.2        1.9
2015       Q4     2.0      1.5      0.3        1.1        1.8
2016       Q1     2.3      1.7      0.4        1.2        2.0
2016       Q2     2.5      1.9      0.5        1.3        2.1
2016       Q3     2.6      2.2      0.5        1.4        2.3
2016       Q4     2.8      2.3      0.6        1.6        2.4
2017       Q1     2.9      2.5      0.7        1.7        2.6
2017       Q2     3.0      2.7      0.7        1.8        2.7
2017       Q3     3.2      2.8      0.8        2.0        2.8
2017       Q4     3.3      3.0      0.9        2.1        2.9

Table A2. Nominal exchange rates

                 Percentage change in effective rate

                 US    Canada    Japan    Euro Area

2012            3.4       0.9      2.2         -1.9
2013            2.9      -3.1    -16.7          2.9
2014            4.1      -5.4     -5.1          1.9
2015           13.0      -9.3     -5.4         -5.1
2016            1.4      -1.0      2.8          3.0
2017           -0.2       0.4      1.4          1.4
2014    Q1      1.6      -3.8     -1.5          0.8
2014    Q2     -1.0       2.4      0.1         -0.1
2014    Q3      1.5      -1.0     -1.1         -0.8
2014    Q4      4.8      -3.1     -6.6         -0.4
2015    Q1      6.3      -6.9     -0.4         -4.9
2015    Q2      0.8       2.4     -1.5         -1.8
2015    Q3      3.5      -4.6      2.2          2.6
2015    Q4     -0.5       0.9      2.6          2.5
2016    Q1     -0.1       0.1      0.0          0.1
2016    Q2     -0.1       0.0     -0.1          0.0
2016    Q3      0.0       0.1      0.2          0.3
2016    Q4      0.0       0.1      0.3          0.3
2017    Q1      0.0       0.1      0.4          0.4
2017    Q2     -0.1       0.1      0.4          0.4
2017    Q3     -0.1       0.1      0.5          0.4
2017    Q4     -0.1       0.1      0.5          0.5

               Percentage change in effective rate

              Germany    France    Italy      UK

2012             -2.0      -2.0     -1.6     4.2
2013              2.8       3.0      3.7    -1.2
2014              1.8       1.8      3.2     7.8
2015             -2.9      -2.9     -1.8     6.2
2016              1.8       1.7      2.2     0.4
2017              0.7       0.7      0.9    -0.1
2014    Q1        0.9       0.7      1.1     2.6
2014    Q2       -0.2      -0.1      0.2     1.4
2014    Q3       -0.8      -0.9     -0.8     1.6
2014    Q4       -0.5      -0.7     -0.3    -0.5
2015    Q1       -2.5      -2.4     -1.9     2.8
2015    Q2       -1.2      -0.8     -1.1     2.4
2015    Q3        1.9       1.5      2.1     2.3
2015    Q4        1.3       1.3      1.6    -1.7
2016    Q1        0.1       0.1      0.1     0.0
2016    Q2        0.0       0.0      0.0     0.0
2016    Q3        0.1       0.1      0.2     0.0
2016    Q4        0.1       0.2      0.2     0.0
2017    Q1        0.2       0.2      0.3     0.0
2017    Q2        0.2       0.2      0.3     0.0
2017    Q3        0.2       0.2      0.3     0.0
2017    Q4        0.2       0.2      0.3     0.0

                         Bilateral rate per US $

              Canadian $      Yen     Euro    Sterling

2012               0.997     79.8    0.778       0.631
2013               1.039     97.6    0.753       0.640
2014               1.112    105.8    0.754       0.607
2015               1.276    120.4    0.892       0.651
2016               1.293    118.6    0.870       0.646
2017               1.286    117.1    0.858       0.643
2014    Q1         1.111    102.7    0.730       0.604
2014    Q2         1.083    102.1    0.729       0.594
2014    Q3         1.100    104.0    0.755       0.599
2014    Q4         1.153    114.6    0.801       0.631
2015    Q1         1.262    119.1    0.888       0.661
2015    Q2         1.237    121.4    0.905       0.652
2015    Q3         1.308    122.2    0.899       0.646
2015    Q4         1.295    119.0    0.874       0.647
2016    Q1         1.294    118.8    0.872       0.646
2016    Q2         1.294    118.8    0.872       0.646
2016    Q3         1.292    118.6    0.870       0.646
2016    Q4         1.291    118.3    0.867       0.645
2017    Q1         1.289    117.9    0.864       0.645
2017    Q2         1.287    117.4    0.861       0.644
2017    Q3         1.285    116.8    0.856       0.642
2017    Q4         1.283    116.2    0.852       0.641

Table A3. Government revenue assumptions

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

               2015    2016    2017    2015    2016    2017

Australia      14.9    14.8    14.6    25.7    25.7    25.7
Austria        32.1    32.5    33.0    21.8    21.8    21.8
Belgium        35.2    35.0    35.1    21.7    21.7    21.7
Canada         21.9    22.0    22.2    20.8    20.8    20.8
Denmark        42.9    41.5    40.4    17.9    17.9    17.9
Finland        32.8    32.8    32.6    23.1    23.1    23.1
France         30.7    30.9    31.1    32.7    32.7    32.7
Germany        29.0    29.1    29.1    19.4    19.4    19.4
Greece         24.2    24.1    24.1    13.5    13.5    13.5
Ireland        26.1    26.0    25.8     9.8     9.8     9.8
Italy          28.7    28.6    28.1    26.5    26.5    26.5
Japan          22.9    22.9    22.9    29.6    29.6    29.6
Netherlands    33.2    32.7    32.6     8.4     8.4     8.4
Portugal       20.6    20.5    20.2    20.1    20.1    20.1
Spain          24.9    24.7    24.4    15.8    15.8    15.8
Sweden         26.4    25.8    25.1    23.1    23.1    23.1
UK             22.7    22.8    22.8    13.3    13.1    12.3
US             19.5    19.5    19.3    29.0    29.0    29.0

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

               2015    2016    2017

Australia      33.2    33.2    33.0
Austria        42.7    43.0    42.9
Belgium        45.0    44.3    43.6
Canada         35.7    35.4    35.0
Denmark        53.2    52.5    50.0
Finland        46.5    46.2    45.7
France         45.6    45.9    46.1
Germany        41.0    40.8    40.7
Greece         40.8    39.4    37.8
Ireland        28.3    28.3    27.9
Italy          43.6    43.5    42.5
Japan          33.8    34.1    34.3
Netherlands    40.7    40.1    39.4
Portugal       38.1    37.7    36.9
Spain          38.1    37.5    36.5
Sweden         44.1    44.6    44.5
UK             35.0    35.4    35.6
US             31.0    31.3    31.3

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

Table A4. Government spending assumptions (a)

                 Gov't spending
               excluding interest
               payments (% of GDP)

               2015    2016    2017

Australia      33.0    32.5    32.3
Austria        43.1    43.5    43.2
Belgium        44.4    44.0    43.2
Canada         34.8    34.6    34.2
Denmark        48.5    48.7    47.4
Finland        48.7    48.1    46.9
France         47.7    47.7    47.6
Germany        38.8    39.0    39.0
Greece         39.6    38.5    36.9
Ireland        26.4    26.2    25.6
Italy          41.7    41.4    40.1
Japan          38.6    38.1    38.0
Netherlands    40.4    40.1    39.6
Portugal       37.0    36.5    35.5
Spain          38.9    37.9    36.3
Sweden         45.1    44.9    44.8
UK             35.8    34.6    33.7
US             31.5    31.1    30.7

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

Australia       2.0     1.8     1.7         --
Austria         2.1     1.9     1.6         --
Belgium         2.8     2.5     2.1        2015
Canada          3.0     2.8     2.8        2013
Denmark         1.4     1.3     1.1        2013
Finland         1.1     1.0     0.9        2016
France          1.8     1.6     1.4        2017
Germany         1.7     1.4     1.2         --
Greece          3.1     3.0     2.5        2015
Ireland         3.6     3.5     3.3        2015
Italy           4.5     4.1     3.6        2015
Japan           2.0     1.7     1.6         --
Netherlands     1.3     1.1     0.9        2013
Portugal        4.5     3.8     3.4        2016
Spain           3.3     3.0     2.5        2017
Sweden          0.8     0.6     0.6         --
UK              1.7     1.9     1.9        2017
US              3.5     3.4     3.4        2017

Notes: (a) Expenditure shares reflect NiGEM aggregates, which may
differ from official government figures, (b) The deficit in
Australia, 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)

                  2013    2014    2015    2016    2017    2018-22

Australia          2.1     2.7     2.4     2.8     2.3        3.0
Austria (a)        0.3     0.5     0.9     1.1     1.6        1.1
Belgium (a)        0.3     1.1     1.1     1.6     1.6        1.3
Bulgaria (a)       0.9     1.7     1.6     1.6     2.8        1.2
Brazil             2.7     0.2    -2.9    -0.6     2.4        2.8
China              7.7     7.3     6.9     6.6     6.4        5.9
Canada             2.0     2.4     0.9     2.1     2.4        1.9
Czech Rep.        -0.5     2.0     4.3     2.5     3.5        2.1
Denmark (a)       -0.5     1.1     1.7     1.8     2.3        1.5
Estonia (a)        1.7     2.9     2.0     2.6     3.6        2.5
Finland (a)       -1.1    -0.4     0.7     1.2     1.5        1.2
France (a)         0.7     0.2     1.1     1.4     1.8        1.4
Germany (a)        0.4     1.6     1.6     1.9     1.7        1.2
Greece (a)        -4.0     0.7    -0.3    -1.9     0.4        2.3
Hong Kong          3.1     2.5     2.2     2.5     2.6        2.4
Hungary (a)        1.7     3.5     2.4     2.4     2.8        1.4
India              6.4     7.1     7.6     7.7     7.7        6.7
Indonesia          5.6     5.0     5.0     3.9     5.4        5.2
Ireland (a)        1.4     5.2     6.4     3.0     3.2        2.7
Italy (a)         -1.7    -0.4     0.7     0.9     2.0        2.1
Japan              1.6    -0.1     0.7     1.4     0.9        0.8
Lithuania (a)      3.7     3.0     1.9     3.6     3.6        1.6
Latvia (a)         4.8     2.5     2.4     2.5     3.3        1.7
Mexico             1.6     2.1     2.3     2.7     3.2        3.4
Netherlands (a)   -0.4     1.0     2.3     2.0     1.8        1.1
New Zealand        2.5     3.0     2.5     2.7     2.7        2.6
Norway             0.8     2.2     1.4     1.9     2.2        1.8
Poland (a)         1.7     3.5     3.2     3.3     4.9        2.6
Portugal (a)      -1.1     0.9     1.7     2.1     2.6        2.1
Romania (a)        3.1     2.9     3.3     3.0     4.2        2.6
Russia             1.3     0.6    -4.2     0.2     3.2        4.3
Singapore          4.4     2.9     1.4     3.0     3.3        2.5
South Africa       2.2     1.5     1.5     3.1     4.4        3.5
S. Korea           2.9     3.3     2.0     3.0     4.2        3.9
Slovakia (a)       1.4     2.4     3.1     3.8     3.8        1.6
Slovenia (a)      -1.0     2.8     2.3     1.8     2.5        1.2
Spain (a)         -1.2     1.4     3.1     2.6     2.7        2.2
Sweden (a)         1.2     2.4     3.1     2.3     2.7        2.3
Switzerland        1.8     1.9     1.2     1.5     1.6        2.1
Taiwan             2.2     3.8     1.4     3.0     3.5        3.7
Turkey             4.2     2.9     3.6     3.7     4.8        4.0
UK (a)             2.2     2.9     2.4     2.3     2.6        2.5
US                 1.5     2.4     2.6     2.8     2.9        2.9
Vietnam            5.3     5.9     6.2     5.3     5.3        4.5
Euro Area (a)     -0.2     0.9     1.5     1.7     1.9        1.6
EU-27 (a)          0.2     1.4     1.8     1.9     2.2        1.8
OECD               1.2     1.8     2.1     2.3     2.6        2.4
World              3.3     3.4     3.0     3.4     4.1        3.9

                           Annual inflation (a) (per cent)

                  2013    2014    2015    2016    2017    2018-22

Australia          2.6     2.3     1.6     2.0     2.0        2.1
Austria (a)        2.1     1.5     0.9     1.4     1.6        2.0
Belgium (a)        1.2     0.5     0.5     0.8     1.3        1.8
Bulgaria (a)       0.4    -1.6     0.8     2.0     3.4        2.6
Brazil             6.2     6.3     9.1     6.5     4.3        5.1
China              2.6     2.0     1.1     1.3     2.5        2.7
Canada             1.3     1.9     1.2     1.5     1.7        2.1
Czech Rep.         1.4     0.4     0.1     0.5     1.2        2.2
Denmark (a)        0.5     0.3     0.3     1.0     1.7        1.6
Estonia (a)        3.2     0.5     0.2     1.4     2.5        1.0
Finland (a)        2.2     1.2    -0.3     0.4     1.6        2.5
France (a)         1.0     0.6     0.1     0.3     0.4        1.3
Germany (a)        1.6     0.8     0.2     0.7     0.9        1.5
Greece (a)        -0.9    -1.4    -1.1     0.3    -0.3        2.2
Hong Kong          2.7     2.7     2.2     2.0     1.9        2.6
Hungary (a)        1.7     0.0     0.0     0.9     1.4        1.9
India             10.1     7.2     4.3     5.4     4.5        4.2
Indonesia          6.4     6.4     6.2     3.9     5.0        5.0
Ireland (a)        0.5     0.3     0.1     0.7     0.5        1.3
Italy (a)          1.3     0.2     0.2     0.4     2.0        2.0
Japan             -0.2     1.9     0.4     0.9     0.9        1.0
Lithuania (a)      1.2     0.2    -0.9     1.8     3.5        0.9
Latvia (a)         0.0     0.7     0.4     1.9     3.9        1.6
Mexico             3.8     4.0     3.4     3.4     3.5        4.1
Netherlands (a)    2.6     0.3     0.3     0.7     0.7        0.6
New Zealand        0.5     0.8     0.5     1.3     2.2        2.7
Norway             2.8     2.3     2.2     2.1     2.5        1.9
Poland (a)         0.8     0.1    -0.6     1.2     1.5        1.6
Portugal (a)       0.4    -0.2     0.4     0.4     2.6        1.5
Romania (a)        3.2     1.4    -0.3     0.0     2.5        0.8
Russia             6.8     7.8    15.9    10.3     8.6        3.6
Singapore          2.3     1.0    -0.1     1.5     1.8        2.5
South Africa       5.5     5.9     4.5     6.6     6.2        4.8
S. Korea           1.3     1.3     0.5     2.0     2.8        2.4
Slovakia (a)       1.5    -0.1    -0.1     1.6     3.2        1.6
Slovenia (a)       1.9     0.4    -0.7     0.7     4.6        2.5
Spain (a)          1.5    -0.2    -0.7     0.0     1.7        2.0
Sweden (a)         0.4     0.2     0.7     1.0     1.4        1.6
Switzerland       -0.6    -0.3    -0.9    -0.4     0.0        2.6
Taiwan             0.3     0.7    -0.8     0.4     0.9        1.6
Turkey             7.5     8.9     7.5     7.8     7.7        6.6
UK (a)             2.6     1.4     0.1     1.1     1.8        2.0
US                 1.4     1.4     0.4     1.3     1.8        2.1
Vietnam            6.6     4.1     1.0     4.0     4.3        6.3
Euro Area (a)      1.3     0.4     0.0     0.5     1.2        1.6
EU-27 (a)          1.5     0.6     0.0     0.7     1.4        1.7
OECD               1.5     1.5     0.7     1.4     1.9        2.2
World              4.8     4.6     3.7     3.4     3.6        3.3

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

Table B2. Fiscal balance and government debt

                    Fiscal balance (per cent of GDP) (a)

                2013    2014    2015    2016    2017    2022

Australia       -1.4    -2.2    -1.8    -1.2    -1.0    -1.3
Austria         -1.3    -2.4    -2.5    -2.3    -1.9    -1.6
Belgium         -2.9    -3.2    -2.2    -2.2    -1.8    -1.9
Bulgaria        -0.9    -2.8    -2.9    -2.9    -2.8    -2.4
Canada          -2.7    -1.6    -2.1    -2.1    -2.0    -1.8
Czech Rep.      -1.2    -2.0    -1.6    -1.7    -1.6    -1.9
Denmark         -1.1     1.2     3.3     2.6     1.6    -0.4
Estonia         -0.2     0.6     0.8     0.5     0.1    -1.1
Finland         -2.5    -3.2    -3.3    -2.8    -2.0    -2.1
France          -4.1    -4.0    -3.9    -3.5    -2.9    -2.6
Germany          0.1     0.7     0.5     0.4     0.5    -0.7
Greece         -12.3    -3.6    -1.9    -2.0    -1.6    -1.5
Hungary         -2.5    -2.6    -2.5    -1.9    -1.5    -1.9
Ireland         -5.8    -4.1    -1.8    -1.4    -1.0     0.3
Italy           -2.9    -3.0    -2.6    -2.0    -1.1    -2.0
Japan           -9.0    -8.2    -6.8    -5.7    -5.3    -4.7
Lithuania       -2.6    -0.7    -0.6    -0.7    -0.8    -1.3
Latvia          -0.7    -1.4    -1.6    -1.7    -1.6    -1.5
Netherlands     -2.2    -2.3    -1.0    -1.0    -1.1    -1.6
Poland          -4.0    -3.2    -4.0    -3.7    -2.8    -3.4
Portugal        -4.8    -4.5    -3.4    -2.6    -2.0    -2.6
Romania         -2.2    -1.5    -1.7    -1.6    -1.5    -1.4
Slovakia        -2.6    -2.9    -2.2    -2.0    -1.5    -0.6
Slovenia       -14.9    -4.9    -3.8    -3.1    -2.7    -1.7
Spain           -6.8    -5.8    -4.2    -3.4    -2.3    -2.5
Sweden          -1.4    -1.9    -1.7    -1.0    -0.9    -1.3
UK              -5.6    -5.7    -4.4    -3.2    -1.9    -0.1
US              -5.5    -5.0    -4.0    -3.2    -2.9    -2.4

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

                2013    2014    2015    2016    2017    2022

Australia       37.6    42.2    42.4    41.3    40.3    35.6
Austria         80.9    84.5    85.3    85.5    84.0    78.5
Belgium        104.4   106.6   113.9   114.3   110.4   100.0
Bulgaria          --      --      --      --      --      --
Canada          91.1    94.1    95.8    93.3    91.3    84.9
Czech Rep.      45.0    42.6    42.1    42.0    41.2    39.8
Denmark         45.0    45.2    41.6    38.6    34.5    27.5
Estonia           --      --      --      --      --      --
Finland         55.8    59.3    62.6    64.2    63.8    61.8
France          92.2    95.5    98.2    98.9    99.4    98.2
Germany         77.4    75.0    70.3    66.9    64.0    52.6
Greece         175.1   177.4   175.7   179.1   174.1   143.0
Hungary         77.3    76.9    78.4    76.1    74.1    70.4
Ireland        123.2   109.7   100.5    98.5    95.4    76.9
Italy          128.6   132.0   135.7   135.6   130.7   109.6
Japan          222.8   228.4   225.6   225.2   226.8   225.1
Lithuania         --      --      --      --      --      --
Latvia            --      --      --      --      --      --
Netherlands     68.6    68.8    69.6    69.7    68.5    69.2
Poland          55.7    50.1    51.0    51.8    51.4    56.6
Portugal       129.7   130.2   129.1   127.7   123.3   112.4
Romania           --      --      --      --      --      --
Slovakia          --      --      --      --      --      --
Slovenia          --      --      --      --      --      --
Spain           92.1    97.7    98.4    98.1    93.5    83.4
Sweden          38.7    43.8    43.6    43.4    42.6    40.2
UK              86.2    88.2    89.3    88.4    86.7    68.7
US             108.0   108.9   108.9   107.8   105.6    93.3

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

Table B3. Unemployment and current account balance

                         Standardised unemployment rate

                  2013    2014    2015    2016    2017    2018-22

Australia          5.7     6.1     6.1     6.0     5.9        5.8
Austria            5.4     5.6     5.7     5.7     5.6        5.2
Belgium            8.4     8.5     8.7     8.4     8.1        7.8
Bulgaria          12.9    11.4     9.6     9.1     8.9        9.5
Canada             7.1     6.9     6.9     7.2     6.9        6.8
China               --      --      --      --      --         --
Czech Republic     7.0     6.1     5.3     5.1     4.7        4.0
Denmark            7.0     6.6     6.3     6.4     6.0        6.0
Estonia            8.6     7.4     6.1     6.1     5.7        5.9
Finland            8.2     8.7     9.5     9.4     8.1        8.2
France            10.3    10.3    10.6    10.5     9.9        9.2
Germany            5.2     5.0     4.6     4.6     5.0        5.2
Greece            27.5    26.5    25.4    24.6    24.1       21.8
Hungary           10.1     7.7     7.1     6.8     6.3        6.0
Ireland           13.1    11.3     9.6    10.1     9.8        8.3
Italy             12.2    12.7    12.2    11.7    10.5       10.3
Japan              4.0     3.6     3.4     3.8     4.1        4.3
Lithuania         11.9    10.7     9.5     9.2     9.3        9.9
Latvia            11.9    10.8    10.0    10.6    10.2       10.6
Netherlands        7.3     7.4     6.9     7.1     7.2        5.8
Poland            10.3     9.0     7.5     6.6     5.6        5.7
Portugal          16.4    14.1    12.5    11.6    10.5       10.5
Romania            7.1     6.8     6.9     6.5     6.1        6.5
Slovakia          14.3    13.2    11.6    11.1    11.1       11.7
Slovenia          10.1     9.7     9.4     8.6     7.9        8.2
Spain             26.1    24.5    22.5    21.2    17.9       17.8
Sweden             8.0     7.9     7.4     7.0     7.1        7.6
UK                 7.6     6.2     5.4     5.3     5.1        5.1
US                 7.4     6.2     5.3     5.3     5.3        5.4

                     Current account balance (per cent of GDP)

                  2013    2014    2015    2016    2017    2018-22

Australia         -3.3    -2.8    -3.0    -1.6     0.7        0.8
Austria            1.0     0.7     2.2     1.7     2.5        4.5
Belgium           -0.2     1.6    -0.5    -2.4     0.0        2.6
Bulgaria           1.9     0.8     0.6     2.6     4.7        2.8
Canada            -3.0    -2.1    -3.7    -2.6    -1.3        0.0
China              1.6     2.1     2.3     0.6     0.0       -0.4
Czech Republic    -0.5     0.6     1.6     1.6     2.2       -0.6
Denmark            7.2     6.3     5.7     3.5     5.8        6.9
Estonia           -1.1     0.0     0.3     1.3     3.0        1.7
Finland           -0.9    -1.8     0.9    -0.4    -0.6       -0.3
France            -0.8    -0.9    -0.6    -0.5    -0.6       -0.6
Germany            6.7     7.8     8.9     9.0     8.9        9.7
Greece             0.6     0.8    -2.5     0.1     2.3        0.2
Hungary            4.0     3.9     5.4     4.2     5.6        4.6
Ireland            6.0     8.1    11.2     6.5     4.1        7.1
Italy              0.9     1.9     1.9     1.4     2.3        4.0
Japan              0.8     0.5     2.1     1.4     2.2        3.7
Lithuania          1.6     0.1    -1.7    -2.1    -1.3       -1.2
Latvia            -2.4    -3.1    -1.5    -2.7    -1.2       -0.3
Netherlands       11.0    10.8    11.2     8.7     8.9       10.6
Poland            -1.3    -1.2     0.5     1.0     1.1       -0.9
Portugal           1.4     0.6    -1.2    -1.8    -2.3       -2.9
Romania           -0.8    -0.4    -0.1    -0.7     0.0        0.0
Slovakia           1.5     0.1    -0.3     1.1     1.2       -2.2
Slovenia           5.6     5.8     5.0     4.0     5.2        5.0
Spain              1.4     0.8     1.7     0.2     1.1       -0.6
Sweden             9.4     7.8     4.6     2.5     0.8       -0.4
UK                -4.5    -5.1    -4.1    -4.3    -4.3       -3.4
US                -2.3    -2.2    -2.5    -3.1    -3.6       -3.9

Table B4. United States

Percentage change

                                       2012     2013     2014     2015

GDP                                     2.2      1.5      2.4      2.6

Consumption                             1.5      1.7      2.7      3.1
Investment : housing                   13.5      9.5      1.8      8.1
           : business                   9.0      3.0      6.2      4.0
Government: consumption                -0.9     -2.5     -0.5      0.5
           : investment                -5.6     -4.8     -1.1      1.3
Stockholding (a)                        0.1      0.0      0.0      0.3
Total domestic demand                   2.1      1.3      2.5      3.2

Export volumes                          3.4      2.8      3.4      1.2
Import volumes                          2.2       1.1     3.8      5.1

Average earnings                        2.1      1.0      2.5      2.0
Private consumption deflator            1.9      1.4      1.4      0.4
RPDI                                    3.3     -1.5      2.7      3.1
Unemployment, %                         8.1      7.4      6.2      5.3

General Govt, balance as % of GDP      -9.0     -5.5     -5.0     -4.0
General Govt, debt as % of GDP (b)    109.6    108.0    108.9    108.9

Current account as % of GDP            -2.8     -2.3     -2.2     -2.5

                                                        Average
                                       2016     2017    2018-22

GDP                                     2.8      2.9        2.9

Consumption                             3.2      3.0        2.6
Investment : housing                    6.4      7.0        4.0
           : business                   6.1      6.1        4.0
Government: consumption                 1.5      1.3        2.0
           : investment                 0.9      1.2        2.1
Stockholding (a)                        0.0      0.0        0.0
Total domestic demand                   3.3      3.2        2.8

Export volumes                          4.8      4.7        4.0
Import volumes                          7.9      6.2        3.0

Average earnings                        2.6      2.9        3.6
Private consumption deflator            1.3      1.8        2.1
RPDI                                    2.7      2.8        2.7
Unemployment, %                         5.3      5.3        5.4

General Govt, balance as % of GDP      -3.2     -2.9       -2.5
General Govt, debt as % of GDP (b)    107.8    105.6       98.0

Current account as % of GDP            -3.1     -3.6       -3.9

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

Table B5. Canada

Percentage change

                                      2012    2013    2014    2015

GDP                                    1.9     2.0     2.4     0.9

Consumption                            1.9     2.5     2.7     1.8
Investment : housing                   5.7    -0.4     2.7     3.6
           : business                  8.4     2.2     0.3    -7.0
Government: consumption                1.2     0.4     0.2     0.5
           : investment               -4.8    -1.6    -2.7     3.0
Stockholding (a)                      -0.2     0.3    -0.3     0.0
Total domestic demand                  2.2     1.9     1.4     0.7

Export volumes                         2.6     2.0     5.4     1.9
Import volumes                         3.7     1.3     1.8     0.9

Average earnings                       2.5     2.6     3.0     2.4
Private consumption deflator           1.3     1.3     1.9     1.2
RPDI                                   2.6     2.3     1.2     1.9
Unemployment, %                        7.4     7.1     6.9     6.9

General Govt, balance as % of GDP     -3.1    -2.7    -1.6    -2.1
General Govt, debt as % of GDP (b)    95.0    91.1    94.1    95.8

Current account as % of GDP           -3.3    -3.0    -2.1    -3.7

                                                        Average
                                       2016     2017    2018-22

GDP                                     2.1      2.4       1.9

Consumption                             1.8      1.3       0.9
Investment : housing                    3.3      3.9       3.1
           : business                  -0.4      1.5       1.0
Government: consumption                 0.9      1.2       1.9
           : investment                 1.3      1.5       1.9
Stockholding (a)                       -0.1      0.0       0.0
Total domestic demand                   1.4      1.5       1.3

Export volumes                          6.1      6.6       3.8
Import volumes                          3.6      3.8       2.1

Average earnings                        1.7      2.1       3.4
Private consumption deflator            1.5      1.7       2.1
RPDI                                    1.2      1.2       0.9
Unemployment, %                         7.2      6.9       6.8

General Govt, balance as % of GDP      -2.1     -2.0      -1.9
General Govt, debt as % of GDP (b)     93.3     91.3      87.3

Current account as % of GDP            -2.6     -1.3       0.0

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

Table B6. Japan

Percentage change

                                 2012     2013     2014     2015

GDP                               1.7      1.6     -0.1      0.7

Consumption                       2.3      2.1     -1.3     -0.7
Investment : housing              3.2      8.7     -4.9     -2.9
           : business             3.6      0.6      3.6      0.9
Government: consumption           1.7      1.9      0.2      1.1
           : investment           2.0      7.9      3.8      1.1
Stockbuilding (a)                 0.2     -0.4      0.1      0.4
Total domestic demand             2.6      1.9     -0.1      0.3

Export volumes                   -0.2       1.1     8.4      2.4
Import volumes                    5.3      3.0      7.3      1.5

Average earnings                 -0.6      0.9      1.0     -0.1
Private consumption deflator     -0.9     -0.2      1.9      0.4
RPDI                              0.7      0.7      1.4      1.8
Unemployment, %                   4.3      4.0      3.6      3.4

Govt, balance as % of GDP        -8.7     -9.0     -8.2     -6.8
Govt, debt as % of GDP (a)      217.2    222.8    228.4    225.6

Current account as % of GDP       1.0      0.8      0.5      2.1

                                                  Average
                                 2016     2017    2018-22

GDP                               1.4      0.9       0.8

Consumption                       1.6      0.8       1.1
Investment : housing              4.3      2.9       2.4
           : business             1.0      1.5       1.0
Government: consumption           0.7      0.5       0.3
           : investment          -0.2     -0.4       0.1
Stockbuilding (a)                 0.0      0.0       0.0
Total domestic demand             1.3      0.8       1.0

Export volumes                    5.7      4.6       3.1
Import volumes                    6.9      4.6       4.0

Average earnings                  1.6      1.2       1.9
Private consumption deflator      0.9      0.9       1.0
RPDI                              1.2      0.1       0.9
Unemployment, %                   3.8      4.1       4.3

Govt, balance as % of GDP        -5.7     -5.3      -4.7
Govt, debt as % of GDP (a)      225.2    226.8     225.5

Current account as % of GDP       1.4      2.2       3.7

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

Table B7. Euro Area

Percentage change

                               2012    2013    2014     2015

GDP                            -0.8    -0.2     0.9      1.5

Consumption                    -1.2    -0.6     0.9      1.8
Private investment             -7.7    -3.2     1.9      2.3
Government : consumption       -0.1     0.2     0.8      1.1
           : investment        -4.7     0.7    -2.3      0.4
Stockbuilding (a)              -0.9     0.1    -0.2     -0.1
Total domestic demand          -3.2    -0.7     0.8      1.6

Export volumes                  2.9     2.2     3.9      5.0
Import volumes                 -0.7     1.4     4.2      5.2

Average earnings                1.9     1.9     1.4      0.7
Harmonised consumer prices      2.5     1.3     0.4      0.0
RPDI                           -1.7    -0.6     1.0      1.4
Unemployment, %                11.4    12.0    11.6     11.0

Govt, balance as % of GDP      -3.6    -2.9    -2.4     -2.0
Govt, debt as % of GDP (b)     89.4    91.2    92.2     92.4

Current account as % of GDP     1.3     2.0     2.4      2.5

                                                 Average
                                2016     2017    2018-22

GDP                              1.7      1.9        1.6

Consumption                      1.6      1.2        1.0
Private investment               2.7      3.3        2.8
Government : consumption         0.9      0.7        1.2
           : investment          1.6      1.4        1.7
Stockbuilding (a)                0.3      0.0        0.0
Total domestic demand            2.0      1.5        1.4

Export volumes                   6.0      6.4        3.6
Import volumes                   6.4      5.9        3.5

Average earnings                  1.1     2.0        2.9
Harmonised consumer prices       0.5      1.2        1.6
RPDI                             0.9      1.4        1.3
Unemployment, %                 10.7     10.0        9.7

Govt, balance as % of GDP       -1.7     -1.2       -1.4
Govt, debt as % of GDP (b)      91.0     88.5       82.2

Current account as % of GDP      2.3      2.7        3.1

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

Table B8. Germany

Percentage change

                               2012    2013    2014    2015

GDP                             0.6     0.4     1.6     1.6

Consumption                     0.9     0.8     1.0     2.1
Investment : housing            4.1    -0.7     3.3     2.2
           : business          -1.7    -2.0     4.7     2.0
Government: consumption         1.3     0.8     1.7     1.9
           : investment         0.9     1.3    -2.2     1.2
Stockholding (a)               -1.6     0.5    -0.3    -0.6
Total domestic demand          -0.9     0.9     1.3     1.4

Export volumes                  3.4     1.8     3.9     5.7
Import volumes                  0.1     3.2     3.7     5.8

Average earnings                3.6     2.8     2.2     2.5
Harmonised consumer prices      2.1     1.6     0.8     0.2
RPDI                            0.6     0.5     1.4     2.4
Unemployment, %                 5.4     5.2     5.0     4.6

Govt, balance as % of GDP       0.1     0.1     0.7     0.5
Govt, debt as % of GDP (b)     79.7    77.4    75.0    70.3

Current account as % of GDP     7.2     6.7     7.8     8.9

                                                 Average
                                2016     2017    2018-22

GDP                              1.9      1.7        1.2

Consumption                      2.0      1.1        0.7
Investment : housing             2.5      3.0        0.5
           : business            4.0      3.0        0.0
Government: consumption          2.2      0.7        0.5
           : investment          1.2      0.8        0.8
Stockholding (a)                 0.2      0.0        0.0
Total domestic demand            2.5      1.4        0.5

Export volumes                   5.7      7.1        3.9
Import volumes                   7.8      7.3        3.1

Average earnings                 2.5      2.8        3.0
Harmonised consumer prices       0.7      0.9        1.5
RPDI                             1.8      1.2        1.0
Unemployment, %                  4.6      5.0        5.2

Govt, balance as % of GDP        0.4      0.5       -0.2
Govt, debt as % of GDP (b)      66.9     64.0       56.3

Current account as % of GDP      9.0      8.9        9.7

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

Table B9. France

Percentage change

                                2012    2013    2014    2015

GDP                              0.2     0.7     0.2     1.1
Consumption                     -0.2     0.5     0.6     1.7
Investment : housing            -2.1    -1.5    -5.3    -4.3
           : business            0.8    -0.2     2.2     1.3
Government: consumption          1.6     1.7     1.5     1.7
           : investment          1.8     0.2    -6.9    -1.7
Stockholding (a)                -0.6     0.2     0.2    -0.2
Total domestic demand           -0.3     0.8     0.7     1.0

Export volumes                   2.6     1.8     2.4     6.3
Import volumes                   0.8     1.8     3.9     5.3

Average earnings                 2.6     2.7     1.5     0.7
Harmonised consumer prices       2.2     1.0     0.6     0.1
RPDI                             0.5     0.3     1.7     1.3
Unemployment, %                  9.8    10.3    10.3    10.6

Govt, balance as % of GDP       -4.8    -4.1    -4.0    -3.9
Govt, debt as % of GDP (b)      89.6    92.2    95.5    98.2

Current account as % of GDP     -1.2    -0.8    -0.9    -0.6

                                                  Average
                                 2016     2017    2018-22

GDP                               1.4      1.8        1.4
Consumption                       1.7      1.9        1.1
Investment : housing             -1.8      1.8        6.4
           : business             2.5      2.8        0.8
Government: consumption           1.3      1.2        1.6
           : investment           2.2      1.5        1.8
Stockholding (a)                  0.0      0.0        0.0
Total domestic demand             1.6      1.8        1.5

Export volumes                    6.0      7.2        3.7
Import volumes                    5.6      6.9        3.7

Average earnings                  1.8      1.9        2.6
Harmonised consumer prices        0.3      0.4        1.3
RPDI                              1.6      1.7        1.1
Unemployment, %                  10.5      9.9        9.2

Govt, balance as % of GDP        -3.5     -2.9       -2.5
Govt, debt as % of GDP (b)       98.9     99.4       98.8

Current account as % of GDP      -0.5     -0.6       -0.6

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

Table B10. Italy

Percentage change

                                2012     2013     2014     2015

GDP                             -2.8     -1.7     -0.4      0.7

Consumption                     -4.0     -2.8      0.3      0.8
Investment : housing            -7.7     -4.5     -3.0     -0.9
           : business          -10.4     -6.1     -2.8      1.6
Government: consumption         -1.2     -0.3     -1.0      0.1
           : investment         -8.1     -7.4     -5.5     -1.3
Stockbuilding (a)               -1.2      0.2      0.0      0.3
Total domestic demand           -5.6     -2.6     -0.6      1.0

Export volumes                   2.0      0.7      2.4      4.1
Import volumes                  -8.3     -2.2      1.7      5.6

Average earnings                  1.1     1.0      0.8     -0.6
Harmonised consumer prices       3.3      1.3      0.2      0.2
RPDI                            -5.5     -1.0      0.0      0.4
Unemployment, %                 10.6     12.2     12.7     12.2

Govt, balance as % of GDP       -3.0     -2.9     -3.0     -2.6
Govt, debt as % of GDP (b)     123.2    128.6    132.0    135.7

Current account as % of GDP     -0.4      0.9      1.9      1.9

                                                 Average
                                2016     2017    2018-22

GDP                              0.9      2.0        2.1

Consumption                      1.5      1.1        1.2
Investment : housing             0.5      2.8        5.2
           : business            2.2      4.3        5.7
Government: consumption          0.1      0.3        1.0
           : investment          0.6     -0.1        1.2
Stockbuilding (a)                0.0      0.0        0.0
Total domestic demand             1.1     1.3        1.9

Export volumes                   5.4      6.6        3.7
Import volumes                   6.7      4.6        3.2

Average earnings                 0.4      1.5        2.4
Harmonised consumer prices       0.4      2.0        2.0
RPDI                             0.1      1.1        1.5
Unemployment, %                 11.7     10.5       10.3

Govt, balance as % of GDP       -2.0      -1.1      -1.4
Govt, debt as % of GDP (b)     135.6     130.7      116.1

Current account as % of GDP      1.4      2.3        4.0

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

Table B11. Spain

Percentage change

                                2012     2013     2014     2015

GDP                             -2.1     -1.2      1.4      3.1

Consumption                     -2.9     -2.3      2.4      3.4
Investment : housing            -9.0     -7.6     -1.8      2.6
           : business           -3.8     -8.1      5.6     11.9
Government: consumption         -3.7     -2.9      0.1      1.0
           : investment        -16.0     15.4      7.8      2.0
Stockbuilding (a)               -0.1      0.0      0.1     -0.1
Total domestic demand           -4.3     -2.7      2.3      3.5

Export volumes                   1.2      4.3      4.2      4.7
Import volumes                  -6.3     -0.5      7.6      6.0

Average earnings                -0.6      1.1      0.3      1.0
Harmonised consumer prices       2.4      1.5     -0.2     -0.7
RPDI                            -5.4     -0.9      2.3      1.8
Unemployment, %                 24.8     26.1     24.5     22.5

Govt, balance as % of GDP      -10.3     -6.8     -5.8     -4.2
Govt, debt as % of GDP (b)      84.4     92.1     97.7     98.4

Current account as % of GDP     -1.2      1.4      0.8      1.7

                                                 Average
                                2016     2017    2018-22

GDP                              2.6      2.7        2.2

Consumption                      2.3      1.6        1.4
Investment : housing             2.0      3.8        5.0
           : business            9.5      8.6        6.6
Government: consumption          0.1      1.2        2.2
           : investment          1.7      2.4        2.4
Stockbuilding (a)                0.0      0.0        0.0
Total domestic demand            2.5      2.4        2.5

Export volumes                   6.5      4.7        3.2
Import volumes                   6.7      4.2        4.2

Average earnings                -0.1      1.8        3.8
Harmonised consumer prices       0.0      1.7        2.0
RPDI                             0.6      2.7        1.4
Unemployment, %                 21.2     17.9       17.8

Govt, balance as % of GDP       -3.4     -2.3       -2.4
Govt, debt as % of GDP (b)      98.1     93.5       85.8

Current account as % of GDP      0.2      1.1       -0.6

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

Graham Hacche, with Jessica Baker, 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 Jonathan Portes for helpful comments and discussion. The forecast was completed on 27 October, 2015. Exchange rate, interest rates and equity price assumptions are based on information available to 15 October 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)

                                                          Euro
              World     OECD       China       EU-27      Area

2012           3.4       1.3        7.7        -0.5       -0.8
2013           3.3       1.2        7.7         0.2       -0.2
2014           3.4       1.8        7.3         1.4       0.9
2015           3.0       2.1        6.9         1.8       1.5
2016           3.4       2.3        6.6         1.9       1.7
2017           4.1       2.6        6.4         2.2       1.9
2006-2011      4.0       1.3        11.0        1.1       1.0
2018-2022      3.9       2.4        5.9         1.8       1.6

                                Real GDP (a)

               USA      Japan     Germany     France     Italy

2012           2.2       1.7        0.6         0.2       -2.8
2013           1.5       1.6        0.4         0.7       -1.7
2014           2.4      -0.1        1.6         0.2       -0.4
2015           2.6       0.7        1.6         1.1       0.7
2016           2.8       1.4        1.9         1.4       0.9
2017           2.9       0.9        1.7         1.8       2.0
2006-2011      0.9       0.3        1.7         1.0       -0.1
2018-2022      2.9       0.8        1.2         1.4       2.1

                                                   Private
                                                 consumption
                      Real GDP (a)                 deflator

                                                          Euro
                                   World       OECD       Area
               UK      Canada    trade (b)

2012           1.2       1.9        2.7         1.9       1.9
2013           2.2       2.0        2.9         1.5       1.1
2014           2.9       2.4        3.2         1.5       0.5
2015           2.4       0.9        3.2         0.7       0.1
2016           2.3       2.1        6.4         1.4       0.4
2017           2.6       2.4        6.2         1.9       1.2
2006-2011      0.7       1.6        4.7         2.0       1.8
2018-2022      2.5       1.9        4.6         2.2       1.6

                     Private consumption deflator

               USA      Japan     Germany     France

2012           1.9      -0.9        1.6         1.4
2013           1.4      -0.2        1.3         0.8
2014           1.4       1.9        0.9         0.0
2015           0.4       0.4        0.4         0.0
2016           1.3       0.9        0.4         0.2
2017           1.8       0.9        0.9         0.4
2006-2011      2.0      -1.0        1.3         1.4
2018-2022      2.1       1.0        1.5         1.3

               Private consumption deflator

              Italy      UK        Canada

2012           2.7       1.8        1.3
2013           1.1       2.3        1.3
2014           0.2       1.5        1.9
2015           0.2       0.2        1.2
2016           0.4       0.9        1.5
2017           2.0       1.9        1.7
2006-2011      2.0       3.3        1.4
2018-2022      2.0       2.1        2.1

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

2012           0.3       0.1        0.9        110.4
2013           0.3       0.1        0.6        107.1
2014           0.3       0.1        0.2         97.8
2015           0.3       0.1        0.1         53.6
2016           1.0       0.1        0.1         57.9
2017           2.2       0.1        0.1         59.5
2006-2011      2.1       0.2        2.3         79.8
2018-2022      3.4       0.6        1.3         63.2

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