The world economy.

Hacche, Graham ; Armstrong, Angus ; Fic, Tatiana 等

World overview

We project a pickup in world growth to 3.7 per cent in both 2014 and 2015. This follows growth of 3.1 per cent in 2013, the weakest annual performance since the world recession in 2009 in the aftermath of the global financial crisis. The recovery has strengthened broadly as we expected, and our world forecast is little changed from the November Review. The forecast is still one of growth that is both sluggish, by the standards of past cyclical recoveries, and uneven, in ways that raise a number of risks.

Associated with the sluggishness of growth, there has recently, in the advanced economies, been increasing concern about below-target inflation. If sustained, this carries various risks: it may threaten the recovery of demand and activity; make the reduction of debt burdens more difficult; exacerbate the divergence between goods and asset price inflation in ways that challenge monetary policies; and complicate adjustment in the Euro Area, making the burden of adjustment more unbalanced to the disadvantage of the deficit countries.

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A second set of risks confronts the Euro Area as it undertakes its balance sheet assessment of banks without sound plans for a banking union. Third, the outlook for emerging market economies has become less encouraging, with new risks arising as the normalisation of monetary policy in the US and other advanced economies becomes a closer prospect.

The outlook for growth has improved mainly in the advanced economies, and especially the United States, which is well into its fifth year of recovery and where our growth forecast has been revised up. Disappointing data have contributed to downward revisions for the Euro Area and Japan, but leading indicators and other considerations point to improved growth in the period ahead. Forces supportive of growth include highly accommodative monetary policies, in most cases less restrictive fiscal policies than in the recent past, greater financial stability in the Euro Area since the turmoil of 2012, and reduced uncertainty about US fiscal policy following the recent budget agreement.

Recent developments among the major emerging market economies have been mixed. The gradual slowdown in China has proceeded broadly as expected, but near-term growth prospects for Brazil, India, Russia and a number of other emerging market economies have deteriorated. Financial pressures have tightened, reflecting capacity constraints, inflationary pressures, and, in some cases, reduced capital inflows and currency weakness, with increased strains appearing in late January in Argentina, Turkey, and other countries. Since late October, official interest rates have been raised in Brazil, India, Indonesia, South Africa and Turkey to reduce inflationary or currency pressures.

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By contrast, a notable feature of recent developments in the advanced economies is the increased prevalence of below-target inflation. In both the United States and the Euro Area, consumer price inflation has recently declined to about 1 per cent, significantly below central banks' targets of close to 2 per cent. In the 34 advanced economies of the OECD, annual consumer price inflation fell to only 1.6 per cent in November 2013 from 2.0 in July. Wage pressures are also subdued. In the US, labour income has been rising by only about 2 per cent a year, while in Japan wages have remained flat, and in parts of the Euro Area wages have even been declining.

Below-target inflation has been noted by central banks, including the Federal Reserve and the ECB, as a factor influencing their recent policy decisions, including their forward guidance on short-term interest rates. In early November last year, the ECB lowered two of its benchmark interest rates by 25 basis points, "given the latest indications of diminishing price pressures, starting from currently low annual inflation rates of below 1 per cent". In mid-December 2013, Sweden's Riksbank lowered its benchmark rate by 25 basis points because inflation was running close to zero, well below its 2 per cent target. Also, when the Federal Reserve announced in December last year that it would begin "tapering" its "QE3" asset purchases in January 2014, it strengthened its forward guidance by indicating that it would be likely to maintain short-term interest rates at their current near-zero level "well past the time that the unemployment rate declines below 6 1/2 per cent, especially if projected inflation continues to run below the Committee's 2 per cent goal". These actions by central banks, together with the outlook of strengthening growth, and the fact that medium-term inflation expectations seem well-anchored and close to targeted rates, provide some reassurance that inflation will in the near future rise back towards the targets. This, broadly, is what our projections show.

However, a notable risk to our projections is that inflation in the advanced economies may continue to decline, even into the negative territory experienced by Japan for much of the past 20 years. On the basis of our forecast, output and employment gaps are likely to remain unusually wide for an extended period. Expected inflation may soon adapt to persistently low actual rates. Moreover, the recent decline in inflation was not forecast and is not well understood. Sustained below-target inflation, and more so deflation, could impede recovery in a number of ways: by limiting further the ability of central banks to reduce real interest rates, given the zero lower bound on nominal rates; by reducing the demand for goods whose prices may be expected to fall; by reducing labour market flexibility, given the relative rigidity of nominal wages; and by increasing the real burden of nominally fixed debt.

The last issue is particularly important currently because of the large burdens of public and private debt that have been accumulated in recent years. Public debt has risen in part because of the cost of financial system support, but much more so because of the depth of the recession and the sub-par recovery, which have undermined fiscal revenues and increased countercyclical spending. While governments have been addressing fiscal deficits, we have argued that it is important for the long-term growth potential of economies to be maintained by sustaining infrastructure investment. In addition, private debt is historically high in many economies (a notable exception being the US) with little sign that the period of exceptionally accommodative monetary policy has been grasped as an opportunity for debt restructuring.

Recent concerns about below-target inflation in the prices of goods and services contrast with concerns in a number of advanced economies about rapid inflation of housing prices--in some cases at annual rates in double digits. The exceptionally accommodative monetary policies of recent years have been intended to work partly through asset prices, and the response of asset prices, including in bond and equity markets as well as real estate markets, has been clear and not surprising. But there is danger of an outcome familiar from the recent crisis--of housing prices outpacing incomes and reaching levels that become unsustainable when monetary conditions are normalised. Thus if below-target inflation continues or declines further, monetary authorities may face an increasingly acute conflict between the apparent need of the real economy for further accommodation to boost demand, and the need to contain the risk of financial collapse by acting to limit the rise in housing prices.

A possible resolution of the dilemma may lie in macro-prudential instruments. Thus in Switzerland, where inflation has been predominantly negative since 2011 but where housing prices have continued rising strongly, the central bank proposed in January an increase in capital requirements (a doubling from 1 to 2 per cent of the "sectoral countercyclical capital buffer") on mortgage loans on Swiss residential property. The effectiveness of such measures in the absence of a tightening of monetary policy is, however, unclear.

The problems of low inflation are especially salient in the Euro Area. Annual core consumer price inflation has been below 2 per cent for five years and fell to only 0.7 per cent in December 2013. This complicates the process of adjustment within the monetary union. Countries in the periphery, some of which have required emergency support from the EU and IMF (see Box A), have needed to regain competitiveness by having lower inflation than countries in the core. Not only is this more difficult when inflation in the core is low (consumer price inflation in Germany was 1.4 per cent in the year to December 2013), but also, the lower the inflation rate required for competitiveness gains, the more difficult it becomes to reduce the country's debt burdens. The peripheral countries are thus caught in a trap: one objective (regaining competitiveness) may conflict with another (debt reduction). Structural reforms to raise productivity may offer an escape, but in practice they tend to be difficult and to take time. In the meantime, low inflation in the surplus countries means that the burden of adjustment placed on the deficit countries is all the greater.

Adjustment in the Euro Area would be more balanced and less costly if inflation were, at least, at its target on average, and above target in the core countries. This strengthens the case for an early further easing of policy by the ECB. In early January, the ECB acknowledged that "we may experience a prolonged period of low inflation" before a rise towards the target, and "firmly reiterated" the downward bias in its forward guidance on interest rates, indicating that it expected its key interest rates to remain "at present or lower levels for an extended period of time". President Draghi also indicated that "two scenarios would cause us to act: one is an unwarranted tightening of short-term money markets, and the other one is a worsening of our medium-term outlook for inflation". Since early December 2013, there has indeed been a tightening of Euro Area money markets as bank liquidity has been reduced by repayments to the ECB of loans taken out through the long-term refinancing operations (LTROs) in 2011-12, thus reinforcing the case for early easing.

Two other risks to the forecast are particularly notable. One also concerns the Euro Area. The ECB has begun work on its comprehensive balance sheet assessment (BSA) of 128 banks accounting for 85 per cent of the Area's banking assets. This will involve a supervisory risk assessment, an asset quality review, and stress tests undertaken in conjunction with the European Banking Authority. The findings are due next September. Our November Review noted that for the assessment to be credible, public backstops would need to be available to fill any capital shortfalls identified, if needed because a bank's own resources, together with bail-ins from shareholders and creditors, were inadequate to do so. This also relates to the need for public backstops for the Single Resolution Mechanism (SRM), an essential component of the banking union that is being developed for the Area.

Last December, the Area's finance ministers reached agreement on the design of an SRM and a common resolution fund. The fund, to be built up (initially at the national level) from levies on banks, would become operational in 2026, with a public backstop for future negotiation. This has been justifiably criticised, including by ECB officials, for the length of the transition, the cumbersome decision processes, the inadequate scale of the funds, and the absence of a backstop. By mid-January legal challenges to the agreement were being made by MEPs. The eventual outcome is uncertain but so far there is little prospect of a robust SRM. In these circumstances, there is a risk that, as the BSA proceeds, investor confidence in banks will be subject to speculation about its results. Another risk is that banks may become more conservative in their decisions, to improve their positions as perceived by regulators. With bank lending to the private sector already weak--down by 2.3 per cent in the Euro Area in the year to November--and especially so in the peripheral countries, this could be very damaging to prospects for continuing recovery.

A third risk is that the volatility of capital flows to emerging markets may increase further, as the normalisation of monetary policy in the advanced economies becomes a closer prospect and as the economic performance and financial imbalances of some emerging market economies are reassessed. Market reactions to the Fed's mid-December announcement of its tapering plans were initially more subdued than those following its more tentative announcements last May and June. But pressures increased markedly in late January3 Since late October last year, sovereign yields have risen by about 40 basis points in China, 70 basis points in Russia, and 160 basis points in Brazil. In foreign exchange markets, the US dollar has appreciated significantly against a number of emerging market currencies, including those of Argentina, Brazil, Indonesia, South Africa, and Turkey. Continuing portfolio shifts and capital outflows from emerging markets are likely with Fed tapering and as the normalisation of monetary policy approaches. Economic and financial imbalances, especially in terms of external financing needs, will threaten sharper adjustments. Thus economies with external current account deficits that are not financed by long-term capital flows remain particularly vulnerable.

Prospects for individual economies

Euro Area

Positive GDP growth, having resumed in the second quarter of last year at a rate of 0.3 per cent, almost stalled in the third, falling to only 0.1 per cent. This weakening of growth was more than accounted for by slower expansion in Germany and a resumption of economic contraction in France; growth performance in most other member countries continued to strengthen modestly, with Spain experiencing positive growth for the first time since early 2011. More recent indicators suggest continuing positive growth in the Area in the fourth quarter, with some signs of strengthening expansion, including in industrial production data and PMIs. Unemployment last November remained plateaued at 12.1 per cent, the new high it reached last spring.

Consumer price inflation on a 12-month basis has been below 1 per cent since last October. In December 2013 it was 0.8 per cent, with the core rate falling to a historic low of 0.7 per cent. In early November, the ECB, referring to the possibility of a prolonged period of inflation below its target of "below, but close to 2 per cent", cut two of its three key interest rates by 0.25 percentage points--its refinancing rate to 0.25 per cent, and its emergency lending facility rate to 0.75 per cent; its third key rate, the deposit rate, was kept unchanged at 0 per cent. These were the first changes in the ECB's benchmark interest rates since last May. The ECB has maintained, and after its January meeting "firmly reiterate(d)" its forward guidance, introduced last July, that it expects "key ECB interest rates to remain at present or lower levels for an extended period". It has also emphasised that, depending on economic developments, especially with regard to the medium-term inflation outlook and money market liquidity conditions, it stands ready to take further action, including lowering the deposit rate below zero and undertaking further long-term refinancing operations to improve bank liquidity.

In the forecast period growth is seen as improving, partly because of diminished fiscal consolidation relative to 2011-13, but it is also expected to remain subdued, with a number of factors continuing to weigh on growth, including private sector deleveraging, further rebalancing adjustments in some cases, financial fragmentation, and uncertainty regarding the completion of a banking union. Thus following the contraction of the past two years, we forecast growth of 0.8 per cent in 2014 and 1.5 per cent in 2015. These average figures for the Area mask substantial differences across member countries. Germany, on the back of robust private consumption and construction activity, and close to full employment, is expected to maintain growth close to its potential rate. France's recovery is forecast to remain subdued, with consumption being held back by recent years' increases in taxation as well as high unemployment. Domestic demand in Italy and Spain will revive only gradually, and a muted recovery is expected in the Netherlands. Among the smaller economies, Latvia, which joined the Area at the beginning of 2014 as its 18th member, is expected to maintain annual growth of about 4 per cent as it continues its catching-up process. Greece and Slovenia are the only Euro Area members expected to experience negative growth this year, in the latter case predominantly owing to fragilities in the banking sector.

The countries that have recently been implementing programmes of adjustment and reform designed to stabilise and rebalance their crisis-hit economies (in some cases with financial support from the EU and IMF, see Box A), have made substantial progress in reducing their external current account deficits and moving into surplus, although further adjustment is needed in some cases, particularly Greece. This progress has been achieved partly through competitiveness gains, reflected in quite strong export performance in some cases, particularly Spain, but to a greater extent, thus far, by compression of domestic demand and imports, and through an associated widening of internal imbalances in the form of output and employment gaps. In the meantime, the long-established surpluses of Germany and the Netherlands have widened, so that the surplus of the Area as a whole has also grown. This has been a factor putting upward pressure on the euro's exchange value. For the adjusting countries to be able to restore internal balance in a reasonable time period without unduly damaging their improved external positions, the keys will be improvements in their competitiveness and favourable external demand conditions. An important question, therefore, is whether the surplus countries manage to rebalance their economies towards domestic demand: by doing so they can help the adjusting countries both directly, through demand for their imports, and indirectly, by reducing upward pressure on the euro through the current account. The forecast does show such rebalancing, to a limited extent, in Germany, where the current account surplus is projected to narrow to 5.5 per cent of GDP in 2015 from about 7 per cent in 2013, but not in the Netherlands, where the surplus is expected to widen to above 12 per cent next year.

There has been a significant further convergence of sovereign yields in the Area in recent months, with a significant fall in the borrowing costs of governments in the periphery (figure 3). This may be partly a result of the progress these countries have made in adjustment, but it also presumably reflects the continuing effects on confidence of the ECB's Outright Monetary Transactions programme, introduced in September 2012, and President Draghi's associated commitment of July 2012 that the ECB would 'do whatever it takes' to preserve the euro.

The narrowing of sovereign yield spreads has not brought commensurate benefits to private sector borrowers in the periphery. The cost and availability of loans still differ widely among countries of the area, depending on the health of banks' balance sheets. Thus potential borrowers with similar credentials and risk profiles may still face widely different borrowing costs and conditions, with small and medium-sized enterprises in peripheral countries being penalised. This is a significant obstacle to economic recovery in these countries. Thus, differences in borrowing rates between core countries, like Germany and France, and peripheral countries, like Greece and Portugal, span several percentage points. Figure 4 shows interest rates on loans to enterprises for selected Euro Area countries.

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Essential to the reintegration of financial markets in the Area and the breaking of adverse feedback loops between banks and sovereigns is the formation of a banking union. The establishment of one of its components, a single supervisory mechanism, is in progress at the ECB. But doubts about the introduction of a satisfactory single resolution mechanism (SRM) remain. In December, the Area's finance ministers reached agreement on the design of an SRM and a common resolution fund. But under the agreement, the fund would not be operational until 2026 and the necessary public backstop is a matter for future negotiation. The eventual outcome is uncertain. Although the ample supply of liquidity provided by the ECB has contributed to a marked improvement in bank funding conditions since 2012, many banks in stressed Euro Area countries find it difficult to access funding at sustainable costs. Financial fragmentation in the Area thus remains an issue which has not been fully addressed.

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Box A. Progress with crisis resolution in Euro Area countries with
EU/IMF-supported policy programmes by Graham Hacche Four Euro Area
countries have in recent years entered financial adjustment
programmes supported by the IMF and the EU designed to resolve
their financial distress and restore sustainable growth. The
arrangement with Cyprus (which accounts for 0.2 per cent of the
Euro Area economy, in terms of 2012 GDP) is quite recent, having
begun last May. This box reviews progress in the other three cases.

In December, Ireland (1.7 per cent of the Euro Area economy) became
the first of the countries to exit from its arrangement. It has
regained access to financial markets: since mid-2012 it has issued
a range of sovereign debt instruments and attracted diverse
investors, building a cash buffer sufficient to meet more than a
year's funding needs. Ten-year sovereign yield spreads over
Germany, which widened to almost II percentage points in mid-2011,
narrowed to about 1.6 percentage points by late January.

The three-year programme was launched in December 2010, following a
deep banking crisis, with the aims of restoring financial stability
by restructuring the banking system, strengthening the public
finances, and implementing structural reforms. As acknowledged by
IMF staff, while policy implementation has been steadfast, progress
under the programme has been mixed. The structural primary fiscal
deficit (excluding the costs of bank support) has been reduced to
about 0.5 per cent of (IMF-estimated) potential GDP in 2013, from 5
per cent in 2010 and 10 per cent in 2008. Fiscal measures
implemented under the programme amounted to 8 per cent of GDP,
two-thirds on the expenditure side. Meanwhile, there has been a
comprehensive reform of the banking system, with capital positions
substantially improved. Financial regulation and supervision have
been strengthened. Other structural reforms have aimed to improve
competitiveness and promote employment, but the IMF views progress
here as disappointing.

Economic growth resumed during 2013. In the year to the third
quarter, GDP rose by 1.7 per cent and recent indicators suggest a
continuing moderate expansion. We project growth of 1.7 per cent in
2014 and 1.8 per cent in 2015. Unemployment was 12.4 per cent in
December, the lowest in 4 1/2 years and well below the peak of 15.1
per cent in early 2012. There has also been a major external
rebalancing: the current account has swung from a deficit of 5.6
per cent of GDP in 2008 to a surplus of 6.3 per cent in 2013.
However, this is mainly attributable to lower imports: growth in
the volume of exports has averaged an unimpressive 3.4 per cent a
year.

Major challenges remain. First, the economy remains deeply
depressed. Despite the recent pickup in activity, GDP in the third
quarter was still 8 per cent below its late-2007 peak.
Unemployment, most of which is long-term, would be much higher
without the large-scale emigration of recent years. (In 2010-12,
net annual emigration averaged 7 per cent of the population.)
Second, fiscal sustainability remains fragile. The government's
support of the banks involved a heavy fiscal burden, equivalent to
about 40 per cent of GDP, and this contributed to a large rise in
government net debt, from near zero at end2007 to above 120 per
cent of GDP at end-2013. The fiscal deficit remains large, at close
to 8 per cent of GDP last year. Third, bank lending has continued
to decline, and is heavily constrained by non-performing loans
(about one quarter of total loans) and weak bank profitability.
Fourth, heavy private sector debt burdens still weigh on demand.
Fifth, despite inflation below the Euro Area average, Ireland's
real effective exchange rate is still higher than in the early part
of the past decade.

Portugal (also 1.7 per cent of the Euro Area economy) is not far
behind Ireland, in that its three-year programme is due to end this
May. In early January the government began to return to market
financing, with an issue of debt sufficient to cover half of its
2014 funding requirement. The 10-year sovereign yield spread over
Germany, which reached nearly 15 percentage points in early 2012,
has recently narrowed to 3.5 percentage points.

Portugal turned to the IMF and EU for assistance in 2011 to help
address an acute crisis in government funding in the context of an
accumulation of economic and financial imbalances that had been
facilitated by the monetary union. By 2010, both the fiscal and
current account deficits had reached 10 per cent of GDP. Fiscal
adjustment under the programme reduced the government deficit to
about 5.5 per cent of GDP by 2013--an adjustment of 6.5 per cent in
structural primary terms-and the current account turned in a small
surplus last year. As in Ireland, economic growth resumed during
2013 and we forecast that this growth will be sustained at moderate
rates in 2014-15.

But Portugal also still faces major difficulties. First, in the
third quarter of 2013, GDP was still 7 per cent lower than in early
2008. Unemployment stood at 15.6 per cent--below the 17.7 per cent
peak reached earlier in the year, but more than double its level
before the crisis, despite increased emigration. Second, with
government debt having grown from 94 per cent in 2010 to about 130
per cent of GDP at end-2013 (expected to be the peak under the
programme), sizeable further fiscal adjustment is needed
to reduce the deficit to below 3 per cent of GDP in 2015. Third,
while the banking sector has been stable, it has been suffering
from low profitability and increasing non-performing loans (about
10 per cent of total loans in mid2013); credit conditions thus
remain difficult. Fourth, further improvements in competitiveness
will be needed for the turnaround in the external balance to be
sustainable as Portugal reduces its output and employment gaps.

Greece (2.0 per cent of the Euro Area economy) has suffered the
most severe economic crisis and recession of the three countries,
and seems furthest from the end of its need for IMF/EU financial
support. It began its current four-year programme in March 2012,
immediately following another two-year arrangement. The fifth and
sixth (out of 16) scheduled disbursements of financing under the
current arrangement, due in September and November last year, have
been held back by delays in completing programme reviews related
partly to failure to agree on structural reforms, where performance
has been mixed in the IMF's view.

Greece has undertaken fiscal adjustment since 2009 on a scale
referred to by IMF staff as unprecedented, and as addressing an
unprecedented deficit. The fiscal deficit in 2009 was 15.6 per cent
of GDP; we estimate that it was reduced to about 3 per cent last
year. In structural primary terms, the adjustment between 2009 and
2013 amounted to about 15 per cent of potential GDP; a small
primary surplus was achieved last year. This adjustment has
contributed to an economic collapse, with domestic demand falling
by about one-third and GDP by about one-quarter between 2008 and
2013. Unemployment has risen from 9.5 per cent in 2009 to a record
27.8 per cent last November, with youth unemployment recently
running close to 60 per cent. With government debt having reached
about 175 per cent of GDP at the end of 2013, further fiscal
consolidation is required during 2014-16.

The contraction of the economy has begun to ease. The decline in
GDP in the year to the third quarter of 2013 was 3.0 per cent, the
smallest since 2010, and the programme assumes that positive growth
will return this year. There have also been signs of renewed
investor interest in some segments of the economy--notably the
financial system, where the banks have been recapitalised through a
combination of public and private investment. Ten-year sovereign
yield spreads over Germany, which peaked above 30 percentage points
in 2012, have narrowed to about 6 percentage points in late
January. There has been a substantial improvement in Greece's cost
competitiveness as the depressed economy has reduced wages by II
per cent during 2010-12, although this has not yet been reflected
in export performance. This deflation, however, complicates the
task of debt reduction. Under an agreement with other members of
the Euro Area, Greece is due to receive a first instalment of debt
relief in mid-2014, provided its programme remains on track.

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Germany

The economy has maintained moderate growth in recent months, close to its potential rate. The preliminary estimate of growth in the fourth quarter of 2013 is 0.25 per cent, close to the previous quarter's outcome of 0.3 per cent. Higher-frequency data have indicated some strengthening of the expansion towards the end of the year, especially in manufacturing and construction. Unemployment in recent months has been at a post-unification low of 5.2 per cent, encouraging significant immigration; wage growth has remained moderate, at about 2.5 per cent a year in the first three quarters of 2013. Currently the main driver of growth is domestic demand, underpinned by the strong labour market and low interest rates. The situation of the banking sector remains sound, but there may be risks arising from rapidly rising house prices and bank lending practices driven by a search for yield.

Growth is expected to remain close to or slightly above potential in the forecast period: after the increase of 0.5 per cent in GDP in 2013 as a whole--reduced by the downturn at the beginning of the year and in 2012--we expect the economy to expand by 1.5 per cent and 1.7 per cent, respectively, in 2014 and 2015. Inflation, recently running at 1.4 per cent a year, at the consumer level, is expected to remain subdued. The outlook for private consumption remains positive, underpinned by low unemployment and rising wages. Demand for housing and data on residential construction have been particularly strong, and particularly visible in urban centres (see National Institute Economic Review, May 2013). This has been driven partly by favourable financing conditions and reflected in a steep rise in housebuilding permits, which were 15 per cent higher in the third quarter than a year earlier. Pressure of demand on more slowly growing supply has put upward pressure on house prices, especially in the main cities.

An important feature of the labour market recently has been the increase in immigration. In the first half of 2013, the increase relative to the same period of 2012 was particularly marked for migrants from other EU countries, especially in Southern Europe. The net influx of workers from Central and Eastern European countries that were granted full labour mobility in 2011 is expected to decline in the forecast period while inflows of workers from Bulgaria and Romania, who were granted access this year, may increase temporarily (figure 5). The increased immigration is a response to labour shortages, particularly in such sectors as health care and construction, arising partly from the ageing of the population. Since the majority of immigrants are pursuing employment opportunities, immigration significantly and directly increases the labour force. The Bundesbank estimates increases in the labour market of 280,000 in both 2013 and 2014, and a further 250,000 in 2015. On this basis, it has increased its estimate of potential output growth from 1.2-1.3 per cent a year to 1.4 per cent.

The financial system remains stable, its overall soundness having been supported by the reduction of tensions in Euro Area financial markets and highly accommodative monetary policy. Persistently low interest rates can, however, pose a risk to financial stability through their encouragement of the search for yield and the demand for risky assets. There may be a danger, in particular, of rising house prices being linked to bank lending practices and forming an unsustainable spiral. The authorities are vigilant to this danger. To strengthen macroprudential supervision, a new Financial Stability Committee became operational at the beginning of 2013, consisting of representatives of the Ministry of Finance, the Financial Supervisory Authority (BaFin), the Bundesbank, and the Agency for Financial Market Stabilisation. The Bundesbank is working on establishing the basis for the practical implementation of macroprudential instruments to which the authorities have had access since 1 January 2014.

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France

Economic performance has deteriorated in recent months. Output in the third quarter was weaker than expected, contracting by 0.1 per cent, and more recent activity indicators have been mixed, with the composite PMI for December at a seven-month low, indicating negative growth in the business sector. Unemployment in the third quarter reached a 16-year high of 10.9 per cent despite government initiatives such as the CICE tax credit aimed at reducing labour costs. We therefore await convincing indications that a solid economic recovery has begun.

In 2014-15, recovery is expected to be supported by more moderate fiscal consolidation than in the past three years, and we are projecting a pickup in growth to 1.6 per cent in 2015 from 0.8 per cent this year, the latter having been revised down slightly. In 2014, real disposable incomes and consumer spending are being negatively affected by a number of measures. As of January 1, the standard and intermediate VAT rates were increased from 19.6 per cent and 7 per cent to 20 per cent and 10 per cent respectively. This is combined with increases in income tax and social security contributions and a reduction in a number of tax credits.

Not only does France have fragile domestic demand, but external demand also continues to act as a brake on growth. While several other Euro Area economies have achieved improvements in international competitiveness, France has not had success in this respect, partly owing to inadequate labour market reform, and the performance of its exports is projected to remain weak. In January, President Hollande signalled a potentially significant shift in policy, announcing his commitment to a "responsibility pact" with business to promote growth and employment, including reductions in payroll taxes and public spending over the next three years together with administrative reforms, in return for commitments by the private sector in terms of job creation, which are yet to be negotiated.

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Italy

After two years of decline, GDP stabilised in the third quarter of 2013. More recent indicators have been mixed, with industrial production in the year to November, as well as the December PMI for manufacturing, indicating the strongest expansion since 2011, while retail sales and activity in the services sector have remained weak. Unemployment reached a new postwar high of 12.7 per cent last November, but there are tentative signs of a turnaround in the labour market as hours per worker have increased. Overall, a modest economic recovery may have begun late last year and we are forecasting that GDP will stabilise this year on an annual average basis before growing by 1.0 per cent in 2015.

The recovery is expected to be supported by diminishing fiscal drag after a period of significant budgetary consolidation and also by net exports stemming from improving world demand as well as improvements in Italy's competitiveness. However, domestic demand continues to be restrained by tight credit conditions and weaknesses in the banking system, including an elevated level of nonperforming loans; last October bank lending to Italian firms fell at its fastest pace in three years. To sustain recovery and improve its growth performance, which has been weak since before the crisis, Italy needs further structural and fiscal reforms. In December 2013, the Prime Minister pledged a package of institutional reforms to lift growth to 2 per cent in 2015, and the need now is to move to vigorous implementation.

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Annual consumer price inflation, which has been below 2 per cent since the beginning of 2013, fell to 0.7 per cent in November and December from around 1.2 per cent mid-year, despite an increase in the standard rate of VAT to 22 per cent from 21 per cent last October. There has also been a similar fall in core inflation. This suggests that some firms may have chosen not to pass on the VAT rise to consumers in light of weak demand, or that without the tax increase price growth would have been even more anaemic.

Spain

The positive developments in the Spanish economy earlier in 2013--particularly the exit from recession in the third quarter--continued in the fourth quarter with GDP growth of 0.3 per cent. Annual GDP fell by 1.2 per cent in 2013 but is expected to show modest positive growth in 2014-15. External demand, which has been key to the economic turnaround, remains fundamental to Spain's growth prospects, with improving global growth and improvements in competitiveness expected to keep export growth high. Moreover, the contraction in domestic demand is easing as confidence returns. Yet the economy remains depressed, with unemployment at 26 per cent in the fourth quarter of 2013, only slightly below its 27 per cent peak earlier in the year, in spite of emigration. Reflecting the large output gap, annual consumer price inflation in recent months has been only about 0.3 per cent. Continuing inflation below the Euro Area average and productivity improvements stemming from structural reforms are key to the rebalancing of the economy and the restoration of high employment.

Following the 2012 labour market reforms, there have been signs of increased labour market flexibility. Our estimates suggest that net job creation, negative since 2008, became positive in the fourth quarter. Many of the new jobs are with small and medium-sized firms, and there has been an increased tendency towards permanent contracts.

In line with our previous forecasts, the government is thought to have narrowly missed its fiscal deficit target for 2013 of 6.5 per cent of GDP. While spending on social security payments was higher than budgeted, a fall in government bond yields will have lowered interest payments, and corporate tax receipts are expected to have been higher than expected. The ratio of public debt to GDP reached a new record of 93.4 per cent in the third quarter; it is expected to peak at 100.7 per cent in 2015, when Spain is expected to achieve a primary surplus.

Spain exited successfully in December from the EU Financial Assistance Programme used since 2012 to recapitalise the banks. Stress tests carried out by the Bank of Spain indicate a significant strengthening of the banking sector since the crisis: thus the tests showed a 'comfortable solvency position' in the aggregate for Spanish banks. These improvements have as yet shown little sign of passing through to credit conditions for the private sector and continuing credit risks have been shown in further increases to record highs in the share of non-performing loans.

Other EU countries in Central and Eastern Europe

Economic activity has continued to strengthen in many countries in Central and Eastern Europe, partly reflecting the turnaround in the Euro Area. We expect that the region as a whole will expand by 2.3 per cent this year, and 3.3 per cent in 2015. There remain, however, substantial divergences among countries resulting from differences in such factors as internal and external imbalances and the health of their financial systems.

Among the largest countries, growth continues to be most robust in Poland. Following a slowdown in 2012-13, growth is expected to pick up to 2.9 per cent this year and 3.9 per cent in 2015. Recent indicators, including retail sales, industrial production, and PMIs point to an acceleration of the expansion, and consumer and business confidence have also improved. Consumer price inflation is low--0.7 per cent in the year to December--and unemployment, at 10.2 per cent, remains relatively high, indicating scope for stronger growth. The competitiveness of the economy remains favourable, but the contribution to growth of net trade is expected to diminish over the forecast horizon as private consumption and investment strengthen.

In Hungary, GDP growth picked up last year, and our estimate for growth in the year as a whole has been revised up to 1.3 from 0.5 per cent. Growth is expected to pick up further in 2014-15, driven mainly by domestic demand. Increases in real disposable income, resulting partly from cuts in regulated prices, and an improving labour market will stimulate consumption, and increased absorption of EU funds will support investment. However, continuing deleveraging, the weak housing market, and declining lending will put a drag on growth. Inflation has continued to decline--the annual increase in consumer prices reached 0.4 per cent in December--and in November the central bank lowered its benchmark rate further, to 3.2 from 3.4 per cent.

GDP in the Czech Republic declined by 1.4 per cent last year, but growth resumed mid-year and will gain some steam this year. Recent currency depreciation as well as the recovery in the Euro Area should boost net exports, while private consumption and investment are expected to become the main drivers of growth next year.

Slovenia is the only country in the European Union apart from Greece expected to experience a decline in GDP this year. The review and stress tests of the banking system revealed a total capital shortfall of about EUR 4.8 billion, 77 per cent of which is accounted by the three biggest banks. The shortfall is to be filled by various measures, including a bail-in of subordinated debt and substantial government aid. Five other banks are expected to cover their EUR 1.1 billion shortfall through asset sales and private capital injections.

[FIGURE 8 OMITTED]

United States

Growth strengthened somewhat in the second half of 2013, and this improvement in performance is likely to be maintained this year as reduced fiscal drag combines with continuing highly accommodative monetary policy. In the third quarter of last year, both GDP growth (4.1 per cent at an annual rate) and the growth of final demand (2.5 per cent) were the fastest since late 2011. More recent indicators suggest continuing moderate expansion in the fourth quarter, with manufacturing and housebuilding showing particular strength. (2) Consumer spending has been robust, albeit partly due to a decline in the saving rate, with consumer confidence having recovered from the doldrums reached around the budget impasse in October.

Labour market developments have also indicated moderate growth. Non-farm payrolls increased by 172,000 a month, on average, in the fourth quarter, close to the average of the preceding six months; and unemployment dropped to 6.7 per cent in December last year, the lowest since 2008. When Federal Reserve Chairman Bernanke set out, last June, his tentative timetable for the normalisation of monetary policy, unemployment was 7.5 per cent, and he envisaged that it might reach 7 per cent in mid-2014, by which time he thought the Federal Reserve might have reduced its 'QE3' asset purchases to zero. He envisaged, further, that about six months later unemployment could be expected to reach 6.5 per cent, the threshold where the Fed would consider beginning to raise short rates. The decline in unemployment since Bernanke spoke has been faster than he envisaged, but partly because of falling labour-force participation: the participation rate last December, at 62.8 per cent, was the lowest since 1978 (figure 9). The decline in unemployment thus exaggerates the strength of the labour market's performance (while the fall in the participation rate understates it because of demographic developments) and the decline in asset purchases has not been related to it in the way that Bernanke originally envisaged.

[FIGURE 9 OMITTED]

In the event, the Federal Reserve announced last December 18 that in light of the growing strength of the economy, and the improvement in actual and projected labour market conditions, it would begin in January reducing its asset purchases by $5 billion a month each for Treasury securities (to $40 billion) and for mortgage-backed securities (to $35 billion). It also indicated that if economic developments proceeded as expected, it would be likely to continue reducing its purchases by $10 billion per policy meeting, and thus to end the purchases in late 2014. At the same time, however, the Fed strengthened its forward guidance by indicating that it would be likely to maintain short-term interest rates at their current, near-zero, level, "well past the time that the unemployment rate declines below 6 1/2 per cent"--the original threshold referred to by Bernanke last June. In this context, the Fed referred to the fact that its projections of inflation were running below its 2 per cent long-term goal. Its preferred measure of inflation, the rise in the price index for personal consumer expenditure, was 0.9 per cent in the year to November 2013, with a 1.1 per cent rise in the corresponding core index. Labour earnings are also subdued: the employment cost index, which takes into account benefits as well as wages and salaries, was 1.9 per cent higher in September 2013 than a year earlier. If inflation remains below target, another possibility that has been under consideration by the Fed (apart from adjusting forward guidance) would be partly to offset the effects of reduced asset sales by reducing interest paid on banks' reserves.

[FIGURE 10 OMITTED]

In the wake of last October's budget impasse and government shutdown, agreement was reached in Congress in mid-December on spending totals for the current fiscal year and the next. This led to the passage, in mid-January, of an appropriations bill that implies significantly reduced fiscal drag this year, and to a lesser extent in 2015. This agreement will prevent another shutdown of the Federal Government at least through September next year.

Agreement is also needed, by early March at the latest, to raise the debt ceiling due to come into force again in early February, in order to avoid the risk of default. We ran a simulation using NIESR's global econometric model (NiGEM) to illustrate the effect on the economy if an agreement on raising the debt ceiling is not reached, highly unlikely though this may be. One way of maintaining government debt, in nominal terms, at its February 2014 level would be to reduce government consumption by 2 per cent of GDP permanently; and this is what we assumed. Our simulation results suggest that this would lower our 2014 GDP growth forecast by about 1.7 percentage points and lead to job losses that would raise the unemployment rate by about 0.6 percentage point from its currently projected level. This would push prospects for reaching the Federal Reserve's tentative threshold of 6.5 per cent for unemployment well beyond reach in 2014-15 (figure 10).

Canada

In the second half of 2013, growth in the Canadian economy improved thanks mainly to a solid gain in consumer spending. We have thus revised our growth estimate for 2013 slightly upwards, to 1.7 per cent from 1.5 per cent projected in November. Last year was marked by weak export performance, which weighed on business investment. Consumer price inflation, on a 12-month basis, was 1.2 per cent in December, and has been below the 2 per cent target since early 2012, reflecting the slack in the economy: unemployment last year fluctuated around 7 per cent. The Bank of Canada maintained its policy rate at 1.0 per cent in 2013, removing its tightening bias in October. In January, the Bank indicated that while it expected inflation to return to target in about two years, the downside risks had grown in importance.

Low inflation, together with weak export performance and the authorities' aim of rebalancing growth in favour of exports and investment and away from consumption, has led to a significant depreciation of the Canadian dollar since early last year after a decade of commodity-based strength. By late January it had fallen by 4.5 per cent against the US dollar since the end of 2013, after a 7 per cent decline last year. This gain in competitiveness, together with the current improvement in US growth, should help improve Canada's net exports. Consumption is also expected to accelerate, based on improving household balance sheets and income growth. We thus forecast a pickup in growth to 2.2 per cent this year and 2.4 per cent in 2015, which should eliminate the output gap next year. Aided by this and the recent currency depreciation, inflation is projected to reach 1.7 per cent this year, but to remain below target throughout the forecast period, assuming no change in the policy rate.

There have been growing signs of a soft landing in the housing market. The rise in house prices moderated last year, and home sales declined through the fourth quarter. Among the main factors behind these developments are worsening affordability conditions, including historically high home prices, and a mild surge in mortgage rates. We expect the housing market to continue cooling off this year, as long-term interest rates rise.

Japan

A key part of the government's strategy to boost growth is the Bank of Japan's policy of 'quantitative and qualitative easing' to end deflation and reach the target of 2 per cent inflation by early 2015. The credibility of this objective has been boosted by a rise in inflation in recent months: in November, the 12-month increase in 'core' consumer prices, excluding fresh food, reached 1.2 per cent, the highest since 2008. Much of the recent increase in inflation, however, may be accounted for by the yen's depreciation (itself a result of the expansionary monetary policy), working particularly through energy imports. But even with energy as well as fresh food excluded, 12-month 'core core' inflation reached 0.6 per cent in November, its highest rate in 15 years. This provides some indication that the rise in inflation may be domestically driven. However, wages have remained flat, and this is a source of concern. Positive core inflation is unlikely to be sustained without rising wages, and also, unless wage increases more than match rising prices, consumption is likely to be depressed, endangering the objective of growth. In recent months, the Prime Minister has held a series of meetings with business and trade union leaders in a campaign to boost wages, and the forthcoming 'shunto' spring wage offensive is likely to form a critical juncture in the efforts to raise inflation. We project that inflation will reach 2.1 per cent in 2014, partly as a result of yen depreciation and the sales tax increase in April, but we expect that it will subsequently fall somewhat short of the 2 per cent objective.

[FIGURE 11 OMITTED]

GDP growth in the third quarter surprisingly fell back to 1.1 per cent at an annual rate, from 3.8 per cent in the preceding quarter. The slowing of the expansion is accounted for mainly by a contraction in exports and weaker consumption growth, the latter possibly reflecting declining real wages. We expect consumption to pick up in the first quarter of this year as households bring forward their spending plans to avoid the increase in sales tax from 5 to 8 per cent in April, but subsequently to fall back. There have been indications of a rise in business confidence, but with little sign of an increase in investment intentions. The large yen depreciation since late 2012 and the improvement in global demand should improve net exports, including by raising export volumes, and we expect the current account balance to move back into surplus this year. Our estimate of GDP growth in 2013 has been revised down to 1.6 per cent from 2.1 per cent, partly because of the disappointing third-quarter outturn. We are projecting growth of 1.4 per cent this year and 1.2 per cent in 2015, partly reflecting the increases in the sales tax due in both years.

The government has announced that it will implement a one-off fiscal stimulus of 5.5 trillion yen (about 0.8 per cent of GDP, not included in our projections) to help to alleviate the immediate effects of the sales tax increase. But also there will be a drop in post-earthquake reconstruction spending. On balance, it is likely that fiscal policy will have a slight contractionary effect in 2014. Government debt remained above 200 per cent of GDP in 2013, and the fiscal deficit grew to about 10 per cent of GDP. We expect both to rise further in 2014 before beginning to fall thereafter.

The 'third arrow' of the government's 'Abenomics' policy strategy comprises structural reforms intended to boost longer-run growth. These encompass trade liberalisation through the Trans-Pacific Partnership currently being negotiated, labour market reforms, deregulation to promote business investment, and also efforts to combat the demographic problems of Japan's aging population. Thus far, there is no specific timetable of measures, and much work remains to be done to implement these policies, which are likely to be key to delivering the objectives of stronger growth and a sustainable fiscal position.

China

The economy recorded 7.7 per cent GDP growth in 2013, the same as in 2012, which was the weakest since 1999. The 2013 outturn was close to the official target of 7.5 per cent, which is unchanged for 2014. More recent high-frequency data point to slower growth: industrial production and retail sales both weakened in December, and a preliminary PMI for manufacturing in January was the lowest for six months. We maintain our view that the expansion will continue to moderate as the economy makes the transition to a more balanced growth path that is less dependent on exports and increasingly unproductive investment, and forecast GDP growth of 7.2 per cent this year and 6.9 per cent in 2015.

The slowing pace of growth has weighed on company profits, and the Shanghai Composite Index of equity prices has fallen by about 11 per cent in the past year (figure 12). Exports have been hurt by the strengthening Yuan, which has appreciated against the US dollar, the currency of its main export destination country, by around 3 per cent since the beginning of last year, while the real effective exchange rate has appreciated by about 7 per cent.

Local governments' debts and shadow banking remain two intertwined risks to the economy. A report released by the National Audit Office in December showed that local government debt, including contingent liabilities, had reached RMB 17.9 trillion Yuan, equivalent to 30 per cent of GDP, by mid-2013, a 67 per cent increase from end-2010. Declining debt tenures and increasingly high borrowing rates have been compounding risks of already dangerous debt levels. The central government has taken steps to restrain local government debt, but officials have been moving cautiously to avoid destabilising consequences. Thus an unduly hasty move to liberalise interest rates could leave local governments unable to meet their liabilities. The cost of 10-year credit default swaps has increased by 14 per cent since the beginning of this year.

[FIGURE 12 OMITTED]

As the authorities have moved to restrain the growth of credit, interbank interest rates have spiked twice in the past year owing to shortages of funds. The second incident, in December 2013, was not as severe as the first, with 7-day interbank interest rate reaching 8.8 per cent, compared with 12 per cent in June 2013 (figure 13), and was partially caused by the year-end factors. The central bank again acted to relieve the liquidity pressure, but the incident once more indicated that the authorities are committed to weaning the financial system off excessive credit growth and related off-balance-sheet lending practices.

A signal of intentions to implement further market-oriented reforms was given in November when the third plenum of the Communist Party's Central Committee pledged a 'decisive' role for the market in allocating resources, rather than the 'basic' role previously indicated. Subsequently the Governor of the central bank set out an agenda of financial market reforms, including the elimination of the ceiling on bank deposit rates, but without a timetable for implementation.

[FIGURE 13 OMITTED]

India

After two years of weakening growth and high inflation, and financial market instability after the Fed's tapering announcements last summer, India's economy showed signs of stabilising in the latter part of 2013. GDP growth stopped falling: on a four-quarter basis it picked up to 5.6 per cent in the third quarter from 2.4 per cent in the preceding quarter; annual consumer price inflation slowed from 11.5 to 9.9 per cent from November to December; and financial markets stabilised in the final quarter. The rupee's exchange value in US dollar terms has stabilised about 10 per cent higher than the trough of late August, while the stock market since late October has stood about 17 per cent above the lows reached around the same time.

The Reserve Bank under its new Governor has declared its commitment to curbing persistently high inflation--above 8 per cent in terms of consumer prices since 2008. After a series of reductions in its benchmark interest rates ending last May, it has raised rates by 25 basis points three times--in mid-September, late October, and late January--to 8.0 per cent, despite the fragile state of the economy. In January, a central bank committee recommended a sweeping overhaul of the country's monetary policy framework, with a move to formal inflation targeting, the adoption of a specific target of 4 per cent inflation in terms of the consumer price index, with a 2 per cent band on either side, and the aim of reaching the top of the band within two years. The latest, January, hike in interest rates was described by the Reserve Bank as needed to set the economy securely on the disinflationary path recommended by the Committee. However, interest rates remain significantly negative in real terms, suggesting that more action may be needed.

The Governor plans to liberalise the financial system and increase competition, including by providing licences more freely to new banks, allowing foreign banks to expand faster, and relaxing rules forcing banks to buy government debt. Such reforms promise significant potential benefits to the economy, but their implementation may be expected to face challenges, particularly from vested interests.

Our forecast for GDP growth in 2014 and 2015 remains broadly unchanged at 5.4 and 5.8 per cent respectively. Upside risks include reduced uncertainty and improved confidence following the next general election, due by May. Downside risks include the possibility of increased turbulence in emerging markets as the Fed proceeds with tapering its QE asset purchases, and slippages in meeting budget deficit targets in an election year.

Brazil

Last year was difficult for the Brazilian economy, with growth falling short of forecasts, inflation persistently high, and weak financial markets, including a depreciating currency. Brazil's equity market last year fell by 16 per cent, more than any other major market. In the third quarter, GDP fell by 0.5 per cent, the weakest quarterly growth performance since 2009. Our growth estimate for 2013 has thus been lowered to 2.2 per cent.

This year will be marked by two events: the FIFA World Cup and the general elections. The economic stimulus provided by the former may fall short of expectations owing to the disruption of business activities it may cause, which may be exacerbated by social protests. Despite an expected improvement in exports, we forecast that GDP growth in 2014 will be roughly the same as last year, at 2.1 per cent, reflecting declining investor confidence and the exhaustion of the country's credit-based growth model.

Annual inflation ended 2013 at 6.2 per cent despite significant efforts to repress it via administered prices. Monthly inflation in December was 0.9 per cent, the largest monthly increase in prices since 2003. Thus inflation expectations may well remain unanchored and above the central bank's 4.5 per cent target. In recent months, the central bank continued raising its benchmark interest rate, with increases of 50 basis points in November and January, to reach 10.5 per cent, 3.25 percentage points higher than nine months earlier. At the end of last year, the central bank stated that inflation had been more resilient than expected in 2013 because of currency depreciation and a tight labour market (unemployment fell to 4.6 per cent in November). Currency depreciation and persistent expectations seem unlikely to allow inflation to decline significantly in the near term; we expect inflation this year to decrease slightly, to 5.7 per cent, before declining further in the medium term.

Brazil's current account deficit in 2013 was the largest in twelve years, reflecting slower Chinese growth, weaker commodity prices, an increase in fuel imports, and declining competitiveness. For 2014, a slight improvement in the current account balance is projected, partly owing to higher oil exports and a recovery of competitiveness permitted by the weaker currency.

Mexico

Last year the government passed a series of laws which could transform the long-term prospects of the Mexican economy. Yet realising this potential will require not only legislation, but also development of the supportive institutions common to advanced economies. This will determine whether we are to witness the transformation of Mexico or a false dawn. We are optimistic, and have revised our forecast for annual GDP growth to 3.2 per cent in 2014 and 3.5 per cent in 2015, up from 2.8 and 2.7 per cent, respectively, in the November Review.

The government elected in 2012 has introduced changes where so many others have failed. The most important is reform of the Constitution to allow private investment in the energy industry for the first time since 1938. Despite having some of the largest oil, gas, and shale reserves in the world, a state monopoly and weak government finances have meant that these could not be developed. Instead, Mexico imports gas, cannot develop cheap fertiliser for farming and has a budget dependent on the vagaries of the oil price. Foreign investors are likely to bring know-how for exploration, extraction, and refining, and for the development of derivative products. The telecommunications, pensions, finance, and political systems are all also being reformed.

The success of these measures depends on developing an institutional framework to support the efficient use of resources. The government is introducing a State Fund for part of the energy revenues (managed by the central bank) so that the benefits are shared across generations. The education reforms, which include performance testing and additional funding, and which are targeted at those unable to rely on private education, are among the most radical. Much needed renewal of the infrastructure is also prioritised, on the basis of the energy revenues. A key to success will be whether these changes are open and transparent with robust regulatory oversight to break through the power of incumbents.

GDP growth in 2013 has been revised down to 1.2 per cent from 1.7 per cent in the November Review, with activity recovering towards the end of the year. Unemployment fell by 1 percentage point to 4.2 per cent in the final three months of the year. Inflation has fallen back to only 3.4 per cent (core inflation to 2.5 per cent), close to the 3 per cent long-term inflation target. The central bank is expected to keep its policy rate at 3.5 per cent as the economy has enough spare capacity to enjoy faster growth in the coming year.

Russia

Russia's growth performance and prospects weakened significantly in 2013, with GDP growth from four quarters earlier declining to 1.3 and 0.6 per cent in the second and third quarters respectively. This slowdown was disappointing relative to expectations: our estimate of growth in 2013 as a whole, at 1.3 per cent, is revised down only slightly from our November forecast but sharply from our 3.2 per cent forecast of last February. The slowdown is the result of much weaker growth in investment and a fall in the price of oil. Investment declined in both the public sector and the energy sector, but private sector investment more broadly has suffered from a lack of business confidence.

Slower growth has led to an increase in unemployment, to 5.6 per cent in December 2013 from 5.2 per cent last summer, but the economy is still operating close to full capacity. This has been reflected in persistent inflationary pressure, with annual consumer price inflation at 6.5 per cent last December, above the 6 per cent upper bound of the central bank's informal target range for 2013. The Central Bank plans to move to a formal 4.5 per cent inflation target in 2015, following an informal 5.0 per cent target for this year. With official interest rates unchanged since September 2012, we expect a small increase in rates this year, which will help reduce average inflation to about 5.6 per cent for the year.

In mid-January, the Central Bank announced that, in preparation for its move to formal inflation targeting, it was reducing its intervention in the foreign exchange market, thereby allowing the rouble to fluctuate more freely. Later in the month, the rouble fell to a five-year low against the US dollar--a depreciation of 8 per cent in the past three months.

Projected growth this year has been revised down to 2.2 per cent. Structural impediments such as inadequate infrastructure and low business confidence, as well as Russia's high dependency on energy revenues, point to continuing below-potential growth, although the more competitive currency should boost net exports. To improve growth prospects, a policy agenda that prioritises productive investment is needed, including measures to raise business confidence, including confidence in the rule of law, and to reduce the weight of the public sector in the economy.

Appendix A: Summary of key forecast assumptions

by Iana Liadze

The forecasts for the world and the UK economy reported in this Review are produced using NIESR's model, NiGEM. The NiGEM model has been in use at the National Institute 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, and there are also separate models of China, India, Russia, Brazil, Hong Kong, Taiwan, Indonesia, Singapore, Vietnam, South Africa, Turkey, Estonia, Latvia, Lithuania, Slovenia, 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.niesr.ac.uk/.

The key interest rate and exchange rate assumptions underlying our current forecast are shown in tables A1-A2. Our short-term interest rate assumptions are generally based on current financial market expectations, as implied by the rates of return on treasury bills of different maturities. Long-term interest rate assumptions are consistent with forward estimates of short-term interest rates, allowing for a country-specific term premium in the Euro Area. Policy rates in the major advanced economies are expected to remain at extremely low levels at least until the end of 2014. After introducing a 25 basis point interest rate cut in the second quarter of this year the Reserve Bank of Australia and Bank of Korea kept their policy interest rates unchanged. Since October last year both central banks of Hungary and Romania continued to reduce interest rates. The central bank of Hungary brought them down by a further 55 basis points, while the Romanian Central Bank reduced rates by 50 basis points in two steps. The Mexican central bank cut its policy interest rates by 25 basis points in September 2013 and has since kept interest rates unchanged. By contrast, tightening measures have been introduced in several emerging market economies in response to inflationary and financial market pressures, most notably in Brazil, Indonesia, and India. (1)

Interest rates in the US, UK and Canada are expected to begin to rise in mid 2015, pre-empting rate rises in the Euro Area by one quarter. This is broadly consistent with the interest rate path signalled for the US by the Federal Open Market Committee (FOMC), which has stated that it plans to keep the target range for the federal funds rate unchanged well past the time of the unemployment rate declining below 6 1/2 per cent, especially if projected consumer price inflation continues to remain below the Committee's 2 per cent per annum longer-term goal. At its most recent meeting in December 2013, (2) the FOMC announced its decision to reduce the pace of its asset purchases slightly by $10 billion a month starting from January 2014, on the back of the cumulative progress towards full employment and the improvement in the labour market's outlook. The pace of QE tapering is not fixed and will depend on the Committee's outlook for the labour market and inflation, and its assessment of the adequacy and costs of asset purchases.

[FIGURE A1 OMITTED]

This announcement did not take financial markets by surprise as a reduction in the asset purchase programme has been anticipated due to earlier FOMC proclamations alongside improvements in the outlook for the US economy in general. The move does not change the accommodative stance of the Federal Reserve, and still leaves it in line with the looser policy adopted by the ECB and loosening measures introduced by the Bank of Japan at the beginning of April 2013.

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. Government bond yields in the US, Euro Area and the UK picked up towards the end of December last year, but have been drifting down recently, reaching levels last seen at the beginning of December 2013. There has been a significant convergence in Euro Area bond yields towards those in the US since the beginning of 2013, with the margin narrowing to about 20 basis points from more than 75 basis points. Despite recent movements in yields, the paths of the US and Japan bond yields through 2014 are expected to be broadly unchanged from the expectations of three months ago. The expectations of yields in the UK are marginally higher (by about 20 basis points), while expectations of yields have been lowered by approximately the same margin in the Euro Area. The slight decrease in Euro Area average bond yields comes from a narrowing of the spread between Germany and all Euro Area countries including the vulnerable economies of Greece, Portugal, Spain, Ireland and Italy.

[FIGURE A2 OMITTED]

Figure A2 depicts the spread between the 10-year government bond yields of Spain, Italy, Portugal, Ireland and Greece over Germany. Sovereign risks in the Euro Area have been a major macroeconomic issue for the global economy and financial markets over the past two years. The final agreement on the Private Sector Involvement in the Greek default 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 the vulnerable economies since the second half of 2012. During summer 2013 there had been some upward pressure on yields in Portugal, related to uncertainty over its fiscal austerity programme, parts of which were declared unconstitutional. However, better than expected GDP figures for the second quarter of 2013 somewhat calmed the financial markets and the spreads receded. In our forecast, we have assumed spreads remain at current levels until the end of 2014, and start to recede in 2015 in all Euro Area countries.

It is the case for Portugal as well, which we assume will exit its international bail-out programme, as expected, in July 2014 and most likely will experience a jump in its funding cost in the near term as a result of a shift in the source of funding. The implicit assumption underlying this is that the Euro Area continues to hold together in its current form and progress is made towards establishing a banking union.

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 May 2013, illustrated by the stability of these spreads in the US and Euro Area and a marginal decline in the UK. Our forecast assumption is for corporate spreads to remain at current levels until the end of 2014, and then gradually converge towards its long-term equilibrium level from 2015.

Nominal exchange rates against the US dollar are generally assumed to remain constant at the rate prevailing on 17 January 2014 until the end of September 2014. After that, they follow a backward-looking uncovered-interest parity condition, based on interest rate differentials relative to the US. We have modified this assumption for China, assuming that the exchange rate target continues to follow a gradual appreciation against the US$, of about 2 1/2 per cent annually from 2014 to 2016.

[FIGURE A3 OMITTED]

[FIGURE A4 OMITTED]

Our oil price assumptions for the short term are based on those of the US Energy Information Administration, who use information from forward markets as well as an evaluation of supply conditions, and are reported in table 1 at the beginning of this chapter. The price of oil has dropped marginally from the recent upward movements in December 2013. We assume a modest decline in oil prices in 2014 of about $4 per barrel. Over the medium term, oil price growth will be restrained in part by the rise in new extraction methods for oil and gas, especially in the US (see the discussion in our February 2013 National Institute Economic Review and Chojna et al., 2013).

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 A5 illustrates the key equity price assumptions underlying our current forecast. Global share prices have performed well since the beginning of 2013, irrespective of a short-lived drop; a reaction to the QE tapering signals emanating from the Federal Reserve last summer. Share prices in some of the more vulnerable economies of the Euro Area, however, remain depressed relative to their position in the first quarter of 2013 (Hungary, Czech Republic). The most significant gains have been in Japan. Since the end of 2012, share prices in Japan have jumped by more than 50 per cent, mirroring the exchange rate movements over the same period.

[FIGURE A5 OMITTED]

Fiscal policy assumptions for 2013-14 follow announced policies as of 1 January 2014. Average personal sector tax rates and effective corporate tax rate assumptions underlying the projections are reported in table A3. Our forecast also incorporates planned/enacted changes in VAT rates in 2013-14 for Canada, Finland, France, Italy and Japan. Government spending is expected to decline as a share of GDP between 2013 and 2015 in most countries reported in the table, with the exceptions of Australia and Germany. We expect the burden of government interest payments to rise this year as compared to the last year in the vulnerable Euro Area economies of Ireland, Spain, Greece, Portugal and Italy. Recent policy announcements in Portugal, Spain, Italy and elsewhere suggest that the commitment to fiscal austerity in Europe may be waning. 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, Holland and Hurst (2013).

REFERENCES

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

Chojna, J., Losoncz, M. and Suni, P. (2013), 'Shale energy shapes global energy markets', National Institute Economic Review, 226, pp. 40-45.

NOTES:

(1) The forecast was finalised before the 25 basis point increase by the Indian central bank, 50 basis point increase by the South African central bank and the surprise 550 basis point increase in interest rates by the Turkish central bank on 29 January 2014.

(2) The forecast was finalised on 28 January 2014, the day before the FOMC January meeting finished.

Table Al. Interest rates Per cent per annum

 Central bank intervention rates

 Euro
 US Canada Japan Area UK

2011 0.25 1.00 0.10 1.25 0.50
2012 0.25 1.00 0.10 0.88 0.50
2013 0.25 1.00 0.10 0.56 0.50
2014 0.25 1.00 0.10 0.25 0.50
2015 0.59 1.20 0.10 0.35 0.68
2016 1.48 1.76 0.23 0.82 1.17
2017-2021 3.20 3.20 0.82 2.11 2.46

2013 Q1 0.25 1.00 0.10 0.75 0.50
2013 Q2 0.25 1.00 0.10 0.60 0.50
2013 Q3 0.25 1.00 0.10 0.50 0.50
2013 Q4 0.25 1.00 0.10 0.37 0.50

2014 Q1 0.25 1.00 0.10 0.25 0.50
2014 Q2 0.25 1.00 0.10 0.25 0.50
2014 Q3 0.25 1.00 0.10 0.25 0.50
2014 Q4 0.25 1.00 0.10 0.25 0.50

2015 Q1 0.25 1.00 0.10 0.25 0.50
2015 Q2 0.52 1.15 0.10 0.25 0.60
2015 Q3 0.70 1.25 0.10 0.40 0.75
2015 Q4 0.88 1.40 0.10 0.50 0.85

2016 Q1 1.06 1.54 0.15 0.65 1.00
2016 Q2 1.34 1.69 0.20 0.75 1.10
2016 Q3 1.62 1.84 0.25 0.90 1.25
2016 Q4 1.90 1.99 0.30 1.00 1.35

 10-year government bond yields

 Euro
 US Canada Japan Area UK

2011 2.8 2.8 1.1 3.9 3.1
2012 1.8 1.9 0.8 3.2 1.8
2013 2.3 2.3 0.7 2.7 2.4
2014 3.0 2.8 0.8 2.8 3.0
2015 3.4 3.2 1.0 3.1 3.1
2016 3.7 3.5 1.2 3.3 3.3
2017-2021 4.1 4.0 1.8 3.8 3.9

2013 Q1 1.9 1.9 0.7 2.7 2.0
2013 Q2 2.0 2.0 0.7 2.5 1.9
2013 Q3 2.7 2.6 0.8 2.8 2.7
2013 Q4 2.7 2.6 0.6 2.7 2.8

2014 Q1 2.9 2.6 0.7 2.7 2.9
2014 Q2 3.0 2.7 0.8 2.8 3.0
2014 Q3 3.1 2.8 0.8 2.9 3.0
2014 Q4 3.2 2.9 0.8 3.0 3.0

2015 Q1 3.2 3.0 0.9 3.0 3.1
2015 Q2 3.3 3.1 0.9 3.1 3.1
2015 Q3 3.4 3.2 1.0 3.1 3.2
2015 Q4 3.5 3.3 1.0 3.2 3.2

2016 Q1 3.5 3.4 1.1 3.2 3.3
2016 Q2 3.6 3.5 1.1 3.3 3.3
2016 Q3 3.7 3.5 1.2 3.3 3.4
2016 Q4 3.7 3.6 1.3 3.4 3.4

Table A2. Nominal exchange rates

 Percentage change in effective rate

 US Canada Japan Euro
 Area

2011 -3.0 2.0 6.8 0.9
2012 3.4 1.0 2.2 -1.9
2013 3.0 -2.9 -16.4 3.0
2014 3.0 -5.0 -4.2 2.0
2015 0.5 -0.6 -0.5 0.3
2016 0.4 -0.4 -0.1 0.5

2013 Q1 1.2 -3.1 -12.0 1.2
2013 Q2 1.4 -0.2 -5.7 0.1
2013 Q3 2.3 0.4 3.7 2.3
2013 Q4 -0.3 -1.6 -2.1 0.9

2014 Q1 1.6 -3.7 -2.9 0.2
2014 Q2 0.1 -0.3 0.1 -0.1
2014 Q3 -0.1 0.0 -0.1 0.0
2014 Q4 0.2 -0.1 -0.1 0.1

2015 Q1 0.1 -0.2 -0.2 0.1
2015 Q2 0.1 -0.2 -0.2 0.1
2015 Q3 0.1 -0.1 -0.1 0.1
2015 Q4 0.1 -0.1 -0.1 0.1

2016 Q1 0.1 -0.1 0.0 0.1
2016 Q2 0.1 -0.1 0.0 0.1
2016 Q3 0.1 -0.1 0.1 0.1
2016 Q4 0.1 0.0 0.1 0.1

 Percentage change in effective rate

 Germany France Italy UK

2011 0.5 1.0 1.3 -0.2
2012 -2.0 -2.0 -1.6 4.2
2013 2.9 3.3 4.1 -1.1
2014 1.9 2.3 3.1 5.9
2015 0.2 0.3 0.5 0.1
2016 0.4 0.5 0.7 0.2

2013 Q1 1.3 1.2 1.3 -3.9
2013 Q2 0.2 0.1 0.1 0.3
2013 Q3 1.8 2.8 3.7 2.2
2013 Q4 0.9 I.0 1.2 3.0

2014 Q1 0.3 0.2 0.4 2.3
2014 Q2 -0.1 -0.1 -0.1 0.1
2014 Q3 0.0 0.0 0.0 0.0
2014 Q4 0.1 0.1 0.2 0.0

2015 Q1 0.1 0.1 0.1 0.0
2015 Q2 0.1 0.1 0.1 0.0
2015 Q3 0.1 0.1 0.2 0.0
2015 Q4 0.1 0.1 0.2 0.0

2016 Q1 0.1 0.1 0.2 0.0
2016 Q2 0.1 0.1 0.2 0.0
2016 Q3 0.1 0.1 0.2 0.1
2016 Q4 0.1 0.2 0.2 0.1

 Bilateral rate per US $

 Canadian Yen Euro Sterling
 $

2011 0.995 79.800 0.719 0.624
2012 0.997 79.800 0.778 0.631
2013 1.035 97.600 0.753 0.640
2014 1.096 104.400 0.738 0.609
2015 1.103 105.200 0.738 0.610
2016 1.109 105.700 0.735 0.610

2013 Q1 1.025 92.300 0.757 0.645
2013 Q2 1.032 98.800 0.765 0.651
2013 Q3 1.035 98.900 0.755 0.645
2013 Q4 1.050 100.500 0.735 0.618

2014 Q1 1.093 104.300 0.737 0.609
2014 Q2 1.096 104.300 0.738 0.609
2014 Q3 1.096 104.300 0.738 0.609
2014 Q4 1.098 104.600 0.738 0.609

2015 Q1 1.100 104.900 0.738 0.610
2015 Q2 1.102 105.100 0.738 0.610
2015 Q3 1.104 105.300 0.738 0.610
2015 Q4 1.106 105.500 0.737 0.610

2016 Q1 1.107 105.600 0.737 0.610
2016 Q2 1.108 105.700 0.736 0.610
2016 Q3 1.109 105.700 0.735 0.610
2016 Q4 1.110 105.700 0.734 0.609

Table A3. Government revenue assumptions

 Average income tax rate
 (per cent) (a)

 2013 2014 2015

Australia 14.1 14.1 14.0
Austria 32.0 32.1 31.8
Belgium 34.0 34.4 34.5
Canada 21.4 21.3 21.2
Denmark 37.6 37.8 37.8
Finland 32.2 32.4 32.4
France 30.4 30.4 30.4
Germany 27.8 27.7 27.7
Greece 17.5 17.2 16.7
Ireland 25.0 24.3 21.3
Italy 30.4 30.4 30.3
Japan 22.9 22.9 23.0
Netherlands 35.6 35.6 35.7
Portugal 21.1 21.3 21.3
Spain 24.9 24.7 25.0
Sweden 30.1 30.1 30.0
UK 22.9 22.9 23.2
US 18.7 18.7 19.1

 Effective corporate tax rate
 (per cent)

 2013 2014 2015

Australia 25.7 25.7 25.7
Austria 19.9 19.9 19.9
Belgium 16.7 16.7 16.7
Canada 19.5 20.3 20.8
Denmark 18.1 18.1 18.1
Finland 22.4 22.6 22.6
France 23.6 23.6 23.6
Germany 16.8 16.8 16.8
Greece 13.5 13.5 13.5
Ireland 9.8 9.8 9.8
Italy 26.4 26.4 26.4
Japan 29.4 29.6 29.6
Netherlands 8.3 8.4 8.4
Portugal 18.6 16.6 16.6
Spain 25.2 25.2 25.2
Sweden 30.4 30.4 30.4
UK 16.3 14.6 13.3
US 28.6 28.8 29.1

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

 2013 2014 2015

Australia 31.4 31.0 31.3
Austria 39.9 38.9 37.9
Belgium 45.4 45.0 44.7
Canada 35.4 35.7 35.8
Denmark 46.5 46.8 47.2
Finland 46.7 46.7 46.1
France 46.2 46.7 46.4
Germany 44.7 44.6 44.7
Greece 47.1 48.0 47.0
Ireland 27.5 28.4 29.0
Italy 45.8 45.8 45.2
Japan 30.7 30.7 30.9
Netherlands 42.8 42.7 40.9
Portugal 37.4 37.2 37.1
Spain 37.6 37.9 37.6
Sweden 45.0 44.4 44.1
UK 37.8 36.9 37.5
US 29.7 30.7 31.1

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

Table A4. Government spending assumptions(a)

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

 2013 2014 2015

Australia 32.2 32.5 32.2
Austria 39.2 37.9 36.8
Belgium 44.7 44.5 43.6
Canada 35.2 35.0 34.9
Denmark 47.2 47.2 47.0
Finland 47.2 47.3 46.6
France 47.9 47.6 46.9
Germany 42.9 43.0 43.2
Greece 44.4 44.5 42.8
Ireland 31.4 29.5 28.9
Italy 43.3 42.8 41.2
Japan 39.3 37.8 36.8
Netherlands 44.4 44.8 43.9
Portugal 37.8 37.0 36.1
Spain 40.4 39.4 38.1
Sweden 45.4 45.3 44.5
UK 38.1 37.1 36.2
US 32.2 31.6 31.1

 Gov't interest payments (% of GDP) Deficit
 projected to
 fall below
 2013 2014 2015 3% of GDP(b)

Australia 1.6 1.6 1.5 2013
Austria 2.6 2.4 2.2 2011
Belgium 3.4 3.2 2.9 2013
Canada 3.3 3.2 3.1 2014
Denmark 1.7 1.7 1.6 2013
Finland 1.5 1.4 1.3 --
France 2.6 2.5 2.4 2015
Germany 1.8 1.5 1.3 2011
Greece 5.7 6.0 5.9 2013
Ireland 3.9 4.0 3.8 2016
Italy 5.8 5.9 5.7 2014
Japan 1.9 1.6 1.5 --
Netherlands 1.8 1.8 1.7 2019
Portugal 5.1 5.3 5.6 2017
Spain 3.9 4.1 4.1 2018
Sweden 1.0 1.0 1.0 --
UK 3.0 3.0 3.1 2016
US 3.7 3.7 3.6 2016

Notes: (a) Expenditure shares reflect NiGEM aggregates, which may
differ from official government figures. (b) The deficit in Finland
and Sweden has not exceeded 3 per cent of GDP in recent history. 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)

 2011 2012 2013 2014 2015 2016-
 20

Australia 2.6 3.6 2.3 2.6 2.6 3.3
Austria (a) 2.9 0.7 0.3 1.0 1.8 2.6
Belgium (a) 1.8 -0.1 0.2 1.0 1.4 2.3
Bulgaria (a) 2.0 0.8 0.8 1.7 2.8 3.0
Brazil 2.7 1.0 2.2 2.1 2.9 3.8
China 9.4 7.8 7.7 7.2 6.9 6.8
Canada 2.5 1.7 1.7 2.2 2.4 2.8
Czech Republic 1.8 -0.9 -1.4 1.6 2.8 2.7
Denmark (a) 1.1 -0.4 0.2 1.0 2.0 2.0
Estonia (a) 9.6 3.9 0.9 2.8 3.6 2.9
Finland (a) 2.7 -0.8 -1.3 0.9 2.3 1.6
France (a) 2.0 0.0 0.2 0.8 1.6 1.8
Germany (a) 3.4 0.9 0.5 1.5 1.7 1.8
Greece (a) -7.1 -6.4 -3.5 -0.2 2.3 2.5
Hong Kong 4.9 1.5 2.7 3.3 3.2 3.1
Hungary (a) 1.6 -1.7 1.3 2.1 2.9 3.3
India 7.7 3.8 4.0 5.4 5.8 6.7
Indonesia 6.5 6.2 5.7 5.9 6.2 6.2
Ireland (a) 2.2 0.2 0.0 1.7 1.8 2.9
Italy (a) 0.6 -2.6 -1.9 0.0 1.0 2.8
Japan -0.4 1.4 1.6 1.4 1.2 0.9
Lithuania (a) 6.1 3.5 3.1 3.5 3.9 4.0
Latvia (a) 5.1 5.0 3.9 4.0 4.1 4.1
Mexico 4.0 3.9 1.2 3.2 3.5 3.7
Netherlands (a) 1.0 -1.3 -1.0 0.4 1.6 2.1
New Zealand 1.2 2.9 2.8 3.3 2.5 3.2
Norway 1.1 2.8 0.9 2.6 1.9 2.1
Poland (a) 4.5 2.0 1.4 2.9 3.9 3.3
Portugal (a) -1.3 -3.2 -1.6 0.2 1.5 3.2
Romania (a) 2.3 0.4 2.6 2.5 3.3 2.9
Russia 4.4 3.5 1.3 2.2 2.7 3.8
Singapore 5.2 1.3 3.9 3.3 5.4 4.3
South Africa 3.6 2.5 1.9 3.8 4.2 3.8
S. Korea 3.7 2.0 2.8 3.5 3.9 4.8
Slovakia (a) 3.0 1.8 0.7 1.9 2.8 2.5
Slovenia (a) 1.1 -2.4 -1.9 -0.3 1.8 2.0
Spain (a) 0.1 -1.6 -1.2 0.7 1.1 3.0
Sweden (a) 3.0 1.3 1.0 2.0 2.1 2.7
Switzerland 1.8 1.0 1.9 2.0 2.4 2.6
Taiwan 4.2 1.5 2.2 3.4 3.0 3.7
Turkey 8.5 2.2 4.0 3.2 4.4 5.9
UK (a) 1.1 0.3 1.9 2.5 2.1 2.4
US 1.8 2.8 1.9 2.8 2.7 3.1
Vietnam 6.2 5.2 5.4 5.2 4.8 4.3
Euro Area (a) 1.6 -0.6 -0.4 0.8 1.5 2.2
EU-27 (a) 1.7 -0.4 0.1 1.2 1.8 2.3
OECD 2.0 1.5 1.3 2.2 2.4 2.8
World 3.9 3.2 3.1 3.7 3.7 4.1

 Annual inflation (a) (per cent)

 2011 2012 2013 2014 2015 2016-
 20

Australia 2.6 2.7 2.5 2.6 2.4 2.6
Austria (a) 3.6 2.6 2.0 1.4 1.9 2.0
Belgium (a) 3.4 2.6 1.2 1.3 1.4 1.8
Bulgaria (a) 3.4 2.4 0.4 1.7 1.8 2.7
Brazil 6.6 5.4 6.2 5.7 4.7 4.2
China 5.4 2.7 2.6 2.4 2.6 2.4
Canada 2.1 1.4 1.1 1.7 1.8 1.7
Czech Republic 2.1 3.5 1.3 2.2 2.3 2.4
Denmark (a) 2.7 2.4 0.5 0.9 1.5 1.9
Estonia (a) 5.1 4.2 3.3 2.9 2.6 3.1
Finland (a) 3.3 3.2 2.2 1.3 1.3 2.6
France (a) 2.3 2.2 1.0 1.4 1.6 2.0
Germany (a) 2.5 2.1 1.6 1.6 1.7 1.9
Greece (a) 3.1 1.0 -0.8 -0.7 0.9 2.8
Hong Kong 3.6 3.1 2.3 2.5 2.5 2.7
Hungary (a) 3.9 5.7 1.7 2.8 3.3 2.6
India 8.8 9.4 10.9 8.7 6.0 5.2
Indonesia 5.4 4.3 7.0 6.9 6.8 5.3
Ireland (a) 1.2 1.9 0.5 1.1 1.7 1.9
Italy (a) 2.9 3.3 1.2 1.1 2.1 2.0
Japan -0.8 -0.8 -0.2 2.1 1.8 1.7
Lithuania (a) 4.1 3.2 1.2 2.5 2.4 3.6
Latvia (a) 4.2 2.3 0.0 2.5 2.5 5.3
Mexico 3.4 4.1 3.8 4.1 3.5 3.8
Netherlands (a) 2.5 2.8 2.7 1.1 1.2 1.7
New Zealand 2.8 0.5 0.6 2.3 2.5 3.0
Norway 1.0 1.2 2.3 1.9 2.3 3.1
Poland (a) 3.9 3.7 0.8 1.8 2.4 2.2
Portugal (a) 3.6 2.8 0.5 1.1 1.0 2.1
Romania (a) 5.8 3.4 3.2 2.6 3.0 2.0
Russia 8.4 5.1 6.7 5.6 4.9 4.8
Singapore 5.3 4.5 2.3 2.6 3.6 3.9
South Africa 4.9 5.7 5.0 5.9 4.4 4.8
S. Korea 4.0 2.2 1.2 1.5 2.3 2.8
Slovakia (a) 4.1 3.7 1.5 1.6 2.5 2.8
Slovenia (a) 2.1 2.8 1.9 1.3 2.9 4.7
Spain (a) 3.1 2.4 1.5 0.8 2.2 3.1
Sweden (a) 1.4 0.9 0.4 1.1 1.4 2.5
Switzerland 0.0 -1.1 -0.5 0.8 1.8 3.0
Taiwan 0.8 1.1 0.6 1.3 1.5 1.9
Turkey 6.5 8.9 7.5 7.1 5.7 5.9
UK (a) 4.5 2.8 2.6 2.2 1.9 1.9
US 2.4 1.8 1.1 1.3 2.0 2.9
Vietnam 18.7 9.1 6.5 6.0 6.2 6.6
Euro Area (a) 2.7 2.5 1.3 1.2 1.7 2.2
EU-27 (a) 3.1 2.6 1.5 1.5 1.8 2.2
OECD 2.4 2.1 1.5 1.8 2.2 2.7
World 5.3 4.9 4.8 4.4 4.3 3.8

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)

 2011 2012 2013 2014 2015 2020

Australia -3.6 -3.4 -2.4 -3.1 -2.5 -1.7
Austria (a) -2.4 -2.6 -1.8 -1.5 -1.2 -1.8
Belgium (a) -3.9 -4.1 -2.7 -2.6 -1.9 -1.8
Bulgaria -2.0 -0.8 0.3 0.4 0.2 -0.7
Canada -3.7 -3.4 -3.1 -2.4 -2.1 -1.7
Czech Republic -3.2 -4.4 -3.2 -3.3 -3.0 -2.6
Denmark (a) -1.8 -4.0 -2.5 -2.1 -1.4 -1.5
Estonia 1.2 -0.3 0.8 0.6 0.0 -1.2
Finland (a) -1.0 -2.2 -2.0 -2.0 -1.8 -1.5
France (a) -5.3 -4.8 -4.3 -3.4 -2.8 -1.9
Germany (a) -0.8 0.2 0.0 0.1 0.2 -1.4
Greece (a) -9.6 -9.0 -2.9 -2.5 -1.6 -2.9
Hungary 4.2 -2.1 -3.4 -3.6 -2.3 -1.0
Ireland (a) -13.1 -8.1 -7.9 -5.1 -3.7 -2.0
Italy (a) -3.8 -3.0 -3.3 -2.9 -1.8 -0.8
Japan -8.9 -9.9 -10.4 -8.7 -7.4 -5.6
Lithuania -5.5 -3.2 -2.5 -2.1 -1.8 -1.5
Latvia -3.6 -1.2 0.0 -0.9 -1.4 -1.0
Netherlands (a) -4.3 -4.0 -3.4 -3.9 -4.6 -2.6
Poland -5.0 -3.9 -3.4 4.6 -2.6 -0.5
Portugal (a) -4.3 -6.5 -5.5 -5.1 -4.7 -0.8
Romania -5.6 -2.9 -2.7 -2.5 -2.3 -1.7
Slovakia -5.1 -4.3 -2.4 -1.4 -0.6 0.1
Slovenia -6.4 -4.0 -3.8 -3.3 -2.7 -0.6
Spain (a) -8.7 -10.2 -6.7 -5.6 -4.6 -1.9
Sweden (a) 0.2 -0.5 -1.4 -1.8 -1.5 -1.1
UK (a) -7.7 -6.0 -6.2 -5.4 -3.9 1.1
US -10.7 -9.3 -6.2 -4.6 -3.6 -2.3

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

 2011 2012 2013 2014 2015 2020

Australia 26.5 31.9 32.9 34.0 34.7 33.8
Austria (a) 72.7 74.1 75.2 72.8 69.5 59.6
Belgium (a) 97.7 99.7 106.0 105.6 103.3 91.0
Bulgaria -- -- -- -- -- --
Canada 91.6 95.3 94.9 93.7 91.9 82.3
Czech Republic 41.4 46.2 48.6 51.9 53.5 53.6
Denmark (a) 46.4 45.4 46.7 48.0 48.5 47.1
Estonia -- -- -- -- -- --
Finland (a) 49.2 53.6 58.1 58.4 57.5 52.9
France (a) 85.8 90.3 95.0 96.4 95.8 87.9
Germany (a) 80.0 81.0 78.3 74.8 71.2 59.0
Greece (a) 170.3 157.0 175.2 176.9 170.9 139.2
Hungary 82.1 79.8 80.9 78.0 74.5 59.2
Ireland (a) 104.1 117.4 127.6 126.7 125.6 109.5
Italy (a) 120.7 127.0 135.2 136.3 133.0 104.8
Japan 202.3 214.6 216.3 214.6 212.2 212.0
Lithuania -- -- -- -- -- --
Latvia -- -- -- -- -- --
Netherlands (a) 65.7 71.2 75.6 79.0 81.3 83.1
Poland 56.2 55.6 59.3 53.6 53.9 44.2
Portugal (a) 108.2 124.1 132.2 134.2 135.1 111.9
Romania -- -- -- -- -- --
Slovakia -- -- -- -- -- --
Slovenia -- -- -- -- -- --
Spain (a) 70.5 86.0 95.4 99.8 100.7 83.4
Sweden (a) 38.7 38.2 41.4 41.9 41.6 37.2
UK (a) 84.3 88.6 89.7 91.6 92.4 76.5
US 97.0 101.0 101.5 102.1 100.3 85.4

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

 2011 2012 2013 2014 2015 2016-
 20

Australia 5.1 5.2 5.7 5.5 5.5 5.6
Austria 4.2 4.4 4.8 4.4 3.9 4.6
Belgium 7.3 7.6 8.4 8.2 7.8 8.3
Bulgaria 11.3 12.3 12.9 11.0 10.0 9.8
Canada 7.5 7.3 7.1 7.0 6.7 6.8
China -- -- -- -- -- --
Czech Rep. 6.7 7.0 7.0 8.6 9.0 5.6
Denmark 7.6 7.5 7.0 6.4 5.8 5.3
Estonia 12.5 10.1 8.7 9.1 9.4 9.1
Finland 7.8 7.7 8.2 8.4 7.5 7.4
France 9.6 10.3 10.8 10.4 9.8 9.7
Germany 5.9 5.4 5.3 5.1 5.0 5.4
Greece 17.7 24.3 27.3 26.2 23.3 21.9
Hungary 11.0 10.9 10.2 11.4 10.9 8.6
Ireland 14.7 14.8 13.1 11.8 I1.1 10.2
Italy 8.4 10.6 12.2 12.0 10.2 9.3
Japan 4.6 4.3 4.0 3.7 3.8 4.0
Lithuania 15.4 13.4 11.8 11.5 12.0 11.7
Latvia 16.4 14.9 12.2 12.5 13.4 13.2
Netherlands 4.4 5.3 6.7 6.9 6.1 6.4
Poland 9.7 10.1 10.4 10.8 11.2 9.6
Portugal 12.9 15.9 16.5 15.2 14.9 11.4
Romania 7.4 7.0 7.3 7.1 6.8 6.5
Slovakia 13.7 14.0 14.2 13.8 13.3 13.1
Slovenia 8.2 8.9 10.2 8.5 7.7 7.5
Spain 21.7 25.1 26.5 25.3 23.9 22.0
Sweden 7.8 8.0 8.0 7.7 7.2 7.3
UK 8.1 7.9 7.6 6.7 6.5 6.3
US 8.9 8.1 7.4 6.6 6.3 5.8

 Current account balance (per cent of GDP)

 2011 2012 2013 2014 2015 2016-
 20

Australia -2.3 -3.6 -2.7 -3.4 -3.6 -1.3
Austria 1.6 1.6 2.8 2.6 3.1 3.9
Belgium -1.1 -2.0 -1.8 -0.6 0.8 1.3
Bulgaria 0.2 -1.5 -2.7 -0.7 5.2 10.1
Canada -2.8 -3.4 -3.2 -2.3 -1.6 0.1
China 2.1 2.6 3.3 3.3 3.1 1.9
Czech Rep. -2.7 -2.5 -0.3 -2.5 -4.6 -4.4
Denmark 5.9 6.0 7.0 8.0 7.1 7.1
Estonia 1.8 -1.9 -1.5 -2.2 -2.8 -3.9
Finland -0.6 -1.5 -0.2 0.2 0.8 1.4
France -1.8 -2.2 -1.8 -1.9 -1.3 -0.6
Germany 6.2 7.1 7.0 6.1 5.5 4.6
Greece -9.9 -2.4 -0.6 3.3 5.9 6.7
Hungary 0.4 0.9 3.2 5.2 7.7 8.3
Ireland 1.2 4.4 6.3 7.9 9.8 8.5
Italy -3.1 -0.4 0.1 -0.9 0.1 3.0
Japan 2.0 1.1 1.1 1.9 2.4 3.6
Lithuania -1.5 -0.3 0.6 1.1 3.5 3.1
Latvia -2.4 -2.8 -0.3 -4.5 -6.9 -9.0
Netherlands 9.5 9.4 11.8 11.5 12.4 13.8
Poland -4.3 -3.8 -1.1 -1.8 -3.5 -4.3
Portugal -7.0 -2.0 0.3 2.1 3.5 4.7
Romania -6.2 -6.3 1.3 -1.4 -3.1 -3.0
Slovakia -1.8 1.9 1.5 -6.9 -8.1 -6.2
Slovenia 0.4 3.3 6.3 9.5 10.9 6.9
Spain -3.8 -1.1 0.3 2.3 3.7 3.0
Sweden 6.4 6.0 6.7 5.9 6.1 6.0
UK -1.5 -3.7 -3.3 -3.4 -4.4 -3.0
US -2.9 -2.7 -2.2 -2.0 -1.9 -2.3

Table B4. United States

Percentage change

 2010 2011 2012 2013

GDP 2.5 1.8 2.8 1.9

Consumption 2.0 2.5 2.2 2.0
Investment : housing -2.5 0.5 12.9 13.5
 : business 2.5 7.6 7.3 3.0
Government : consumption 0.1 -2.7 -0.2 -1.7
 : investment -0.1 -5.2 -3.9 -2.9
Stockbuilding (a) 1.4 -0.2 0.2 0.0
Total domestic demand 2.9 1.7 2.6 1.7

Export volumes 11.5 7.1 3.5 3.0
Import volumes 12.8 4.9 2.2 1.4

Average earnings 2.1 2.0 2.0 1.3
Private consumption deflator 1.7 2.4 1.8 1.1
RPDI 1.4 2.6 2.1 0.8
Unemployment, % 9.6 8.9 8.1 7.4

General Govt. balance as % of GDP -12.2 -10.7 -9.3 -6.2
General Govt. debt as % of GDP (b) 92.9 97.0 101.0 101.5

Current account as % of GDP -3.0 -2.9 -2.7 -2.2

 Average
 2014 2015 2016-
 20

GDP 2.8 2.7 3.1

Consumption 2.4 2.5 2.7
Investment : housing 9.8 9.4 7.6
 : business 6.7 6.1 5.3
Government : consumption -0.5 0.1 1.7
 : investment 0.0 0.0 1.8
Stockbuilding (a) 0.0 0.0 0.0
Total domestic demand 2.6 2.8 3.1

Export volumes 5.9 7.1 6.7
Import volumes 4.6 6.5 6.2

Average earnings 2.8 3.4 4.3
Private consumption deflator 1.3 2.0 2.9
RPDI 3.0 2.6 2.7
Unemployment, % 6.6 6.3 5.8

General Govt. balance as % of GDP -4.6 -3.6 -2.7
General Govt. debt as % of GDP (b) 102.1 100.3 91.6

Current account as % of GDP -2.0 -1.9 -2.3

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

Table B5. Canada
Percentage change

 2010 2011 2012 2013

GDP 3.4 2.5 1.7 1.7

Consumption 3.4 2.3 1.9 2.1
Investment : housing 8.7 1.6 6.1 0.2
 : business 14.2 10.9 6.1 1.9
Government : consumption 2.7 0.8 1.1 0.7
 : investment 10.5 -7.0 0.5 0.1
Stockbuilding(a) 0.3 0.5 0.0 0.1
Total domestic demand 5.2 2.8 2.3 1.7

Export volumes 6.9 4.7 1.5 1.3
Import volumes 13.6 5.7 3.1 0.7

Average earnings 1.4 3.6 2.3 2.0
Private consumption deflator 1.4 2.1 1.4 1.1
RPDI 2.2 2.2 2.4 2.6
Unemployment, % 8.0 7.5 7.3 7.1

General Govt. balance as % of GDP -4.9 -3.7 -3.4 -3.1
General Govt. debt as % of GDP(b) 87.7 91.6 95.3 94.9

Current account as % of GDP -3.5 -2.8 -3.4 -3.2

 Average
 2014 2015 2016-20

GDP 2.2 2.4 2.8

Consumption 2.3 2.6 2.0
Investment : housing 1.0 2.6 3.1
 : business 2.7 3.3 2.7
Government : consumption 0.3 1.6 2.6
 : investment 2.7 3.6 3.0
Stockbuilding(a) -0.1 -0.2 -0.2
Total domestic demand 1.7 2.3 2.1

Export volumes 4.1 4.7 6.3
Import volumes 2.2 3.9 4.1

Average earnings 2.4 2.8 3.2
Private consumption deflator 1.7 1.8 1.7
RPDI 2.1 2.4 1.9
Unemployment, % 7.0 6.7 6.8

General Govt. balance as % of GDP -2.4 -2.1 -1.9
General Govt. debt as % of GDP(b) 93.7 91.9 85.9

Current account as % of GDP -2.3 -1.6 0.1

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

Table B6. Japan
Percentage change

 2010 2011 2012 2013

GDP 4.7 -0.4 1.4 1.6

Consumption 2.8 0.3 2.1 2.0
Investment : housing -4.8 5.1 2.8 7.8
 : business 0.7 4.1 3.6 -1.6
Government : consumption 1.9 1.2 1.7 1.9
 : investment 0.1 -7.7 2.2 10.5
Stockbuilding(a) 0.9 -0.2 0.1 -0.2
Total domestic demand 2.9 0.5 2.3 1.8

Export volumes 24.5 -0.4 -0.1 1.9
Import volumes 11.1 5.9 5.4 2.8

Average earnings -1.4 0.9 -0.6 1.0
Private consumption deflator -1.7 -0.8 -0.8 -0.2
RPDI 2.3 0.5 1.2 1.4
Unemployment, % 5.1 4.6 4.3 4.0

Govt. balance as % of GDP -8.3 -8.9 -9.9 -10.4
Govt. debt as % of GDP(b) 192.8 202.3 214.6 216.3

Current account as % of GDP 3.7 2.0 1.1 1.1

 Average
 2014 2015 2016-20

GDP 1.4 1.2 0.9

Consumption 1.3 0.3 0.1
Investment : housing 4.4 3.9 3.1
 : business 2.0 3.7 2.7
Government : consumption -0.4 -0.8 0.5
 : investment 4.0 -2.9 1.7
Stockbuilding(a) 0.1 0.4 0.0
Total domestic demand 1.4 0.8 0.7

Export volumes 5.4 6.6 5.9
Import volumes 5.7 5.1 5.3

Average earnings 0.4 1.6 2.3
Private consumption deflator 2.1 1.8 1.7
RPDI -0.4 0.2 0.0
Unemployment, % 3.7 3.8 4.0

Govt. balance as % of GDP -8.7 -7.4 -6.1
Govt. debt as % of GDP(b) 214.6 212.2 211.8

Current account as % of GDP 1.9 2.4 3.6

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

Table B7. Euro Area

Percentage change

 2010 2011 2012 2013

GDP 1.9 1.6 -0.6 -0.4

Consumption 1.0 0.3 -1.4 -0.5
Private investment 0.2 2.1 -3.9 -3.4
Government: consumption 0.6 -0.1 -0.5 0.3
 : investment -4.0 -1.6 -3.8 -1.4
Stockbuilding (a) 0.7 0.2 -0.4 -0.1
Total domestic demand 1.3 0.7 -2.1 -0.9

Export volumes 11.4 6.7 2.7 1.2
Import volumes 9.8 4.7 -0.8 0.2

Average earnings 1.1 1.6 1.8 1.4
Harmonised consumer prices 1.6 2.7 2.5 1.3
RPD1 -0.6 -0.5 -1.6 -1.0
Unemployment, % 10.1 10.1 11.4 12.1

Govt. balance as % of GDP -6.2 -4.2 -3.7 -2.9
Govt. debt as % of GDP (b) 85.4 87.3 90.6 95.9

Current account as % of GDP 0.1 0.1 1.3 2.0

 Average
 2014 2015 2016-20

GDP 0.8 1.5 2.2

Consumption 0.5 0.7 1.0
Private investment 0.7 2.8 6.3
Government: consumption 0.2 0.5 1.3
 : investment 0.7 0.3 1.4
Stockbuilding (a) 0.1 0.1 0.0
Total domestic demand 0.5 1.0 2.1

Export volumes 4.6 7.3 6.0
Import volumes 4.7 6.8 6.2

Average earnings 1.1 1.8 3.1
Harmonised consumer prices 1.2 1.7 2.2
RPD1 0.7 1.2 1.7
Unemployment, % 11.6 10.8 10.3

Govt. balance as % of GDP -2.5 -2.0 -1.7
Govt. debt as % of GDP (b) 95.0 93.0 85.0

Current account as % of GDP 2.4 2.8 3.2

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

Table B8. Germany

Percentage change

 2010 2011 2012 2013

GDP 3.9 3.4 0.9 0.5

Consumption 1.0 2.3 0.7 1.1
Investment : housing 4.1 9.2 1.9 1.4
 : business 6.7 6.8 -2.1 -1.8
Government : consumption 1.3 1.0 1.0 0.5
 : investment -0.9 2.6 -7.1 0.2
Stockbuilding(a) 0.6 0.0 -0.6 0.2
Total domestic demand 2.3 2.9 -0.3 0.9

Export volumes 14.8 8.1 3.8 0.6
Import volumes 12.3 7.5 1.8 1.3

Average earnings 0.9 2.7 3.4 2.0
Harmonised consumer prices 1.2 2.5 2.1 1.6
RPDI 1.0 1.8 0.7 0.8
Unemployment, % 7.1 5.9 5.4 5.3

Govt. balance as % of GDP -4.1 -0.8 0.2 0.0
Govt. debt as % of GDP(b) 82.5 80.0 81.0 78.3

Current account as % of GDP 6.1 6.2 7.1 7.0

 Average
 2014 2015 2016-20

GDP 1.5 1.7 1.8

Consumption 1.4 1.3 1.2
Investment : housing 3.3 2.9 5.7
 : business 2.8 3.0 2.4
Government : consumption 1.6 1.6 1.4
 : investment 5.8 -2.2 0.7
Stockbuilding(a) -0.3 0.0 0.1
Total domestic demand 1.5 1.5 1.8

Export volumes 5.3 8.2 6.4
Import volumes 5.8 8.8 7.0

Average earnings 2.8 3.8 3.2
Harmonised consumer prices 1.6 1.7 1.9
RPDI 1.7 1.7 1.3
Unemployment, % 5.1 5.0 5.4

Govt. balance as % of GDP 0.1 0.2 -0.8
Govt. debt as % of GDP(b) 74.8 71.2 63.2

Current account as % of GDP 6.1 5.5 4.6

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

Table B9. France

Percentage change

 2010 2011 2012 2013

GDP 1.6 2.0 0.0 0.2

Consumption 1.5 0.5 -0.4 0.3
Investment : housing -0.4 2.3 -0.4 -3.9
 : business 4.7 3.9 -1.7 -1.8
Government : consumption 1.8 0.4 1.4 1.7
 : investment -8.2 0.3 -0.6 -1.2
Stockbuilding(a) 0.5 0.9 -0.5 -0.3
Total domestic demand 2.0 1.8 -0.6 -0.1

Export volumes 9.0 5.6 2.5 0.5
Import volumes 8.6 5.3 -0.9 1.0

Average earnings 1.8 2.5 2.3 1.4
Harmonised consumer prices 1.7 2.3 2.2 1.0
RPDI 0.9 0.2 0.0 0.5
Unemployment, % 9.7 9.6 10.3 10.8

Govt. balance as % of GDP -7.1 -5.3 -4.8 -4.3
Govt. debt as % of GDP(b) 82.4 85.8 90.3 95.0

Current account as % of GDP -1.3 -1.8 -2.2 -1.8

 Average
 2014 2015 2016-20

GDP 0.8 1.6 1.8

Consumption 0.4 0.9 1.5
Investment : housing -1.6 0.8 2.6
 : business 2.1 3.9 1.9
Government : consumption 0.9 0.6 1.2
 : investment 0.3 0.3 1.3
Stockbuilding(a) 0.0 0.0 0.0
Total domestic demand 0.6 1.1 1.5

Export volumes 3.4 7.7 6.2
Import volumes 3.6 5.9 5.1

Average earnings 0.9 1.7 3.0
Harmonised consumer prices 1.4 1.6 2.0
RPDI 0.5 1.2 1.8
Unemployment, % 10.4 9.8 9.7

Govt. balance as % of GDP -3.4 -2.8 -2.1
Govt. debt as % of GDP(b) 96.4 95.8 91.4

Current account as % of GDP -1.9 -1.3 -0.6

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

Table B10. Italy

Percentage change

 2010 2011 2012 2013

GDP 1.7 0.6 -2.6 -1.9

Consumption 1.5 -0.3 -4.2 -2.5
Investment : housing -0.4 -6.0 -7.0 -5.6
 : business 4.6 0.9 -9.7 -4.3
Government : consumption -0.4 -1.1 -2.6 -0.3
 : investment -5.9 -4.4 -8.3 -3.6
Stockbuilding (a) 1.2 0.0 -0.5 -0.1
Total domestic demand 2.2 -0.7 -5.1 -2.6

Export volumes 11.2 6.9 1.9 0.2
Import volumes 12.3 1.4 -7.5 -2.2

Average earnings 2.2 1.2 1.2 1.1
Harmonised consumer prices 1.6 2.9 3.3 1.2
RPDI -0.8 -0.9 -4.9 -3.0
Unemployment, % 8.4 8.4 10.6 12.2

Govt. balance as % of GDP -4.5 -3.8 -3.0 -3.3
Govt. debt as % of GDP (b) 119.4 120.7 127.0 135.2

Current account as % of GDP -3.5 -3.1 -0.4 0.1

 Average
 2014 2015 2016-20

GDP 0.0 1.0 2.8

Consumption -0.5 -0.3 0.8
Investment : housing -1.3 0.6 9.6
 : business -0.9 2.4 8.5
Government : consumption -0.9 -0.2 1.1
 : investment 1.3 0.3 1.4
Stockbuilding (a) 0.5 0.3 0.0
Total domestic demand 0.1 0.4 2.3

Export volumes 4.6 7.1 6.2
Import volumes 5.0 5.6 5.3

Average earnings -1.1 -0.8 2.0
Harmonised consumer prices 1.1 2.1 2.0
RPDI -1.2 -0.5 2.2
Unemployment, % 12.0 10.2 9.3

Govt. balance as % of GDP -2.9 -1.8 -1.0
Govt. debt as % of GDP (b) 136.3 133.0 116.6

Current account as % of GDP -0.9 0.1 3.0

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

Table B11. Spain

Percentage change

 2010 2011 2012 2013

GDP -0.2 0.1 -1.6 -1.2

Consumption 0.2 -1.2 -2.8 -2.4
Investment : housing -11.4 -12.5 -8.7 -8.5
 : business 0.5 1.1 -8.0 -5.6
Government : consumption 1.5 -0.5 -4.8 -1.1
 : investment 0.0 0.0 -0.2 -1.4
Stockbuilding(a) 0.3 -0.1 0.0 0.0
Total domestic demand -0.6 -2.1 -4.1 -2.9

Export volumes 11.7 7.6 2.1 5.6
Import volumes 9.3 -0.1 -5.7 0.6

Average earnings 0.0 0.3 -0.4 0.5
Harmonised consumer prices 2.0 3.1 2.4 1.5
RPDI -4.8 -2.9 -4.4 -4.1
Unemployment, % 20.1 21.7 25.1 26.5

Govt. balance as % of GDP -9.4 -8.7 -10.2 -6.7
Govt. debt as % of GDP(b) 61.7 70.5 86.0 95.4

Current account as % of GDP -4.5 -3.8 -1.1 0.3

 Average
 2014 2015 2016-20

GDP 0.7 1.1 3.0

Consumption 0.9 0.2 0.3
Investment : housing -6.5 -2.4 10.6
 : business 1.7 5.0 18.4
Government : consumption -1.3 -0.8 1.6
 : investment -1.0 0.7 2.4
Stockbuilding(a) 0.0 0.0 0.0
Total domestic demand -0.2 0.2 3.7

Export volumes 7.4 6.8 5.1
Import volumes 5.2 4.9 7.4

Average earnings -0.1 1.2 4.2
Harmonised consumer prices 0.8 2.2 3.1
RPDI 0.7 0.2 1.9
Unemployment, % 25.3 23.9 22.0

Govt. balance as % of GDP -5.6 -4.6 -2.8
Govt. debt as % of GDP(b) 99.8 100.7 92.8

Current account as % of GDP 2.3 3.7 3.0

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

Graham Hacche, with Angus Armstrong, Tatiana Fic, Iana Liadze, Miguel Sanchez-Martinez, Jack Meaning 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 Simon Kirby for helpful comments and discussion and Chizoba Obi for compiling the database underlying the forecast. The forecast was completed on 28 January, 2014. Exchange rate, interest rates and equity price assumptions are based on information available to 17 January 2014. Unless otherwise specified, the source of all data reported in tables and figures is the NiGEM database and NIESR forecast baseline.

NOTES

(1) These developments occurred largely after the 17 January cutoff date for our projections.

(2) The advance estimate of fourth quarter GDP, released just before we went to press, shows 3.2 per cent growth at an annual rate, slightly below the 3.5 per cent asumed in our forecast.

Table I. Forecast summary Percentage change

 Real GDP(a)

 World OECD China EU-27 Euro
 Area

2010 5.2 3.0 10.4 2.0 1.9
2011 3.9 2.0 9.4 1.7 1.6
2012 3.2 1.5 7.8 -0.4 -0.6
2013 3.1 1.3 7.7 0.1 -0.4
2014 3.7 2.2 7.2 1.2 0.8
2015 3.7 2.4 6.9 1.8 1.5
2004-2009 3.8 1.4 10.9 1.2 1.0
2016-2020 4.1 2.8 6.8 2.3 2.2

 Real GDP(a)

 USA Japan Germany France Italy

2010 2.5 4.7 3.9 1.6 1.7
2011 1.8 -0.4 3.4 2.0 0.6
2012 2.8 1.4 0.9 0.0 -2.6
2013 1.9 1.6 0.5 0.2 -1.9
2014 2.8 1.4 1.5 0.8 0.0
2015 2.7 1.2 1.7 1.6 1.0
2004-2009 1.4 0.1 0.8 1.0 0.0
2016-2020 3.1 0.9 1.8 1.8 2.8

 Real GDP(a)
 World
 trade
 UK Canada (b)

2010 1.7 3.4 12.5
2011 1.1 2.5 5.8
2012 0.3 1.7 2.4
2013 1.9 1.7 2.8
2014 2.5 2.2 5.3
2015 2.1 2.4 7.4
2004-2009 1.1 1.6 4.9
2016-2020 2.4 2.8 6.8

 Private consumption deflator

 OECD Euro USA Japan Germany
 Area

2010 1.9 1.6 1.7 -1.7 2.0
2011 2.4 2.4 2.4 -0.8 2.0
2012 2.1 2.1 1.8 -0.8 1.6
2013 1.5 1.2 1.1 -0.2 1.6
2014 1.8 1.1 1.3 2.1 1.6
2015 2.2 1.7 2.0 1.8 1.7
2004-2009 2.1 1.8 2.2 -0.8 1.2
2016-2020 2.7 2.2 2.9 1.7 1.9

 Private consumption deflator

 France Italy UK Canada

2010 1.1 1.5 4.0 1.4
2011 2.1 2.8 3.9 2.1
2012 1.9 2.8 2.6 1.4
2013 0.5 1.3 2.8 1.1
2014 1.1 1.4 1.8 1.7
2015 1.6 2.1 1.9 1.8
2004-2009 1.7 2.1 2.5 1.3
2016-2020 2.0 2.0 2.1 1.7

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

2010 0.3 0.1 1.0 78.8
2011 0.3 0.1 1.2 108.5
2012 0.3 0.1 0.9 110.4
2013 0.3 0.1 0.6 107.2
2014 0.3 0.1 0.3 103.2
2015 0.6 0.1 0.3 99.4
2004-2009 2.8 0.2 2.6 63.2
2016-2020 2.7 0.6 1.7 103.3

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