The world economy.

Hacche, Graham ; Fic, Tatiana ; Liadze, Iana 等

World Overview

The moderate strengthening of the global economic recovery is proceeding broadly as expected three months ago, and our overall growth forecast is little changed. We project world GDP growth of 3.6 per cent this year, rising to 3.9 per cent in 2015. These growth rates would still be lower than those seen both in previous economic recoveries and in the years immediately before the crisis, in 2004-7.

Strengthening global growth is being driven mainly by the advanced economies. In many major emerging market economies growth has continued to slow, in some cases as a result of necessary structural change, in others as a result of capacity constraints or increased financing costs.

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In the major advanced economies, growth will be supported this year not only by continuing highly accommodative monetary policies, but also, in both the United States and the Euro Area, by less restrictive fiscal policies than in the past three years. In Japan, growth slowed sharply in late 2013, and not only the recent sales tax hike but also the fiscal consolidation in prospect raise questions about the need for additional monetary action to boost demand. With inflation in most cases remaining close to 1 per cent a year--and thus below official targets--and with significant economic slack, monetary policies have remained accommodative, with no further adjustments in recent months in official interest rates or unconventional operations. The US Federal Reserve's 'tapering' of asset purchases has proceeded as originally envisaged, with the programme still expected to end late this year. In March, the Federal Reserve amended its forward guidance on short-term interest rates: with unemployment approaching the threshold of 6 1/2 per cent, which had been in place since December 2012, the threshold was replaced by qualitative guidance. The Fed indicated that this did not imply any change in its policy intentions.

With inflation in the Euro Area having drifted further down, to 0.5 per cent, from the official target in recent months--and falling into negative territory in five of its eighteen member countries--the ECB has increasingly emphasised its scope for further action, while taking none. Market expectations of such action have contributed to a further marked narrowing of sovereign spreads in the Area. This has had only limited effects on the cost and availability of credit in the periphery countries, however, and bank lending has continued to decline, partly reflecting the weakness of banks' balance sheets in many cases. The remaining legislation needed to underpin the Area's new banking union was passed by the European Parliament in early April. The single resolution mechanism, though improved in some respects from that agreed by ministers last December, still seems under-funded, its resolution procedures too complex, and it continues to lack a public backstop.

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Among the major emerging market economies, growth is continuing to slow in China, where corporate balance sheet weaknesses have recently come more to the fore. The government's intentions with regard to financial liberalisation have been clarified to some extent in recent months, and the daily trading band for the renminbi has been widened. Growth prospects for Russia, which were already weak, have been marked down significantly further, with the country facing higher financing costs in the wake of the Ukraine crisis, partly because of international sanctions. Growth in India, recently half the rates seen a few years ago, is expected to strengthen, assuming that the current general election reduces political uncertainties. Growth in Brazil has also remained sluggish, reflecting macroeconomic imbalances and capacity constraints, partly related to inadequate investment. Brazil, India, and Russia all suffer from excessive inflation, a factor constraining monetary policy.

Our forecast is subject to several risks, which are mainly on the downside. One is the risk that inflation, already significantly below target in most advanced economies, will fall further. The broad decline in inflation among the advanced economies to annual rates close to 1 per cent--the lowest since the depths of the recent global recession --was highlighted in the February Review. The risk that it may go further still seems greatest in the Euro Area, not least because it has recently indeed fallen further, to about 0.5 per cent on average, and to negative levels in five member countries (as well as in Bulgaria and Sweden, two countries outside the Area). Moreover, on the basis of our forecast, output and employment gaps are likely to remain unusually wide for an extended period in the Area as a whole, and especially in its weakest member economies. The ECB, which last took easing action in November 2013 with small cuts in two of its benchmark interest rates, has in recent months increasingly emphasised its ability and readiness to take further action--not only further reductions in official rates, even to below zero, but quantitative easing as well, "in order to cope effectively with risks of a too prolonged period of low inflation". And these statements have apparently had some market impact, in helping to narrow sovereign spreads further in the weaker member countries. But this falls well short of the benefits to demand, and to the alleviation of risk, that action, as opposed to talk, could bring. One of the ECB's justifications for eschewing action has been that medium-term inflation expectations seem to have remained "well anchored", close to the target. But inflation expectations are likely eventually to adapt to persistently low actual rates, and perhaps sooner rather than later. Moreover, the recent decline in inflation was not forecast, including by the ECB, and is not fully understood, suggesting that the risk of further forecast errors is significant.

A common misperception is that while deflation may be damaging, low inflation is benign--even that the lower inflation is, the better, with absolute price stability the best outcome of all. In fact, excessively low, positive inflation could impede economic growth and recovery in a number of ways: by limiting the ability of the central bank to reduce real interest rates, given the zero lower bound on nominal rates; by reducing labour market flexibility, given the relative rigidity of nominal wages; and by impeding the reduction of the real burden of nominally fixed debt. The last issue is particularly important currently because of the large burdens of public and private debt accumulated in recent years. In the Euro Area, the problems of low inflation are particularly salient because of the dual needs of the weak 'peripheral' economies both to reduce debt and to improve their international competitiveness. The latter objective requires them to have lower inflation than in the stronger economies of the core. But the lower is inflation in the core--in Germany recently it has been about 1 per cent--the more difficult it becomes for them to reduce their debt burdens when they do achieve gains in competitiveness.

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. With consumer price inflation in the Euro Area having been consistently below 2 per cent for more than a year, below 1 1/2 per cent for eight months, and below 1 per cent for six months--and with the only national inflation rates in the Area recently above 1 per cent being 1.3-1.4 per cent in Austria, Finland, and Malta--it seems clear that the ECB now needs to take further, decisive action to serve its mandate of maintaining inflation of 'below, but close to 2 per cent' in the medium term.

A second risk relating to the Euro Area is that the continued concentration of the burden of adjustment on the deficit countries may increase adjustment fatigue to such an extent that progress with EMU and even the broader European project may appear to be jeopardised, with effects on financial markets and wider repercussions. Signs of fatigue with adjustment and reform have been apparent for some time; the European parliamentary elections in May could provide a particularly clear demonstration of them.

A third set of risks surrounds the comprehensive balance sheet assessment of major Euro Area banks currently being conducted by the ECB. As the assessment proceeds, there is a risk that investor confidence in banks will be subject to speculation about its results. Also, banks may become more conservative in their decisions, with the intention of improving their positions as perceived by regulators. With bank lending in the Euro Area still declining, such reactions could further damage the economic recovery.

A fourth risk relates to Japan. Progress with Abenomics seems in some ways to have stalled, with the marked weakening of growth late last year, the recent plateauing of inflation well short of the 2 per cent target, and very limited progress with structural reforms. The recent hike in the consumption tax may be welcomed as a step towards needed medium-term fiscal consolidation, but in the short term it threatens the recovery of domestic demand. In these circumstances, there is a risk that confidence in the strategy and in the recovery may be lost, which points to a case for yet more aggressive monetary expansion to insure against this risk.

A fifth set of risks continues to be posed by the continued increases in asset prices--most visible in equity and real estate markets--associated with the exceptionally accommodative monetary policies that have been employed across the advanced economies in recent years to support the recovery of demand. The risk of a destabilising correction is apparent, especially in the event that the economic recovery exceeds expectations and calls for an acceleration of the normalisation of monetary policy. A different risk is that if below-target inflation persists or declines further, central banks may face a conflict between the need to provide an additional boost for demand in the real economy and the need to contain the danger of financial collapse by acting to limit the rise in housing or other asset prices. Whether macroprudential policies could be used to resolve such a dilemma is unclear.

A sixth risk is that capital flows to emerging markets may suffer further declines and volatility as the normalisation of monetary policies in the advanced economies approaches. Such a reaction was seen last summer, when financial markets responded to statements by the Federal Reserve about the timing of the 'tapering' of its asset purchase programme. Bond yields rose in the advanced economies, and capital flows to emerging markets declined; and one result was that local-currency bond yields in the emerging market economies rose by more than in the advanced economies. This is consistent with past patterns, indicating how emerging market risk tends to be reassessed unfavourably when advanced economy rates rise. This has been an important source of the slowdown in emerging market economies over the past year. Further capital outflows from emerging markets are likely as the normalisation of monetary policy approaches. The economies with external current account deficits that are not financed by long-term capital flows remain particularly vulnerable.

Most of these risks are familiar from recent issues of this Review. But a new set of risks has recently come to the fore--the geopolitical risks stemming from the crisis in Ukraine, the Russian annexation of Crimea, and the associated international dispute. These events are already having a negative impact on the Russian economy, reflected in the downgrading of our projections for its growth in 2014-15, with repercussions on the economies with which Russia has close economic relations. Because of the major political uncertainties, the most likely eventual economic effects are difficult to assess, and so are the risks (see Box B). Larger effects on Russia and larger spillovers, including to countries beyond Russia's neighbouring trading partners, could result from disruptions to trade and finance, including as a result of sanctions and reactions to them. The Russian economy represents about 3 per cent of global GDP, but Russia produces significantly larger proportions of some primary products, including fuels, and serious disruptions of the markets for these products could have substantial global repercussions.

Prospects for individual economies

Euro Area

The modest economic recovery has continued and seems to have gathered some strength in recent months. In the final quarter of 2013, GDP growth picked up to 0.2 per cent from 0.1 per cent in the third quarter, and higher-frequency data suggest a further strengthening in early 2014. Industrial production has shown a moderately accelerating trend and in February was 1.7 per cent higher than twelve months earlier; and recent PMIs suggest GDP growth of about 0.5 per cent in the first quarter. The European Commission's economic sentiment indicator for March was the highest since mid-2011. But the Area's economy remains depressed, with considerable economic slack. Unemployment in February was 11.9 per cent, unchanged since last October and only slightly below its 12.0 per cent peak. Consumer price inflation has fallen further: in March, the 12-month all-items rate declined to 0.5 per cent, while the core rate fell to 0.7 per cent; neither rate has exceeded 1 per cent over the past six months.

The average inflation rate for the Euro Area as a whole of course masks differences among individual member countries. The number of countries experiencing negative inflation has recently risen to five--Cyprus, Greece, Portugal, Slovakia, and Spain--while the highest inflation rates, of about 1.4 per cent on a 12-month basis, have been in Austria, Finland, and Malta. We expect that the deflationary landscape in southern Europe will change somewhat next year, with Greece the only country continuing to experience price declines in 2015 and other economies seeing inflation close to zero, before converging towards the target in the medium term as the recovery becomes more entrenched. This is echoed in our forecast for the Euro Area as a whole where we expect average HICP inflation to be close to zero, at around 0.2 per cent, this year before picking up to around 1.1 per cent in 2015 and 2 per cent in the medium term. There are, however, important downside risks to this forecast, as discussed above in the World Overview.

The ECB has kept its interest rates and operational stance unchanged in recent months, while increasingly emphasising the scope for further easing action if judged necessary. At his press conference following the early-March meeting of the Bank's governing council, President Draghi observed that the moderate economic recovery was proceeding in line with the ECB's previous assessment, and that the expected prolonged period of inflation lower than the objective of 'below, but close to, 2 per cent' was less of a concern than it might be because inflation expectations still seemed well anchored, close to the targeted level. At the same time, he "firmly re-iterate(d)" the ECB's forward guidance, that "We continue to expect the key ECB interest rates to remain at present or lower levels for an extended period of time", given "the subdued outlook for inflation ..., the broad-based weakness of the economy, the high degree of unutilised capacity and subdued money and credit creation". He also again indicated that the ECB remained firmly determined to maintain the high degree of monetary accommodation and to take further decisive action if required.

After the next meeting, in early April, Draghi went further, providing the strongest signal yet that the ECB was prepared to embrace quantitative easing, by stating that "The governing council is unanimous in its commitment to using unconventional instruments within its mandate in order to cope effectively with risks of a too prolonged period of low inflation". Draghi subsequently confirmed that "unconventional instruments" included bond buying, but at the same time stressed that the Bank had "not exhausted its conventional armoury", thus indicating that further cuts in official interest rates, possibly into negative territory, might be undertaken first.

As Draghi acknowledged, a factor holding down inflation in the Area has been the strength of the euro, which has appreciated by about 9 per cent against the US dollar and 8 per cent in effective terms since its trough of 2012. Indeed, in mid-April, Draghi acknowledged that the appreciation effectively entailed a tightening of monetary conditions, thus requiring additional stimulus by the ECB. The euro's rise may be attributed partly to the recovery from the Euro Area's financial crisis and partly to the widening of the Area's current account surplus. It has heightened the challenge already faced by the Area's deficit countries of improving their international competitiveness, given the low rates of inflation prevailing throughout the Area, including in the surplus countries. However, the relatively weak economic recovery in the Area and the related prospect that the normalisation of monetary policy in the Area will lag behind other advanced economies seems likely to limit how much further the appreciation will go.

Heightened expectations of additional easing action by the ECB, including purchases of the sovereign bonds of deficit countries, have contributed to a further narrowing of sovereign yield spreads in the Area. By late April, spreads on ten-year government bonds relative to Germany had narrowed to 4.6 per cent for Greece (which returned to international capital markets earlier in the month, with an over-subscribed issuance of five-year instruments), 2.2 per cent for Portugal, and 1.6 per cent for Spain. Nevertheless, credit conditions have remained tight in the peripheral countries, reflecting the continuing weakness of banks' balance sheets, and the volume of credit in the Area has continued to decline, by 2.3 per cent in the year ended February.

The legislative work underpinning the Area's new banking union--an objective since June 2012--was completed in mid-April. The first leg of the union had been put in place last October with the establishment of the single supervisory mechanism at the ECB. The ECB will be the ultimate supervisor of all banks in the Area from next November; in the meantime, it is carrying out a comprehensive balance sheet assessment of about 130 major banks. On March 20, 2014, agreement was reached between the European Parliament, the European Council, and the European Commission on the single resolution mechanism (SRM), the banking union's second major component. The compromise reached amended the agreement reached by ministers last December in a number of ways: it allows the single resolution fund to be built up from bank levies in eight years rather than ten, a faster pooling of the fund's resources, a larger role for the Commission in resolution decisions, a somewhat simplified procedure for such decisions, and allowance for the establishment of enhanced borrowing capacity for the fund. The agreement was welcomed by the ECB, with President Draghi declaring that the "two pillars (of the Banking Union) are now in place". However, the mechanism may still be regarded as under-funded, its resolution procedures too complex, and it continues to lack a public backstop. The regulation on the SRM was passed by the European Parliament on April 15, along with a Bank Recovery and Resolution Directive (setting out common rules on bailing-in and state aid for failing banks) and a Directive on Deposit Guarantee Schemes (to facilitate faster pay-outs of insured funds).

Both weak growth and low inflation have been making deleveraging more difficult for public and private sectors across the Euro Area. In several cases, governments have been showing signs that they are finding it tough to meet their deficit and debt reduction targets. In April, France's new administration adopted less ambitious targets for deficit reduction in 2015-17, while reaffirming the commitment not to exceed the upper limit of 3 per cent of GDP agreed with the EU for 2015. Also, Italy's new government has officially asked the EU to extend from 2015 to 2016 the deadline for achievement of a balanced budget.

Germany

Growth has strengthened somewhat further in recent months, while inflation has continued to decline. Following 0.3 per cent growth in the third quarter of 2013, GDP expanded by 0.4 per cent in the final three months of the year, and higher-frequency indicators point to further acceleration in early 2014, although this may have been partly due to favourable weather conditions. The 12-month growth rate of industrial production, which was negative in early 2013, rose to about 5 per cent in the first two months of this year, and business sentiment has recently been at its highest since 2011.

Partly reflecting recent developments, our projections of GDP growth in 2014 and 2015 have been revised up slightly, to 1.7 per cent and 1.9 per cent respectively. Growth will be driven mainly by domestic demand, underpinned by the strong labour market and low interest rates. The contribution of net exports is expected to remain positive throughout the forecast horizon, although their relative role will decrease significantly as domestic demand gains momentum, fuelling imports.

After two years of declining investment amid uncertainty about policies ahead of the federal elections last September and in relation to the financial crisis in the Euro Area, we project a pick-up in investment starting this year. Reduced uncertainty, and steadily increasing capacity utilisation, will be the main drivers of this recovery, while the continuing weak growth and fragile macroeconomic situations in much of the Euro Area, together with slower growth in key emerging market economies, including China, will limit the pace of the upswing.

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Unemployment has fallen further, to post-unification lows of around 5 per cent. This is, in part, an outcome of the implementation during 2002-05 of the laws known as the Hartz labour market reforms--see figure 3. Strong labour market conditions have contributed to significant recent immigration from both Southern, and Central and Eastern, Europe, as discussed in the January Review.

Although the economy is operating close to full capacity, and growth is running slightly above its estimated potential rate of about 1.3 per cent, inflation has declined further, to 1.0 per cent in terms of the 12-month change in consumer prices in March. We forecast that consumer prices will increase by 1.4 per cent, on average, in 2014 and 1.6 per cent in 2015. While higher unit labour costs are likely to pass through to inflation, this should be partly offset by the projected easing of oil price pressures.

France

While the French economy has remained weak in recent months, a continued slow improvement in activity is apparent. In the fourth quarter of 2013, GDP growth turned positive, albeit by only 0.3 per cent, and indicators of more recent activity suggest continuing modest expansion. The 12-month growth rate of industrial production, which was negative for most of 2012-13, has been positive in most recent months, and in March 2014 PMIs reached 2-3 year highs, although they indicate only muted growth. Unemployment, down slightly to 10.2 per cent in the fourth quarter of 2013 after a revision of data, has remained close to 16-year highs. Consumer price inflation fell to 0.6 per cent on a 12-month basis in March; it has been at or below 1 per cent since early last year.

There have been several developments with respect to the Government's 'responsibility pact' with business announced by President Hollande in January to promote growth, employment, and the associated fiscal policies. In early March, labour and business representatives reached agreement on aims for job creation under the pact. In early April, following local government elections, newly appointed Prime Minister Vails presented a policy programme to parliament which reiterated Hollande's commitment to public spending cuts worth EUR 50 billion over 2015-17--to be split between central state (18 billion [euro]), local authorities (11 billion [euro]), health care (10 billion [euro]) and social security (11 billion [euro])--and also promised EUR 11 billion in tax cuts for businesses and households over the same period, additional to the EUR 30 billion cuts in payroll tax announced by Hollande in January. The Prime Minister also, in mid-April, reaffirmed the government's commitment to observe the fiscal deficit ceiling for 2015 of 3 per cent of GDP agreed last year with the European Commission, even though the deficit in 2013, at 4.2 per cent of GDP, overshot last year's target of 4.1 per cent. Later in the month he set out less ambitious targets for deficit reduction in 2015-17 than those adopted earlier, but with the 3 per cent ceiling for 2015 still honoured: the new targets are 3.0, 2.2, and 1.3 per cent of GDP, respectively, for 2015-17, up from 2.8, 1.7, and 1.2 per cent.

These policies promise continuing fiscal consolidation in 2014-16, though at a more moderate rate than over the past three years. Given this continuing fiscal drag, the strengthening of growth will depend partly on continuing accommodative monetary conditions and the healing of private sector balance sheets, but also, importantly, on needed improvements in France's international competitiveness. Such improvements have recently been difficult to achieve given the strength of the euro in foreign exchange markets and the low rates of inflation throughout the Euro Area. But they should be promoted by the tax cuts included in the responsibility pact, and also by the structural reforms, already implemented or being planned, in the labour market, the energy and transport sectors, and public administration.

In light of recent data, we have revised down slightly our GDP growth forecast for 2014 by 0.2 percentage points, although our forecast for 2015 is unchanged. We also forecast that France will miss its 3 per cent deficit target in 2015, not crossing this threshold until 2017.

Italy

After nine consecutive quarters of economic contraction, Italy emerged from recession in the final quarter of 2013, albeit with minimal, 0.1 per cent, positive growth. The economy shrank by 1.8 per cent in 2013 as a whole and remains deeply depressed: in February, unemployment rose to a 37-year high of 13.0 per cent, with the rate among 15-24 year-olds at 42.3 per cent. Inflation has continued to decline: in March, the 12-month increase in consumer prices fell to 0.4 per cent. Substantial fiscal consolidation over the past three years has contributed to the weakness of activity. With fiscal drag waning in the short run, we forecast weak positive growth to continue through 2014 before picking up pace next year.

As well as high unemployment, Italy's economic problems include chronically weak productivity growth. Prime Minister Renzi, newly appointed at the end of February, has declared these two issues to be his top priorities for economic policy, and in March he announced a programme of fiscal and labour market reforms designed to improve conditions in the labour market and spur productivity growth, while keeping Italy within the fiscal deficit ceiling of 3 per cent of GDR They include a number of tax cuts to be implemented on May 1, and to be financed partly by spending reductions; the payment by July of arrears owed by the public to the private sector; and proposed measures, currently being considered by parliament, to improve labour market flexibility.

Related to low productivity growth, real disposable incomes have continued to contract, despite muted inflation. This has weighed on consumer spending--now at its lowest level since 1999--and on demand more broadly.

By the end of 2013, Italy had returned to a marginally positive external current account balance. Unlike Spain, which has achieved surplus partly through strong export performance, Italy's adjustment has occurred predominantly through a contraction of imports, which continued last year. We expect the downward pressure on imports to ease somewhat in 2014 as growth boosts domestic spending power. However, robust exports, driven by a rebound in demand from Italy's main trading partners and any competitiveness gains the reforms may bring, will mean that the current account balance should remain positive through 2014 and 2015.

Spain

The economic recovery that began late last year, with GDP growth of 0.2 per cent in the fourth quarter, strengthened somewhat in the first quarter of 2014. The upturn in activity is being driven by strong export performance alongside pickups in investment and consumption. Recent data have prompted a significant upward revision to our growth forecast, to 1.1 per cent and 1.4 per cent for 2014 and 2015 respectively.

Underpinning export growth has been an improvement in international competitiveness brought about by falling domestic labour costs, with high unemployment and labour market reforms holding wages broadly flat since 2010.

The benefits of lower wage growth for competitiveness, however, must be weighed against its wider implications for inflation and the easing of debt burdens. Falling wage costs, together with the appreciating euro, have exerted downward pressure on prices, and the 12-month change in the HICP turned negative in March at -0.2 per cent. We are now forecasting deflation of 0.2 per cent in 2014 as a whole, followed by 0.8 per cent inflation in 2015. This low or negative inflation will make more difficult the deleveraging process that needs to continue in both the private and public sectors, where debt levels, though reduced from their peaks, remain high. The government narrowly missed its deficit target for 2013, by less than 0.2 per cent of GDP, but with inflation lower than expected earlier subsequent targets may prove harder to achieve, even with upward revisions to growth projections. With government spending already forecast to contract into 2015, further cuts in pursuit of targets for deficits and debt risk derailing growth at the very moment it is gathering pace.

In the labour market, unemployment has fallen slightly, to 25.6 per cent in February from the peak of about 27 per cent reached early last year. The slow decline is expected to continue for seven years before stabilising at around 13-14 per cent, a level consistent with the historical average. The recent decline has been due in part to shrinkage of the labour force arising from emigration, particularly by non-nationals. Employment actually fell for 22 consecutive quarters up to the end of 2013. However, we estimate that employment grew by 0.3 per cent in the year to the first quarter of 2014, and expect employment growth to continue through 2014 and 2015.

Other EU countries in Central and Eastern Europe

Economic growth in Central and Eastern Europe strengthened further in the fourth quarter of 2013, with GDP rising by 0.9 per cent, after its 0.6 per cent increase in the third quarter. Growth differentials among the countries of the area have meanwhile been narrowing. As in the Euro Area, inflation in the region has declined further, partly reflecting continuing substantial output gaps. In Bulgaria, there is a risk of deflation setting in: consumer prices trended downwards through 2013, driven by declines in import prices, administratively set energy prices, and food prices, and the 12-month inflation rate reached -2.3 per cent in March 2014. Inflation has also recently has been below 0.5 per cent in the Czech Republic, Hungary, and the Baltic countries; only slightly higher, at 0.5-0.7 per cent, in Poland and Slovenia; and about 1 per cent in Romania.

We expect GDP growth in the region to pick up by 2.4 per cent this year and 3.2 per cent in 2015, spurred partly by the recovery in the Euro Area but also by strengthening domestic demand. We project that consumer prices in the region will increase by 1.5 per cent this year, and 2.3 per cent next year.

In Poland, the largest country of the region, growth is expected to strengthen from 1.5 per cent last year to 2.9 per cent in 2014 and 3.9 per cent next year. Rising growth is expected to be driven mainly by domestic demand, with the relative contribution of net exports decreasing as the recovery strengthens. Private investment is expected to be particularly buoyant over the next two years, reflecting favourable demand prospects, high capacity utilisation in manufacturing, high levels of liquidity enjoyed by non-financial corporations, and an improving supply of credit. Inflation is expected to be significantly below the 2.5 per cent target of the National Bank of Poland: we forecast that it will pick up from its recent levels and reach 1.4 per cent on an average basis this year and 2.2 per cent in 2015, up from 0.8 per cent last year.

In Hungary, growth is expected to pick up from 1.2 per cent last year to 2.3 per cent this year, driven primarily by domestic demand, and to remain close to this rate in 2015. Private consumption growth will return to positive territory this year, mirroring rising disposable incomes, shored up by cuts in regulated prices and increasing public-sector wages, as well as more favourable credit conditions, including a new subsidised mortgage scheme. Credit conditions for corporations are also expected to ease, which, together with a high pace of absorption of EU funds, will help boost investment. Twelve-month consumer price inflation fell to zero in January 2014. We project that HICP inflation will increase somewhat this year, to an average rate of 1.2 per cent, before rising to 2.4 per cent in 2015, still below the Central Bank's target of 3 per cent.

After six quarters of contraction, GDP in the Czech Republic turned up last spring, and growth strengthened significantly late last year. Average growth was still negative in 2013, at -0.9 per cent, but it is expected to pick up to 1.1 per cent this year, and 2.1 per cent in 2015. The main engine of growth is expected to be domestic demand, benefiting from improving labour market conditions and rising business and consumer confidence. With its benchmark interest rate already close to zero, the Czech National Bank since last November has used foreign exchange market intervention as an instrument of monetary policy, to depreciate the Czech koruna and then maintain the exchange rate close to CZK 27 to the euro. On the back of a drop in regulated prices of electricity, inflation is expected to remain subdued this year, at 1.2 per cent on average, before rising to 2.1 2015, slightly above the official 2 per cent target.

United States

Recent data indicate a continued underlying strengthening of the recovery, despite a period of weakness around the turn of the year related to unusually severe winter weather. GDP growth eased back to 2.6 per cent, annualised, in the fourth quarter of last year from 4.1 per cent in the third, and a further sharp deceleration seems to have occurred in the first quarter. But data for the period since January, including industrial production and retail sales, have been more favourable, and growth seems likely to rebound in the current quarter. In the labour market, non-farm payrolls increased by an average of 195,000 in February and March, compared with the averages of 114,000 in the previous two months and 183,000 in the year to February. Most other indicators also suggest a continuing, slow improvement in the labour market: unemployment in March, at 6.7 per cent, was unchanged from December, but labour force participation has risen slightly in recent months, and broader measures of unemployment have fallen by more. Key indicators of annual wage growth remain subdued at about 2 per cent. Consumer price inflation has remained close to 1 per cent a year: in February, the 12-month change in the price index for personal consumer expenditure was 0.9 per cent, while the increase in the corresponding core index was 1.1 per cent. In March, the 12-month change in the core CPI, a narrower index, was 1.7 per cent. Real wages have recently been stagnant (figure 4).

Monetary policy has remained highly accommodative. Judging the economic outlook as broadly unchanged, the Federal Reserve has continued to reduce its monthly 'QE3' asset purchases by $10 billion at recent meetings of the FOMC. Thus at the March meeting, it reduced purchases to $55 billion a month from April. It seems likely that such reductions will continue so that the asset purchase programme will expire late this year. Also at its March meeting, the FOMC revised its forward guidance on short-term interest rates. In December 2012 it had introduced an unemployment threshold of 6 1/2 per cent, indicating that it expected that the near-zero federal funds rate would remain appropriate at least as long as unemployment remained above this level and inflation was well behaved. In December 2013, with unemployment having fallen to 7 per cent, it amended this guidance by adding that it expected it to be appropriate to maintain the near-zero federal funds rate "well past the time that the unemployment rate declines below 6 1/2 per cent", assuming inflation to be well behaved. This March, with unemployment having fallen to 6.7 per cent, the FOMC replaced the quantitative threshold with the qualitative guidance that "In determining how long to maintain the current 0 to 1/4 per cent target range for the federal funds rate, the Committee will assess progress --both realized and expected--toward its objectives of maximum employment and 2 per cent inflation", taking into account a wide range of information. It reiterated that it viewed it as likely that the current target range for the federal funds rate would remain appropriate "for a considerable time after the asset purchase program ends ...".

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The FOMC and Chair Yellen emphasised that this was only an "updating" of guidance to take into account the proximity of unemployment to the 6 1/2 per cent threshold, and that it did not indicate any change in policy intentions. Markets, however, initially brought forward somewhat their expectations of the first increase in the federal funds rate, partly because the Federal Reserve's revised projections showed that FOMC participants' assessments of the appropriate federal funds rate at the end of 2015 had risen slightly since December, and partly because in her press conference on March 19 Chair Yellen suggested that the interval between the end of the asset purchase programme and the first increase in the rate would be "something on the order of six months", though she hedged this with caveats. More recently, however, partly in response to further statements by Yellen, markets have reverted to expecting the first increase in the federal funds rate in the second half of 2015.

Fiscal restraint on economic growth is diminishing after the substantial adjustment of the past three years. In 2013, according to the IMF's estimates, the general government's cyclically adjusted primary balance was reduced by 2.1 per cent of GDP, but its reduction this year is forecast to be only 0.4 per cent of GDP. In mid-April, the CBO revised its baseline forecast of the federal budget deficit to 2.8 per cent of GDP this year and 2.6 per cent of GDP in 2015. Further fiscal gridlock in Congress is unlikely in the near term: in mid-February, Congress approved suspension of the debt ceiling until March 2015.

The easing of fiscal drag, together with highly accommodative monetary policy, is expected to help drive a continuing moderate strengthening of growth. Improving labour market conditions should help to boost real wages and consumer spending, which is already being supported by the progress made in reducing household indebtedness and by rising household net worth, partly reflecting rising asset values, notably in the housing and equity markets (figure 5).

Canada

The improved growth performance observed earlier in 2013, driven largely by household consumption and housing investment, was maintained in the fourth quarter, with GDP growth of 0.7 per cent from the previous three months. For 2013 as a whole, growth was 2.0 per cent, slightly above the forecast in our February Review. Higher-frequency indicators for early 2014, including PMIs, suggest that the expansion has strengthened further.

Consumer price inflation has been below the Bank of Canada's target of 2 per cent since early 2012, partly reflecting the slack in the economy: unemployment has fluctuated around 7 per cent since early last year. But inflation has picked up in recent months from below 1 per cent (on a twelve-month basis) to 1.5 per cent in March, owing partly to a depreciation of about 7 per cent of the Canadian dollar against the US currency between October 2013 and February this year. This depreciation is attributable partly to below-target inflation and accommodative monetary policy, but also to weak export performance in recent years and the authorities' aim of rebalancing growth in favour of exports and investment and away from consumption and residential construction. In mid-April, the Bank of Canada announced that it was maintaining its intervention rate at 1 per cent. Even though the Bank's Governor indicated that the possibility of future rate cuts cannot be dismissed, in our view this is unlikely given the expected rise in inflation towards the target, and the still elevated levels of household leverage and house prices. However, we do not expect official interest rates to be raised until at least 2015. Our inflation projections for 2014 and 2015 are unchanged at 1.7 and 1.8 per cent respectively.

Boosted by the depreciated currency and stronger external demand, especially in the US, exports are expected to be an important contributor to growth this year. Business investment, benefiting from a rebound in producer confidence indicated by recent surveys, and aided by supportive borrowing conditions and stronger corporate balance sheets, is also expected to play a key role in helping to improve growth this year. We have thus raised our growth forecast for 2014 slightly to 2.4 per cent, and this remains our forecast for 2015.

Japan

The government's strategy aimed at reviving economic growth, ending deflation, and attaining a sustainable fiscal position, by means of the 'three arrows' of 'Abenomics'--expansionary monetary policy, flexible fiscal policy, and structural reforms--has been maintained, but progress towards its objectives has been mixed.

Initially, following the government's election in December 2012 and the introduction of more expansionary fiscal and monetary policies, GDP growth picked up sharply to about 4 per cent at an annual rate in the first half of 2013; but it slowed markedly in the second half, to about 1 per cent. More recent indicators, including industrial production and retail sales, have been more buoyant, and overall growth seems likely to have strengthened in the first quarter of this year, driven partly by consumer spending ahead of the increase in the consumption tax rate from 5 to 8 per cent on April 1.

Progress towards the Bank of Japan's target of 2 per cent annual inflation, fuelled partly by its policy of 'quantitative and qualitative easing' begun in April 2013, seems to have stalled in recent months: 12-month core CPI inflation (excluding only seasonal food) was unchanged between December and February, at 1.3 per cent. Progress is expected to resume, however: the Bank's March Tankan survey indicates that enterprises, on average, expected general inflation to be 1.5 per cent in the year ahead and 1.7 per cent annually both over the next three and the next five years. Although somewhat short of the target, this would represent substantial progress from the deflation of the past decade. There have also been signs of a pickup in wages: partly in response to government pressure, a number of major companies announced in mid-March that they would be increasing workers' basic pay, in many cases for the first time since 2008 or earlier. We expect average consumer price inflation to rise slightly above the target to 2.2 per cent this year, boosted by the sales tax increase, but to ease back to about 1.5 per cent in 2015 and 1.3 per cent in the medium term.

Japanese gross government debt, relative to GDP, remains the highest in the world: it was about 220 per cent at end-2013; net government debt was about 135 per cent of GDP. The government's objectives with regard to economic growth and inflation are directed partly towards reducing the real burden of this debt over time. But in addition, the government is appropriately committed to sizeable fiscal consolidation--to halving the primary deficit by 2015 and returning it to surplus by 2020, thereafter slowly reducing the absolute level of debt. The sales tax increase on April 1 this year is part of this consolidation effort; a further increase in the rate, to 10 per cent, is planned for October 2015. Also contributing to fiscal tightening will be the unwinding both of reconstruction spending related to the 2011 tsunami and nuclear accident, and of the 2013 fiscal stimulus. Current budget plans, however, taking into account stimulus spending this year intended to offset the effect of the April tax hike, imply that fiscal consolidation will not begin until 2015, and this is what our forecast assumes. A concrete plan is yet to be announced for the further substantial fiscal consolidation that will be needed over the medium term. This adjustment will need to be managed in a way that does not jeopardise the other aims of Abenomics.

Partly because of the recent sales tax increase, consumption growth is likely to weaken in the second quarter, before rebounding in the second half of the year. We expect consumption to grow by around 1 per cent in 2014 as a whole and 0.5 per cent in 2015.

One of the effects of the monetary easing undertaken by the Bank of Japan has been a large depreciation of the yen--by about 24 per cent in terms of the US dollar since October 2012. However, export growth has remained weak. This may be due to J-curve effects, but it may also suggest some underlying structural problems with the export sector. We expect export volume growth to remain flat in 2014 at around 2.8 per cent, before picking up in 2015 to above 5.6 per cent. Import growth has been robust, partly due to Japan's increased reliance on imported fuels, and we expect this to remain so over our forecast horizon.

Taking into account the slowing of growth in the latter part of 2013, we expect average GDP growth to weaken somewhat in 2014, to 1.3 per cent, and this rate to be maintained in 2015. If growth weakens unduly, it will be important for the Bank of Japan to undertake further easing action.

The longer-term prospects for the growth and debt reduction strategy will depend partly on the 'third arrow' of Abenomics--structural reform--where progress has remained slow. The effectiveness of the special strategic economic zones intended to increase investment remains to be seen. Negotiations on the Trans-Pacific Partnership are reported to have encountered difficulties, including on the liberalisation of Japan's agricultural imports. Other mooted reforms, such as reducing the corporate tax rate and encouraging an increased participation rate of woman in the labour force, remain to be specified. Liberalisation of immigration policies, which could also help Japan address the constraint on growth formed by its declining labour force, remains to be addressed.

China

Economic growth in China has continued its moderate slowdown. In the year to the first quarter of 2014, GDP rose by 7.4 per cent, the lowest four-quarter growth rate since 2012, and the expansion we forecast for this year as a whole, at 7.2 per cent, would be the slowest annual growth since 1990 (figure 6). GDP data for the first quarter surprised some observers on the upside, given indications in some other data of a marked slowing in recent months. In March, the Prime Minister announced that the official target for GDP growth in 2014 was 7.5 per cent, unchanged from 2013. A month later, in response to signs of slower growth, the government introduced a 'mini-package' of measures to support the expansion, including tax breaks for SMEs and targeted infrastructure spending. It has also indicated, however, that its GDP growth target has some flexibility--that it is less concerned with this precise target than with ensuring adequate employment growth and promoting the transition to a growth model less dependent on investment, exports, and credit, and that it does not envisage a larger stimulus package unless these priorities are jeopardised. A continuing moderate slowdown still seems the most likely prospect, and we expect GDP to expand by about 7.2 and per cent this year and 7.0 per cent in 2015.

Significant downside risks to this forecast remain, however, from the ongoing shift in the growth model and the associated moderation of credit expansion already in progress, especially given unusually high corporate leverage, local government debt, and real estate investment. To illustrate the possible effects of a more severe drop in Chinese domestic demand on world GDP, oil prices and output in selected Asian economies we ran a simulation using NIESR's global econometric model: see Box A (page 19) of this Review.

Box A. Effects of a drop in Chinese domestic demand on world GDP,
oil prices and output in selected Asian economies

by Iana Liadze

China is the second largest economy in the world (based on GDP at
PPP exchange rates) and its contribution to world output growth has
increased from less than one tenth in the early 1980s to more than
a third since 2011. China's annual GDP growth, after exceeding 9
per cent in eight out of ten years since 2002, has recently slowed
and in 2013 was 7.7 per cent.

Our baseline forecast shows a continuing moderate slowing in
China's growth. But what if growth slows more abruptly? In this box
we use the National Institute's model, NiGEM, to estimate the
likely effects of a reduction in China's output, via weaker
domestic demand, on world GDP, oil prices and the output of China's
trading partner countries in Asia. In the simulation, output in
China is reduced via an endogenous temporary decrease in domestic
demand (the dynamics of demand response are taken into account).
The Renminbi is assumed to be pegged to the US dollar and oil
prices are determined endogenously, allowing them to react, in
particular, to changes in the energy intensity of world output.
Chinese domestic demand is assumed to fall by about 5 per cent from
the baseline value over the first two years, which reduces GDP by
about 2.3 per cent as compared to the baseline projection.

The reduction in Chinese demand reduces world oil prices and world
output (figure Al). The effect on world GDP is felt straight away,
but oil prices react more slowly and are reduced by about I per
cent after three years. World output is reduced by just under 0.5
per cent for two years, but the impact is transitory as other
components of global demand adjust.

The drop in China's domestic demand has a heterogeneous effect on
its trading partner countries, with a combination of factors having
a role to play: the immediate direct effect of a reduction in
demand from China will vary among countries depending on the share
in each country's GDP of exports to China; there will also be an
indirect effect via the reduction in world demand, changes in the
terms of trade, and changes in the oil intensity of output. Figure
A2 illustrates the effect on GDP relative to baseline values for
selected Asian countries from the assumed drop in Chinese domestic
demand. Countries that are major suppliers of intermediate products
to China, like South Korea and Taiwan, are affected the most, while
minor suppliers of intermediate products, like Indonesia and
Vietnam, are affected significantly less in terms of both the depth
and the duration of the shock.

[FIGURE A1 OMITTED]

[FIGURE A2 OMITTED]

[FIGURE 6 OMITTED]

Corporate debt has risen from 85 per cent of GDP in 2008 to about 120 per cent recently, and a large proportion of this debt is due for repayment or renewal this year. Concerns about the productivity of the investment financed by this credit expansion, together with fears of slowing economic growth, have given rise to increased concerns about corporate default. In early March, China's first corporate bond default occurred, and a week later the Prime Minister warned that "isolated cases of default will be unavoidable". These developments suggest a shift in policy after many years of corporate bailouts. One of its consequences may be to heighten awareness of risk in the financial sector--a pre-condition for liberalisation of the sector.

Indeed, further steps have been taken towards financial and exchange market liberalisation. In early March, there was the first official indication of the timing of further interest rate liberalisation, including of deposit rates: the Governor of the People's Bank said that he expects to see full interest rate liberalisation in 1-2 years. Beginning in mid-February, after a prolonged period of appreciation against the US dollar, the renminbi's exchange rate turned around and the currency began to depreciate slowly. Officials indicated that this was a deliberate result of intervention, intended both to show that the exchange rate did not offer a one-way bet (partly to discourage speculative capital inflows) and to prepare the currency for wider trading. A month later, the PBoC announced that, beginning on March 17, the width of the daily trading band for the renminbi/dollar exchange rate would be doubled to 2 per cent either side of the parity rate, which continues to be fixed daily by the PBoC. (The half-width of the band had last been widened in April 2012 from 0.5 per cent, and before that in May 2007 from 0.3 per cent.) The slow and limited depreciation has continued, and by late April the yuan was 2.6 per cent lower in terms of the US dollar than in mid-February, at a level last seen in April 2013. China's effective exchange rate, however, both in real and nominal terms, has continued to appreciate.

India

Economic growth has recently remained broadly stable, in the 4 1/2-5 per cent range prevailing since early 2012 --roughly half the rates experienced in much of the previous decade. Thus GDP increased by 4.6 per cent in the year to the final quarter of 2013, and by 4.4 per cent in 2013 as a whole, the lowest average annual growth rate since 2001. Growth in 2013 was driven predominantly by services; manufacturing contracted and construction was virtually stagnant. Data for early 2014 indicate that private sector activity has continued to stagnate, especially in manufacturing. Slow growth in recent years has been attributed to delays in infrastructure project approvals and uncertainty over government policies. Current general elections (results due on May 16) should help resolve some of these issues and lead to an investment recovery. On this assumption, growth is likely to strengthen moderately, with GDP expanding by 5.4 and 5.8 per cent, respectively, this year and next.

Inflation has eased recently, the 12-month change in consumer prices falling to 8.3 per cent in March, compared with its peak last November of 11.2 per cent. In light of high and rising inflation, the Reserve Bank raised its benchmark interest rate by 25 basis points three times between September 2013 and January 2014, to 8 per cent. This moderate tightening of monetary policy has helped lower inflation, partly by helping to strengthen the rupee. After losing about a fifth of its value, in US$ terms, between May and August 2013, the currency has since recovered more than half of this fall. We expect inflation to continue declining, towards 7.0 per cent on average in 2015. Sharper tightening of monetary policy may be needed to reduce inflation further, for example to meet the 4 per cent target that the Reserve Bank is considering.

Other factors contributing to the rupee's recovery since last summer, apart from the rise in interest rates, include increased capital inflows drawn by expectations of more business-friendly policies after the election, and improvements in macroeconomic imbalances. Last year's actions by the government and the Reserve Bank to curb gold imports, plus an improvement in export performance, have helped reduce the current account deficit since early last year. On the fiscal front, the government announced in February tax cuts aimed at boosting consumption and lifting the weak economy ahead of the elections, while stressing its commitment to its deficit target. The budget deficit was estimated by the government to have been 4.6 per cent of GDP in the fiscal year ended March 2014, less than the 4.8 per cent target for 2013/14 and the 4.9 per cent outturn for the previous fiscal year.

Box B. Economic implications of recent developments in Ukraine

by Miguel Sanchez-Martinez with Angus Armstrong and Graham Hacche

Recent developments in Ukraine, including the overthrow of the
government in late February, the Russian annexation of Crimea in
March, the conflict and political instability in eastern Ukraine,
and the sanctions imposed on Russia by many countries, are already
having economic consequences. In the current context of
considerable uncertainty about how this geopolitical crisis may
evolve, this box attempts to evaluate what the potential economic
implications may be.

Thus far, the Ukraine crisis has had clear economic repercussions
on Ukraine itself and on Russia--two economies that were already
weak in different degrees. But, as yet, broader effects, in global
markets and other national economies, have been more difficult to
discern.

As discussed in the main text, the crisis had immediate effects on
Russian financial markets, raising official and market interest
rates, lowering equity prices, and increasing capital outflows. In
March, Fitch lowered Russia's debt rating from stable to negative,
implying additional difficulties for funding through international
capital markets. The increased cost and reduced availability of
finance, the application of international sanctions, and the fiscal
burden of the Crimean annexation will all damage the Russian
economy. It has been estimated that the fiscal costs of the
annexation of Crimea, together with budgetary support for the
region in the short term alone, could be about 2 per cent of GDP.
This adds further pressure to a budget that is already under
strain, and which relies heavily on revenue from oil sales. This
dependence means that any significant disruption of fuel exports
could end prospects for the achievement of the budget targets for
2014-15. In fact, 2013 saw the first deficit in Russia's
consolidated budget since the financial crisis, which indicates the
vulnerability inherited from last year.

With regard to Russia's external sector, a moderate pick-up in
exports this year and lower import demand, both helped by a
depreciation of the rouble by about 11 per cent between last
October and February, are expected to partly offset a marked
deterioration in the capital account. On net, however, the
significant downward pressure on the rouble seen in recent weeks is
likely to continue, and this will have to be absorbed by a
continuing depletion of foreign exchange reserves unless interest
rates are raised further or the currency is allowed to depreciate.
Russia's official reserves are among the largest in the world, but
downward pressure on the rouble has led to substantial declines in
recent weeks. As of 1st April, international reserves amounted to
$486 billion, down from $528 billion a year earlier.

On Ukraine, its finance minister has recently predicted that the
economy will contract by 3 per cent in 2014. Persistence of the
crisis would likely cause the economy to continue contracting in
2015. Ukraine's economic vulnerability stems from a number of
factors. First, already before the crisis, Ukraine suffered from
severe macroeconomic imbalances and governance problems. Second,
Russia buys about 20-25 per cent of its exports; if Russia
continues to restrict the flow of imports coming from Ukraine, it
will particularly damage Ukrainian manufacturers. Third, Ukraine
relies on Russia for about 63 per cent of its supply of natural
gas. Since April, Russia has raised the price that Ukraine has to
pay for Russian gas, to levels higher than those paid by any EU
country. This adds to Ukraine's sizeable debt to Russia, which, if
defaulted upon, could put part of Europe's energy supply at risk
next winter. Financing in prospect through Ukraine's expected
programme with the IMF should prevent this, however. Finally, the
crisis has called for increased defence spending, which adds to
Ukraine's fiscal problems.

What about the impacts on other countries? Table B1 shows Russia's
main trading partners. In light of these numbers, a sharp
contraction in Russian imports from the EU would hurt the EU
economy. As an illustration, a temporary downward shock to Russian
domestic demand resulting in a 20 per cent decrease in Russian
import demand this year, simulated using the National Institute's
model NiGEM, would lead to an estimated 0.25 per cent drop in
Germany's GDP, while having a greater proportionate impact on
neighbouring CEE and Baltic economies, where GDP would fall by
about 0.3-0.8 and 0.9-2.5 per cent, respectively. Given the added
dependence of certain countries (chiefly, the countries
geographically closest to Russia) on Russian energy imports, any
disruption of trade would be harmful for both regions. However,
while the EU is a major buyer of Russian exports, only a small
share of the EU's exports are shipped to Russia. (According to data
from the German Federal Statistical Office, Destatis, only about 10
per cent of all exporting enterprises in Germany export goods to
Russia and, for about 73 per cent of them, exports to Russia
account for no more than a quarter of their total exports.) Hence,
any worsening of relations leading to a lower volume of trade
between the EU and Russia would hurt the latter more than the
former. With regard to the US, its exports to Russia are smaller,
relative to its total exports, than they are for the EU.

With respect to the degree of financial exposure of foreign
investors in Russia, Figure B1 displays the value of assets in the
hands of nationals of the countries and country groups with the
highest presence in the Russian financial (private and public)
sector. The chart shows that the imposition by Russia of sanctions
in the form of, for instance, asset freezes, would harm foreign
investors. Also, although this seems very unlikely at present,
Russia could default on its sovereign debt, a significant part of
which is held as assets by foreign banks.
The risks that these possibilities pose for foreign owners of
Russian assets notwithstanding, the escalation of sanctions and/ or
threats would, as in the case of trade, arguably hurt Russia to a
greater extent. If measures such as economy-wide asset freezes
materialise, the very negative precedent created would be likely to
severely reduce foreign direct investment inflows to the Russian
economy, which could, in the worst case scenario, suffer long
periods of financial autarky. Any threat of retaliatory measures
would most likely be followed by a sharper outflow of capital,
which would notably impair the Russian balance of payments,
financing possibilities and productive capacity.

[FIGURE B1 OMITTED]

Finally, concerning energy security, even though Russian gas
represents roughly one third of the EU's total gas imports, a
disruption in the flow would arguably be more damaging to Russia
than to the EU, for several reasons. First, partly because of the
increase in European domestic production and the shift in energy
sources, the ratio of the volume of Russian gas imports to total EU
energy consumption has recently declined: at 12 per cent in 2012,
it reached its lowest level since 2003, after having reached a
ten-year peak in 2008, at 14 per cent. Second, Russia's economy is
still heavily reliant on its endowment of natural resources, both
for its balance of payments and to finance its budget. Third,
European leaders are already looking to reduce their dependence on
Russian energy by developing alternative sources such as shale gas,
which improves the degree of substitutability of Russian gas. This
has been underscored as one of the reasons why the economic impact
of a halt in incoming Russian gas and oil on Western economies
would be significantly less than that of the 1970s oil crisis.
Hence, it seems in Russia's interest to find a compromise solution
to the gas dispute over the Ukrainian gas bill, for example, in
order not to jeopardise gas revenue from Europe, which may prove
crucial in a context characterised by very weak economic
resilience.

To conclude, while political uncertainty remains very high, the
Ukraine crisis seems likely, short of a major escalation, to have a
significant, but small, negative impact on growth in the EU
overall, including Germany, and a negligible impact on the rest of
the global economy. However the significant negative consequences
of the crisis for the Russian economy are already apparent, and as
argued in the main text and in this box, are likely to worsen if
the situation deteriorates further.

Table B1. Russia's main trading partners

 Export destinations

 Share of total Share of imports
 Russian exports from Russia in each
 block's total imports

 (per cent)

EU (excl. UK) 49.5 1.2
UK 3.1 1.4
USA 2.7 1.3
Asia 13.3 --
Rest of CIS 15.8 --
Rest of world 15.6 --

 Import sources

 Share of total Share of exports
 Russian imports to Russia in each
 block's total exports

 (per cent)

EU (excl. UK) 39.9 7.3
UK 2.7 1.0
USA 5.1 0.7
Asia 26.2 --
Rest of CIS 13.5 --
Rest of world 12.5 --

Sources: Central Bank of Russia (2012), Eurostat (2012), Office for
National Statistics (2013) and United States Census Bureau (2012).

Brazil

S&P's downgrade of its sovereign credit rating for Brazil in March, from BBB+ to BBB-, reflects a plethora of issues plaguing the economy, including deteriorating public finances, sluggish growth, and a widening current account deficit, which in 2013 was the largest since 2001. A contraction of GDP in the third quarter of last year was followed by an upturn in the last quarter, based largely on a rise in exports attributable partly to the depreciation of the Real since mid-2011. The average growth rate of GDP in 2013 was 2.3 per cent, up from 1.0 per cent in 2012. This improvement in performance occurred despite a widening of the external deficit, which stemmed partly from a pick-up in domestic investment that generated a substantial increase in imports.

The central bank has taken further action to reduce inflation to its target of 4.5 per cent a year. It has raised its benchmark (Selic) interest in nine steps over the past twelve months, most recently by 25 basis points each in late February and early April. The Selic now stands at 11.0 per cent, and the central bank has signalled that the peak may not have been reached. Recently, 12-month consumer price inflation has turned up again, reaching an eight-month high of 6.2 per cent in March. Given capacity constraints, including the tight labour market--unemployment in February stood at 5.1 per cent--it seems unlikely that inflation will soon converge on the target. Thus, we have revised up our projections for average inflation in 2014 and 2015, to 6.0 and 5.6 per cent respectively.

The boost to exports this year from strengthening demand in advanced economies and the Real's depreciation since 2011 is likely to be partly offset by the effects of weaker growth in Argentina and China, two of Brazil's key trading partners. And an improvement in the external sector is unlikely to compensate for an expected weakening of investment growth, reflecting business confidence that has recently been at its lowest since 2009. We have thus reduced our growth forecast for 2014 marginally to 1.8 per cent. The persistence of supply constraints, especially in infrastructure, coupled with the likely implementation of more restrictive policies after the October elections, have also led us to lower our growth forecast for 2015 to 2.3 per cent.

The combination of twin deficits, persistently high inflation, capacity constraints, and slow growth makes Brazil vulnerable to possible adverse shocks. To improve the economy's performance and resiliency, decisive efforts are needed to strengthen the public finances, promote investment, and enhance competitiveness.

Russia

Growth in Russia was already weak before its intervention in Ukraine in late February and its absorption of Crimea: in mid-February, the Central Bank lowered its forecast of GDP growth this year to 1.5-1.8 per cent, compared with the government's earlier forecast of 2.5 per cent. Subsequently, short-term growth prospects have deteriorated markedly, as acknowledged by Russian officials: in mid-April the finance minister was reported to have said that growth this year would perhaps be around zero. In fact, GDP estimates for the first quarter of 2014 already show a drop of 0.5 per cent from the final quarter of last year. Reduced growth prospects are due to less favourable financial conditions, arising partly from increased private capital outflows, and to the effects of international sanctions.

Immediately after the start of Russia's intervention in Crimea, on 3 March, the Central Bank raised its benchmark interest rate to 7.0 per cent from 5.5 per cent (the first change in 17 months), referring to the need to address risks to inflation and financial stability arising from increased financial market volatility. It raised the rate again in late April, to 7.5 per cent. Also, since late February, 10-year government bond yields have risen by about 90 basis points. These increases in interest rates, together with reported official intervention in the foreign exchange market, have helped maintain broad stability in the rouble's exchange rate in US$ terms. Despite the rise in domestic yields, there has been a surge in capital outflows: net outflows in the first quarter of the year, at more than $50 billion, roughly matched outflows in the whole of 2013. Moreover, the stock market has declined by about 7 per cent since late February.

The increased costs of domestic finance, and the increased cost and reduced availability of foreign finance linked partly to international sanctions, now weigh on Russian growth. We expect GDP growth in 2014 to be slightly negative, at -0.1 per cent. On the assumption that the geopolitical situation does not deteriorate, we project an upturn in 2015, with 1.4 per cent growth. Monetary policy is unlikely to be available to boost demand, because of both exchange rate pressures and persistent inflation: 12-month consumer price inflation picked up to 6.9 per cent in March, significantly higher than the Central Bank's informal target of 5.0 per cent for 2014. With expectations not well anchored, our inflation forecasts for 2014 and 2015 are revised upwards to 6.0 per cent and 5.6 per cent, respectively. Meanwhile, hopes have diminished for the improvement in business confidence and the investment climate that Russia badly needs to strengthen longer-term growth.

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.mesr. ac.uk/.

The key interest rate and exchange rate assumptions underlying our current forecast are shown in tables A1-A2. Our short-term interest rate assumptions are generally based on current financial market expectations, as implied by the rates of return on treasury bills and government bonds of different maturities. Long-term interest rate assumptions are consistent with forward estimates of short-term interest rates, allowing for a country-specific term premium in the Euro Area. Policy rates in the major advanced economies are expected to remain at extremely low levels at least until the beginning of 2015. The Reserve Bank of Australia and Mexican central bank reduced interest rates through 2013 by 50 and 100 basis points respectively and have kept rates unchanged since. After introducing a 25 basis point interest rate cut last year, the Bank of Korea and Swedish central bank have kept their policy interest rates unchanged. Since last autumn both the central banks of Hungary and Romania have continued to reduce interest rates. The central bank of Hungary brought them down by a further 80 basis points, while the Romanian Central Bank reduced rates by 75 basis points in three steps. 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, India, Russia, South Africa and Turkey. After raising interest rates in January, India, South Africa and Turkey have kept their interest rates unchanged, while Brazil's have increased further by 50 basis points in two steps. The central bank of New Zealand has increased its policy rate by 50 basis points since March in two steps, the first change in interest rates since 2011. (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 to two quarters. This is broadly consistent with the interest rate path signalled for the US by the Federal Open Market Committee (FOMC). In March the FOMC replaced its quantitative threshold with qualitative guidance, emphasising that it did not indicate any change in policy intentions but rather was taking into account the proximity of unemployment to the 6 1/2 per cent threshold. Instead of having a single threshold of 6 1/2 per cent for the unemployment rate, the FOMC will take into account a wide range of both realised and expected information (on its objectives of maximum employment and a 2 per cent inflation rate) while determining the path of the federal funds rate. But despite changes in its guidance the Committee expects the target range for the federal funds rate to remain unchanged for a "considerable time after the asset purchase program ends". (2)

[FIGURE A1 OMITTED]

Initially, markets reacted by bringing slightly forward their expectations of the first increase in the federal funds rate, partly due to revised projections by FOMC participants' of a slight increase in the federal funds rate at the end of 2015, and partly because of the remark by Chair Yellen suggesting that the interval between the end of the asset purchase programme and the first increase in the rate would be "something in the order of six months". However, more recently, markets have reverted to expecting the first increase in the federal funds rate in the second half of 2015, partly in response to further statements by Yellen.

At the meeting in December 2013, the FOMC announced a modest reduction in the pace of its asset purchases by $10 billion a month starting in January 2014, on the back of the cumulative progress towards full employment and the improvement in the labour market outlook. The FOMC has realised this policy decision in each month since January 2014. By April 2014, monthly 'QE3' asset purchases were reduced to $55 billion a month. It seems likely that a reduction of asset purchases will continue at the same pace, so that the QE programme will expire late this year. By contrast, the ECB and the Bank of Japan are considering re-introducing further rounds of balance sheet expansion.

[FIGURE A2 OMITTED]

Figure A1 illustrates the recent movement in, and our projections for, 10-year government bond yields in the US, Euro Area, the UK and Japan. Government bond yields in the US, Euro Area and the UK picked up towards the end of December last year, but have drifted down since and have stayed broadly unchanged recently. Convergence in Euro Area bond yields towards those in the US, observed since the beginning of 2013, has reversed recently. Since February 2014 the margin between Euro Area and US bond yields started to increase, reaching 40 basis points (in absolute terms) in March. The expectations for bond yields throughout 2014, in all four economies, are lower than expectations just three months ago. However, while the expectations of yields in the UK, US and Japan are marginally lower (ranging from about 10-20 basis points), expectations of yields in the Euro Area have fallen more, by approximately 50 basis points. The significant decrease in Euro Area average bond yields is due to a further narrowing of the spread between Germany and all Euro Area countries including the vulnerable economies of Greece, Portugal, Spain, Ireland and Italy.

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 Private Sector Involvement in the Greek government debt 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 these vulnerable economies. During summer 2013 there was 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 bond spreads narrowed. Recent announcements by the ECB president Mario Draghi concerning the possibility of introducing more monetary stimulus measures, alongside the perceived softening of the resistance from German and Finnish ECB council members to such measures, have probably contributed to further narrowing of the spreads.

[FIGURE A3 OMITTED]

[FIGURE A4 OMITTED]

In our forecast, we have assumed spreads over German bond yields remain at current levels until the end of 2014, and start to narrow in 2015 in all Euro Area countries. In the case of Portugal, we also assume an exit from its international bail-out programme in July 2014 and that this will result in a jump in its funding costs in the near term, as a result of market sources for funding. The implicit assumption underlying this is that the Euro Area continues to hold together in its current form and further progress will be 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 the second half of 2013, illustrated by the stability of these spreads in the US, Euro Area and the UK. Our forecast assumption is for corporate spreads to remain at current levels until the end of 2014, and then gradually converge towards their long-term equilibrium level from 2015.

[FIGURE A5 OMITTED]

Nominal exchange rates against the US dollar are generally assumed to remain constant at the rate prevailing on 14 April 2014 until the end of December 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 end 2014 to 2016.

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 $5 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 February 2013 National Institute Economic Review and Chojna et al., 2013). However, the recent crisis in Ukraine, and the associated international dispute, pose an upside risk to the price of oil in the short term.

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 (e.g. Hungary and the Czech Republic). The most significant gains have been made in Japan. Since the end of 2012, share prices in Japan have jumped by more than 50 per cent, mirroring the depreciation in the Japanese effective exchange rate over the same period.

Fiscal policy assumptions for 2014-15 follow announced policies as of 1 April 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 2014 and 2015 in all Euro Area countries (apart from Germany, where it remains unchanged) reported in the table. We expect the burden of government interest payments to rise this year as compared to the past year in Spain and Greece, and remain unchanged in Ireland 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).

Table A1. Interest rates Per cent per annum

 Central bank intervention rates

 US Canada Japan Euro 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 0.46 1.17 0.10 0.28 0.69
2016 1.61 1.95 0.17 0.69 1.19
2017-2021 3.30 3.37 0.77 2.00 2.50

2013Q1 0.25 1.00 0.10 0.75 0.50
2013Q2 0.25 1.00 0.10 0.60 0.50
2013Q3 0.25 1.00 0.10 0.50 0.50
2013Q4 0.25 1.00 0.10 0.37 0.50
2014Q1 0.25 1.00 0.10 0.25 0.50
2014Q2 0.25 1.00 0.10 0.25 0.50
2014Q3 0.25 1.00 0.10 0.25 0.50
2014Q4 0.25 1.00 0.10 0.25 0.50
2015Q1 0.25 1.00 0.10 0.25 0.50
2015Q2 0.33 1.00 0.10 0.25 0.63
2015Q3 0.50 1.25 0.10 0.25 0.75
2015Q4 0.75 1.45 0.10 0.38 0.88
2016Q1 1.13 1.65 0.10 0.50 1.00
2016Q2 1.45 1.85 0.15 0.63 1.13
2016Q3 1.77 2.05 0.20 0.75 1.25
2016Q4 2.10 2.25 0.25 0.88 1.38

 10-year government bond yields

 US Canada Japan Euro 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 2.8 2.6 0.7 2.4 2.8
2015 3.2 3.0 0.9 2.6 3.0
2016 3.6 3.4 1.1 2.9 3.2
2017-2021 4.1 4.0 1.7 3.6 3.8

2013Q1 1.9 1.9 0.7 2.7 2.0
2013Q2 2.0 2.0 0.7 2.5 1.9
2013Q3 2.7 2.6 0.8 2.8 2.7
2013Q4 2.7 2.6 0.6 2.7 2.8
2014Q1 2.8 2.5 0.6 2.5 2.8
2014Q2 2.7 2.5 0.6 2.3 2.7
2014Q3 2.8 2.6 0.7 2.3 2.7
2014Q4 2.9 2.7 0.7 2.4 2.8
2015Q1 3.0 2.9 0.8 2.5 2.9
2015Q2 3.2 3.0 0.8 2.6 2.9
2015Q3 3.3 3.1 0.9 2.6 3.0
2015Q4 3.3 3.2 0.9 2.7 3.1
2016Q1 3.5 3.3 1.0 2.8 3.1
2016Q2 3.5 3.4 1.1 2.9 3.2
2016Q3 3.6 3.5 1.1 2.9 3.3
2016Q4 3.7 3.6 1.2 3.0 3.3

Table A2. Nominal exchange rates

 Percentage change in effective rate

 US Canada Japan Euro Germany France
 Area
2011 -3.0 2.0 6.8 0.9 0.5 1.0
2012 3.4 1.0 2.2 -1.9 -2.0 -2.0
2013 2.9 -3.2 -16.6 2.9 2.9 3.1
2014 2.4 -4.9 -2.8 2.8 2.8 2.9
2015 0.1 -0.3 -0.3 0.3 0.2 0.3
2016 0.4 -0.5 -0.1 0.5 0.4 0.6

2013Q1 1.2 -3.1 -12.0 1.2 1.3 1.2
2013Q2 1.4 -0.2 -5.6 0.1 0.2 0.1
2013Q3 2.0 0.3 2.9 2.0 1.7 2.3
2013Q4 -0.1 -3.0 -1.9 0.9 1.0 1.0
2014Q1 1.6 -3.2 -1.6 0.8 0.9 0.8
2014Q2 -0.6 0.5 0.3 0.4 0.3 0.3
2014Q3 0.0 0.0 0.1 0.0 0.0 0.0
2014Q4 -0.1 0.0 -0.1 0.0 0.0 0.0
2015Q1 0.1 -0.2 -0.2 0.1 0.1 0.1
2015Q2 0.1 -0.2 -0.2 0.1 0.1 0.1
2015Q3 0.1 -0.1 -0.1 0.1 0.1 0.1
2015Q4 0.1 -0.2 -0.1 0.1 0.1 0.1
2016Q1 0.1 -0.1 0.0 0.1 0.1 0.1
2016Q2 0.1 -0.1 0.0 0.1 0.1 0.2
2016Q3 0.1 -0.1 0.1 0.2 0.1 0.2
2016Q4 0.0 -0.1 0.2 0.2 0.1 0.2

 Percentage Bilateral rate per US $
 change in
 effective rate

 Italy UK Canadian Yen Euro Sterling
 $
2011 1.3 -0.2 0.995 79.800 0.719 0.624
2012 -1.6 4.2 0.997 79.800 0.778 0.631
2013 3.8 -1.2 1.039 97.600 0.753 0.640
2014 4.4 6.4 1.098 102.100 0.725 0.599
2015 0.6 0.2 1.101 102.500 0.723 0.599
2016 0.7 0.1 1.108 103.000 0.720 0.599

2013Q1 1.3 -3.9 1.025 92.300 0.757 0.645
2013Q2 0.1 0.3 1.032 98.800 0.765 0.651
2013Q3 3.1 1.9 1.035 98.900 0.755 0.645
2013Q4 1.2 3.1 1.064 100.400 0.735 0.618
2014Q1 1.2 2.6 1.103 102.800 0.730 0.604
2014Q2 0.8 0.5 1.096 102.000 0.724 0.598
2014Q3 0.0 0.0 1.096 101.800 0.724 0.598
2014Q4 0.0 0.0 1.096 101.800 0.724 0.598
2015Q1 0.1 0.0 1.098 102.100 0.724 0.598
2015Q2 0.1 0.0 1.100 102.400 0.724 0.598
2015Q3 0.2 0.0 1.102 102.600 0.723 0.599
2015Q4 0.2 0.0 1.104 102.800 0.723 0.599
2016Q1 0.2 0.0 1.106 103.000 0.722 0.599
2016Q2 0.2 0.0 1.108 103.000 0.721 0.599
2016Q3 0.2 0.1 1.109 103.000 0.720 0.599
2016Q4 0.2 0.1 1.109 102.900 0.718 0.598

Table A3. Government revenue assumptions

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

 2013 2014 2015 2013 2014 2015

Australia 14.1 14.3 14.3 25.7 25.7 25.7
Austria 31.8 31.5 30.9 19.9 19.9 19.9
Belgium 34.0 34.0 33.7 16.7 16.7 16.7
Canada 21.6 21.6 21.7 19.5 20.3 20.8
Denmark 37.5 37.3 36.9 16.6 16.6 16.6
Finland 32.2 32.4 32.4 22.4 22.6 22.6
France 30.4 30.4 30.4 23.6 23.6 23.6
Germany 27.8 27.7 27.7 17.8 17.8 17.8
Greece 17.7 18.1 18.2 13.5 13.5 13.5
Ireland 25.0 24.5 23.0 9.8 9.8 9.8
Italy 30.4 30.4 30.3 26.4 26.4 26.4
Japan 22.9 22.9 23.0 29.4 29.6 29.6
Netherlands 35.6 35.6 35.7 8.3 8.4 8.4
Portugal 21.1 21.3 21.3 18.6 16.6 16.6
Spain 24.6 24.8 24.9 25.2 25.2 25.2
Sweden 30.1 30.0 30.1 30.4 30.4 30.4
UK 23.2 23.4 23.6 16.3 14.6 13.3
US 18.6 18.6 19.0 28.6 28.8 29.1

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

 2013 2014 2015

Australia 31.4 31.3 31.3
Austria 40.4 39.5 38.0
Belgium 45.4 45.3 45.0
Canada 35.3 35.3 35.3
Denmark 48.4 48.1 48.0
Finland 46.1 47.2 47.1
France 46.3 46.0 45.7
Germany 44.6 44.4 44.6
Greece 35.4 40.8 41.0
Ireland 28.3 28.3 27.6
Italy 45.7 45.8 45.3
Japan 30.9 30.9 31.0
Netherlands 43.6 43.5 42.1
Portugal 38.1 38.8 38.8
Spain 37.5 35.4 35.1
Sweden 44.9 44.3 44.1
UK 38.4 37.4 37.9
US 29.5 30.0 30.3

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

Table A4. Government spending assumptions (a)

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

 2013 2014 2015 2013 2014 2015

Australia 32.2 32.1 31.7 1.6 1.6 1.5
Austria 39.3 38.3 36.8 2.6 2.4 2.2
Belgium 44.6 44.1 43.7 3.4 3.1 2.8
Canada 35.1 34.4 34.5 3.3 3.1 3.0
Denmark 47.5 47.5 46.8 1.7 1.6 1.5
Finland 47.8 48.6 48.4 1.5 1.3 1.3
France 47.8 47.7 47.2 2.6 2.5 2.3
Germany 43.0 43.0 43.0 2.1 1.8 1.6
Greece 42.5 44.6 42.5 5.6 5.7 5.5
Ireland 31.7 30.3 29.7 3.8 3.8 3.7
Italy 42.9 42.8 41.4 5.8 5.8 5.6
Japan 39.4 38.4 37.3 1.9 1.6 1.4
Netherlands 44.4 43.5 42.9 1.8 1.6 1.5
Portugal 38.0 37.5 35.9 5.0 4.9 4.9
Spain 40.2 38.6 37.9 3.9 4.1 4.2
Sweden 45.2 45.1 44.9 1.0 1.0 1.0
UK 38.8 37.6 36.5 3.0 3.1 3.2
US 32.2 31.3 30.7 3.7 3.5 3.5

 Deficit
 projected to
 fall below
 3%
 of GDPW

Australia 2013
Austria 2011
Belgium 2013
Canada 2014
Denmark 2013
Finland 2014
France 2017
Germany 2011
Greece --
Ireland 2019
Italy 2014
Japan --
Netherlands 2013
Portugal 2015
Spain --
Sweden --
UK 2016
US 2018

Notes: (a) Expenditure shares reflect NiGEM aggregates, which may
differ from official government figures, (b) The deficit in Sweden has
not exceeded 3 per cent of GDP in recent history. In Japan, Greece and
Spain 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 2.4 2.8 2.8 3.8
Austria (a) 2.9 0.7 0.4 1.6 2.7 3.1
Belgium (a) 1.8 -0.1 0.2 0.9 1.5 1.7
Bulgaria (a) 2.0 0.6 0.8 1.3 2.0 3.6
Brazil 2.7 1.0 2.3 1.8 2.3 3.2
China 9.4 7.7 7.6 7.2 7.0 6.6
Canada 2.5 1.7 2.0 2.4 2.4 2.6
Czech Republic 1.8 -0.9 -0.9 1.1 2.1 2.8
Denmark (a) 1.1 -0.4 0.4 1.0 2.3 2.2
Estonia (a) 9.6 3.9 0.8 3.0 3.8 2.8
Finland (a) 2.8 -1.0 -1.4 0.0 1.8 1.8
France (a) 2.0 0.0 0.3 0.6 1.6 1.7
Germany (a) 3.4 0.9 0.5 1.7 1.9 1.8
Greece (a) -7.1 -7.0 -3.9 0.0 2.0 2.9
Hong Kong 4.8 1.5 2.9 3.4 3.3 3.3
Hungary (a) 1.6 -1.7 1.2 2.3 2.2 3.8
India 7.9 4.9 4.4 5.4 5.8 6.6
Indonesia 6.5 6.3 5.8 5.6 6.0 5.7
Ireland (a) 2.2 0.2 -0.3 0.8 1.0 2.6
Italy (a) 0.6 -2.4 -1.8 0.1 1.2 2.9
Japan -0.4 1.4 1.5 1.3 1.3 0.8
Lithuania (a) 6.1 3.5 3.4 3.5 4.2 2.9
Latvia (a) 5.1 5.0 4.8 3.9 4.4 2.7
Mexico 4.0 3.9 1.1 2.8 3.4 3.5
Netherlands (a) 1.0 -1.3 -0.8 0.0 1.1 2.1
New Zealand 1.2 2.9 2.5 2.9 2.6 2.7
Norway 1.1 2.8 0.8 1.8 1.6 2.0
Poland (a) 4.5 2.0 1.5 2.9 3.9 3.3
Portugal (a) -1.3 -3.2 -1.4 0.5 2.0 3.4
Romania (a) 2.4 0.5 3.5 3.0 2.6 4.1
Russia 4.3 3.5 1.3 -0.1 1.4 4.4
Singapore 6.0 1.9 4.0 3.3 4.1 5.8
South Africa 3.6 2.5 1.9 2.9 3.5 3.7
S. Korea 3.7 2.3 3.0 3.6 3.7 4.5
Slovakia (a) 3.0 1.8 0.9 2.6 3.4 2.5
Slovenia (a) 1.0 -2.4 -0.9 0.0 2.5 2.3
Spain (a) 0.1 -1.6 -1.2 1.1 1.4 2.4
Sweden (a) 3.0 1.3 1.5 2.1 2.0 2.7
Switzerland 1.8 1.0 2.0 1.4 2.5 2.6
Taiwan 4.2 1.5 2.1 3.0 3.1 3.8
Turkey 8.5 2.1 4.2 2.7 2.7 4.7
UK (a) 1.1 0.3 1.7 2.9 2.4 2.5
US 1.8 2.8 1.9 2.7 2.9 3.0
Vietnam 6.2 5.2 5.4 5.5 5.2 4.3
Euro Area (a) 1.6 -0.6 -0.4 0.9 1.7 2.1
EU-27 (a) 1.7 -0.3 0.1 1.4 1.9 2.3
OECD 2.0 1.5 1.3 2.1 2.5 2.7
World 3.9 3.2 3.0 3.6 3.9 4.0

 Annual inflation (a) (per cent)

 2011 2012 2013 2014 2015 2016-20

Australia 2.6 2.6 2.7 2.9 2.3 3.0
Austria (a) 3.6 2.6 2.1 1.6 1.9 1.7
Belgium (a) 3.4 2.6 1.2 1.7 1.6 2.0
Bulgaria (a) 3.4 2.4 0.4 -0.4 0.9 3.0
Brazil 6.6 5.4 6.2 6.0 5.6 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 1.6
Czech Republic 2.1 3.5 1.4 1.2 2.1 2.0
Denmark (a) 2.7 2.4 0.5 0.9 1.7 1.4
Estonia (a) 5.1 4.2 3.2 1.9 2.8 3.7
Finland (a) 3.3 3.2 2.2 1.4 1.4 2.6
France (a) 2.3 2.2 1.0 0.6 0.8 1.7
Germany (a) 2.5 2.1 1.6 1.4 1.6 2.0
Greece (a) 3.1 1.0 -0.9 -1.2 -0.6 2.8
Hong Kong 3.6 3.2 2.4 2.7 2.8 3.1
Hungary (a) 3.9 5.7 1.7 1.2 2.4 2.0
India 8.8 9.4 10.9 8.0 7.5 5.2
Indonesia 5.4 4.3 7.0 6.4 6.1 4.8
Ireland (a) 1.2 1.9 0.5 0.6 0.9 0.7
Italy (a) 2.9 3.3 1.3 0.6 1.3 1.9
Japan -0.8 -0.8 -0.2 2.2 1.5 1.3
Lithuania (a) 4.1 3.2 1.2 0.5 1.7 3.8
Latvia (a) 4.2 2.3 0.0 1.3 2.2 4.1
Mexico 3.4 4.1 3.8 3.9 3.7 3.5
Netherlands (a) 2.5 2.8 2.6 0.1 0.2 1.3
New Zealand 2.8 0.5 0.5 1.5 2.6 3.1
Norway 1.0 1.2 2.6 1.9 3.2 2.9
Poland (a) 3.9 3.7 0.8 1.4 2.2 2.4
Portugal (a) 3.6 2.8 0.4 -0.4 0.3 1.8
Romania (a) 5.8 3.4 3.2 2.5 3.8 2.7
Russia 8.4 5.1 6.8 6.0 5.6 6.3
Singapore 5.3 4.5 2.4 2.5 2.4 4.1
South Africa 4.9 5.7 5.2 5.4 2.9 4.2
S. Korea 4.0 2.2 1.3 1.5 1.8 2.6
Slovakia (a) 4.1 3.7 1.5 0.8 1.4 2.6
Slovenia (a) 2.1 2.8 1.9 0.7 0.8 4.5
Spain (a) 3.1 2.4 1.5 -0.2 0.8 2.6
Sweden (a) 1.4 0.9 0.4 0.2 1.4 2.3
Switzerland 0.0 -1.1 -0.6 0.0 0.0 1.0
Taiwan 0.8 1.1 0.6 0.6 0.7 2.0
Turkey 6.5 8.9 7.5 7.9 6.4 6.5
UK (a) 4.5 2.8 2.6 1.9 1.8 1.9
US 2.4 1.8 1.1 1.4 2.0 2.4
Vietnam 18.7 9.1 6.6 6.0 6.2 6.5
Euro Area (a) 2.7 2.5 1.3 0.2 1.1 2.0
EU-27 (a) 3.1 2.6 1.5 1.0 1.4 2.0
OECD 2.4 2.1 1.5 1.8 2.0 2.4
World 5.3 4.8 4.6 4.6 4.6 3.7

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 -2.4 -1.9 -1.4
Austria -2.4 -2.6 -1.5 -1.2 -1.0 -1.8
Belgium -3.9 -4.1 -2.6 -1.9 -1.6 -1.9
Bulgaria -2.0 -0.8 0.3 0.5 0.3 -0.7
Canada -3.7 -3.4 -3.0 -2.2 -2.2 -2.0
Czech Rep. -3.2 -4.4 -2.9 -3.0 -2.8 -2.6
Denmark -1.8 -4.1 -0.9 -1.0 -0.2 -1.0
Estonia 1.1 -0.2 0.9 0.7 0.1 -1.2
Finland -1.0 -2.2 -3.1 -2.8 -2.6 -1.2
France -5.3 -4.8 -4.2 -4.2 -3.9 -2.6
Germany -0.8 0.1 -0.4 -0.4 0.0 -1.4
Greece -9.6 -9.0 -12.7 -9.5 -7.1 -4.2
Hungary 4.2 -2.1 -3.3 -3.2 -2.0 -1.0
Ireland -13.1 -8.1 -7.2 -5.8 -5.8 -2.2
Italy -3.8 -3.0 -3.0 -2.8 -1.8 -0.6
Japan -8.9 -9.9 -10.4 -9.1 -7.7 -5.7
Lithuania -5.5 -3.2 -2.5 -2.1 -1.8 -1.5
Latvia -3.6 -1.3 0.0 -1.2 -1.7 -1.3
Netherlands -4.3 -4.0 -2.5 -1.6 -2.3 -1.8
Poland -5.0 -3.9 -3.9 4.2 -2.9 -0.5
Portugal -4.3 -6.5 -4.9 -3.6 -2.0 0.2
Romania -5.6 -3.0 -2.7 -2.6 -2.4 -1.7
Slovakia -5.1 -4.5 -2.6 -1.6 -0.7 0.0
Slovenia -6.3 -3.8 -3.7 -3.3 -2.6 -0.6
Spain -8.7 -6.8 -6.6 -7.3 -7.0 -3.7
Sweden 0.2 -0.2 -1.4 -1.8 -1.7 -1.3
UK -7.6 -6.1 -5.9 -5.4 -4.0 1.1
US -10.7 -9.3 -6.4 -4.9 -3.8 -2.5

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

 2011 2012 2013 2014 2015 2020

Australia 26.5 31.9 32.6 33.1 33.2 29.3
Austria 72.7 74.1 76.9 74.8 71.2 62.1
Belgium 97.7 99.7 103.8 102.0 100.0 90.9
Bulgaria -- -- -- -- -- --
Canada 91.6 95.3 94.5 92.5 91.4 84.8
Czech Rep. 41.4 46.2 45.2 49.4 51.0 51.7
Denmark 46.4 45.4 46.5 46.5 45.4 42.3
Estonia -- -- -- -- -- --
Finland 49.2 53.6 55.3 57.4 58.1 51.1
France 85.8 90.3 93.3 95.3 96.4 93.6
Germany 80.0 81.0 77.7 74.5 70.7 56.5
Greece 170.3 157.0 177.0 188.6 189.0 159.4
Hungary 82.1 79.8 79.9 74.2 71.3 57.0
Ireland 104.1 117.4 126.7 128.8 131.5 127.0
Italy 120.7 127.0 133.2 135.1 132.8 103.9
Japan 202.4 214.7 220.0 216.2 214.4 219.1
Lithuania -- -- -- -- -- --
Latvia -- -- -- -- -- --
Netherlands 65.7 71.2 73.8 73.1 74.2 71.2
Poland 56.2 55.6 58.0 53.1 54.3 44.3
Portugal 108.2 124.1 128.0 130.7 129.4 98.7
Romania -- -- -- -- -- --
Slovakia -- -- -- -- -- --
Slovenia -- -- -- -- -- --
Spain 70.5 86.0 95.4 101.6 105.9 103.2
Sweden 38.7 38.2 40.6 41.1 41.4 38.4
UK 84.3 89.1 90.6 92.3 92.6 75.5
US 97.0 101.0 101.8 101.9 100.4 89.1

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 5.7 5.2 5.1
Austria 4.1 4.4 4.9 5.0 4.0 4.6
Belgium 7.2 7.6 8.4 8.6 8.9 9.5
Bulgaria 11.3 12.3 12.9 12.0 10.6 9.7
Canada 7.4 7.3 7.1 6.7 7.4 6.7
China -- -- -- -- -- --
Czech Rep. 6.7 7.0 6.9 7.3 7.5 6.5
Denmark 7.6 7.5 7.0 6.4 5.3 5.4
Estonia 12.4 10.0 8.6 9.9 9.4 9.0
Finland 7.8 7.7 8.2 8.0 8.0 7.3
France 9.2 9.8 10.3 10.4 10.3 9.2
Germany 5.9 5.4 5.3 5.3 5.1 5.4
Greece 17.7 24.3 27.3 25.7 22.3 16.9
Hungary 11.0 10.9 10.2 11.5 10.8 8.4
Ireland 14.7 14.8 13.1 11.6 10.5 9.2
Italy 8.4 10.7 12.3 13.0 11.9 9.7
Japan 4.6 4.3 4.0 3.6 3.6 4.1
Lithuania 15.4 13.4 11.8 11.6 12.1 12.0
Latvia 16.3 14.9 11.9 11.9 12.4 12.6
Netherlands 4.4 5.3 6.7 6.7 6.0 4.7
Poland 9.7 10.1 10.3 10.5 11.5 10.5
Portugal 13.0 15.9 16.5 14.8 13.5 10.4
Romania 7.3 7.1 7.3 7.3 6.9 6.1
Slovakia 13.7 14.0 14.3 13.2 12.7 13.0
Slovenia 8.2 8.9 10.1 9.6 8.0 7.5
Spain 21.7 25.0 26.4 25.4 24.6 19.2
Sweden 7.8 7.9 8.0 8.0 8.0 7.3
UK 8.1 7.9 7.6 6.5 6.2 6.0
US 8.9 8.1 7.4 6.5 6.0 5.9

 Current account balance (per cent of GDP)

 2011 2012 2013 2014 2015 2016-20

Australia -2.8 -4.0 -2.7 -3.4 -3.5 -2.7
Austria 1.6 1.6 2.6 2.3 2.1 0.9
Belgium -1.1 -2.0 -2.0 -0.7 0.1 -0.2
Bulgaria 0.2 -1.5 3.1 1.3 6.9 12.6
Canada -2.8 -3.4 -3.2 -2.3 -2.4 -1.6
China 2.1 2.6 2.5 3.1 3.0 2.4
Czech Rep. -2.7 -2.5 -0.8 -1.2 -1.8 -2.5
Denmark 5.9 6.0 7.3 9.2 8.8 7.9
Estonia 1.8 -1.9 -1.1 -0.7 -2.7 -6.3
Finland -0.6 -1.5 -0.2 -0.2 -0.3 -0.5
France -1.8 -2.2 -1.9 -2.5 -2.0 -1.1
Germany 6.8 7.5 7.6 6.7 5.8 5.4
Greece -9.9 -2.4 0.7 -0.9 3.0 4.2
Hungary 0.4 0.9 2.5 5.0 7.9 6.5
Ireland 1.2 4.4 6.6 6.3 4.5 2.9
Italy -3.1 -0.4 0.3 0.6 2.0 5.1
Japan 2.1 1.1 0.7 -0.4 0.4 3.1
Lithuania -1.5 -0.3 1.6 2.3 1.1 -1.9
Latvia -2.4 -2.8 -0.9 3.1 1.4 1.3
Netherlands 9.5 9.4 10.7 11.1 12.2 12.2
Poland -4.3 1.3 -1.0 -2.1 -4.5 -3.8
Portugal -7.0 -2.0 0.3 -0.2 1.4 3.6
Romania -6.3 -6.3 -0.7 -0.8 2.3 2.2
Slovakia -1.8 1.9 2.8 0.8 3.6 3.0
Slovenia 0.4 3.3 6.3 3.8 2.8 0.2
Spain -3.8 -1.1 0.3 1.4 3.6 4.5
Sweden 6.1 6.0 6.2 5.2 5.2 5.0
UK -1.5 -3.8 -4.4 -4.1 -2.9 -2.1
US -2.9 -2.7 -2.3 -1.7 -1.6 -2.2

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 12.2
 : business 2.5 7.6 7.3 2.7
Government: consumption 0.1 -2.7 -0.2 -2.0
 : investment -0.1 -5.2 -3.9 -3.2
Stockbuilding (a) 1.4 -0.2 0.2 0.2
Total domestic demand 2.9 1.7 2.6 1.7

Export volumes 11.5 7.1 3.5 2.7
Import volumes 12.8 4.9 2.2 1.4

Average earnings 2.2 2.1 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 -6.4
General Govt. debt as % of GDP (b) 92.9 97.0 101.0 101.8
Current account as % of GDP -3.0 -2.9 -2.7 -2.3

 Average
 2014 2015 2016-20

GDP 2.7 2.9 3.0

Consumption 2.5 2.6 2.6
Investment: housing 9.2 9.3 7.5
 : business 6.4 6.7 5.1
Government: consumption -0.3 0.1 1.7
 : investment -0.3 0.0 1.7
Stockbuilding (a) 0.0 0.0 0.0
Total domestic demand 2.6 2.9 3.0

Export volumes 4.2 8.1 6.2
Import volumes 3.6 6.9 5.8

Average earnings 2.3 3.5 4.0
Private consumption deflator 1.4 2.0 2.4
RPDI 2.8 2.8 2.5
Unemployment, % 6.5 6.0 5.9

General Govt. balance as % of GDP -4.9 -3.8 -2.9
General Govt. debt as % of GDP (b) 101.9 100.4 93.7
Current account as % of GDP -1.7 -1.6 -2.2

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 2.0
Consumption 3.4 2.3 1.9 2.2
Investment : housing 8.7 1.6 6.1 -0.2
 : business 14.2 10.9 6.1 1.3
Government: consumption 2.7 0.8 1.1 0.8
 : investment 10.5 -7.0 0.5 -1.5
Stockbuilding (a) 0.3 0.5 0.0 0.3
Total domestic demand 5.2 2.8 2.3 1.8

Export volumes 6.9 4.7 1.5 2.1
Import volumes 13.6 5.7 3.1 1.1

Average earnings 1.4 3.6 2.3 1.8
Private consumption deflator 1.4 2.1 1.4 1.1
RPDI 2.2 2.2 2.4 2.3
Unemployment, % 8.0 7.4 7.3 7.1

General Govt. balance as % of GDP -4.9 -3.7 -3.4 -3.0
General Govt. debt as % of GDP (b) 87.7 91.6 95.3 94.5
Current account as % of GDP -3.5 -2.8 -3.4 -3.2

 Average
 2014 2015 2016-20

GDP 2.4 2.4 2.6
Consumption 2.8 2.4 1.4
Investment : housing 0.1 0.3 0.8
 : business 1.5 4.7 3.4
Government: consumption 0.6 1.4 2.4
 : investment -0.7 5.0 3.6
Stockbuilding (a) 0.3 0.0 0.0
Total domestic demand 2.2 2.4 1.9

Export volumes 5.2 6.8 6.6
Import volumes 4.3 6.2 4.5

Average earnings 1.5 2.2 2.5
Private consumption deflator 1.7 1.8 1.6
RPDI 2.8 1.4 1.2
Unemployment, % 6.7 7.4 6.7

General Govt. balance as % of GDP -2.2 -2.2 -2.0
General Govt. debt as % of GDP (b) 92.5 91.4 87.3
Current account as % of GDP -2.3 -2.4 -1.6

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 1.5
Consumption 2.8 0.3 2.1 1.9
Investment : housing -4.8 5.1 2.8 8.8
 : business 0.7 4.1 3.6 -1.5
Government: consumption 1.9 1.2 1.7 2.2
 : investment 0.1 -7.6 2.2 11.6
Stockbuilding (a) 0.9 -0.2 0.1 -0.3
Total domestic demand 2.9 0.5 2.3 1.8

Export volumes 24.5 -0.4 -0.1 1.6
Import volumes 11.1 5.9 5.4 3.3

Average earnings -1.4 0.9 -0.6 1.2
Private consumption deflator -1.7 -0.8 -0.8 -0.2
RPDI 2.3 0.6 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 GDPM 192.9 202.4 214.7 220.0
Current account as % of GDP 3.9 2.1 1.1 0.7

 Average
 2014 2015 2016-20

GDP 1.3 1.3 0.8
Consumption 1.0 0.5 0.4
Investment : housing 6.9 3.6 2.9
 : business 2.8 2.9 2.7
Government: consumption 2.0 -0.4 0.1
 : investment 8.0 -1.0 0.6
Stockbuilding (a) 0.0 0.5 0.0
Total domestic demand 2.0 1.2 0.7

Export volumes 2.8 5.6 5.3
Import volumes 7.0 5.1 5.1

Average earnings 0.3 1.3 2.1
Private consumption deflator 2.2 1.5 1.3
RPDI -0.5 0.5 0.2
Unemployment, % 3.6 3.6 4.1

Govt. balance as % of GDP -9.1 -7.7 -6.2
Govt. debt as % of GDPM 216.2 214.4 217.1
Current account as % of GDP -0.4 0.4 3.1

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 -0.7
Private investment 0.3 2.1 -3.7 -3.2
Government : consumption 0.6 -0.1 -0.6 0.1
 : investment -6.0 -1.6 -4.4 0.5
Stockbuilding (a) 0.7 0.2 -0.4 -0.1
Total domestic demand 1.3 0.7 -2.0 -1.1

Export volumes 11.4 6.7 2.7 1.4
Import volumes 9.8 4.7 -0.8 0.0

Average earnings 1.1 1.6 1.8 1.5
Harmonised consumer prices 1.6 2.7 2.5 1.3
RPDI -0.6 -0.5 -1.6 -1.1
Unemployment, % 10.1 10.1 11.3 12.0

Govt. balance as % of GDP -6.2 -4.2 -3.7 -3.1
Govt. debt as % of GDP (b) 85.4 87.3 90.6 94.7
Current account as % of GDP 0.1 0.1 1.3 2.2

 Average
 2014 2015 2016-20

GDP 0.9 1.7 2.1
Consumption 1.1 1.2 1.2
Private investment 0.8 1.6 4.6
Government : consumption 0.4 0.0 1.3
 : investment 0.9 -0.6 1.2
Stockbuilding (a) 0.0 0.1 0.0
Total domestic demand 0.8 1.0 1.8

Export volumes 2.9 6.9 6.2
Import volumes 3.3 6.2 6.1

Average earnings 1.4 1.9 3.0
Harmonised consumer prices 0.2 1.1 2.0
RPDI 0.8 1.4 1.7
Unemployment, % 11.9 11.3 9.7

Govt. balance as % of GDP -2.9 -2.4 -1.9
Govt. debt as % of GDP (b) 94.4 93.4 86.6
Current account as % of GDP 2.4 2.8 3.5

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

Table B8. Germany

Percentage change

 2010 2011 2012 2013 2014

GDP 3.9 3.4 0.9 0.5 1.7
Consumption 1.0 2.3 0.7 1.0 1.8
Investment : housing 4.1 9.2 1.9 0.9 3.2
 : business 6.7 6.8 -2.1 -1.5 2.5
Government : consumption 1.3 1.0 1.0 0.7 1.6
 : investment -0.9 2.6 -7.1 2.0 7.0
Stockbuilding (a) 0.6 0.0 -0.6 -0.1 -0.5
Total domestic demand 2.3 2.9 -0.3 0.5 1.4

Export volumes 14.8 8.1 3.8 1.0 3.4
Import volumes 12.3 7.5 1.8 1.0 3.1

Average earnings 0.9 2.7 3.3 2.3 3.5
Harmonised consumer prices 1.2 2.5 2.1 1.6 1.4
RPDI 1.0 1.8 0.7 0.6 1.5
Unemployment, % 7.1 5.9 5.4 5.3 5.3

Govt. balance as % of GDP -4.2 -0.8 0.1 -0.4 -0.4
Govt. debt as % of GDP (b) 82.5 80.0 81.0 77.7 74.5
Current account as % of GDP 6.3 6.8 7.5 7.6 6.7

 Average
 2015 2016-20

GDP 1.9 1.8
Consumption 1.7 1.4
Investment : housing 1.9 4.8
 : business 2.7 1.9
Government : consumption 1.2 1.2
 : investment -4.2 0.2
Stockbuilding (a) 0.1 0.1
Total domestic demand 1.8 1.7

Export volumes 6.8 6.5
Import volumes 7.3 7.2

Average earnings 3.9 3.7
Harmonised consumer prices 1.6 2.0
RPDI 1.8 1.7
Unemployment, % 5.1 5.4

Govt. balance as % of GDP 0.0 -0.8
Govt. debt as % of GDP (b) 70.7 61.3
Current account as % of GDP 5.8 5.4

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

Table B9. France

Percentage change

 2010 2011 2012 2013 2014

GDP 1.6 2.0 0.0 0.3 0.6
Consumption 1.5 0.5 -0.4 0.3 0.9
Investment : housing -0.4 2.3 -0.4 -3.8 -2.2
 : business 4.7 3.9 -1.7 -2.2 2.0
Government : consumption 1.8 0.4 1.4 1.8 0.9
 : investment -8.2 0.3 -0.6 1.4 0.3
Stockbuilding (a) 0.5 0.9 -0.5 -0.3 0.0
Total domestic demand 2.0 1.8 -0.6 0.0 0.8

Export volumes 9.0 5.6 2.5 0.8 0.8
Import volumes 8.6 5.3 -0.9 0.8 1.9

Average earnings 1.8 2.5 2.3 1.5 1.4
Harmonised consumer prices 1.7 2.3 2.2 1.0 0.6
RPDI 0.9 0.2 0.0 0.5 0.6
Unemployment, % 9.3 9.2 9.8 10.3 10.4

Govt. balance as % of GDP -7.1 -5.3 -4.8 -4.2 -4.2
Govt. debt as % of GDP (b) 82.4 85.8 90.3 93.3 95.3
Current account as % of GDP -1.3 -1.8 -2.2 -1.9 -2.5

 Average
 2015 2016-20

GDP 1.6 1.7
Consumption 1.1 0.9
Investment : housing -0.3 2.3
 : business 4.1 1.9
Government : consumption 0.2 1.1
 : investment -0.7 1.0
Stockbuilding (a) 0.0 0.0
Total domestic demand 1.1 1.1

Export volumes 7.4 6.4
Import volumes 5.1 4.4

Average earnings 1.7 2.9
Harmonised consumer prices 0.8 1.7
RPDI 1.3 1.1
Unemployment, % 10.3 9.2

Govt. balance as % of GDP -3.9 -2.9
Govt. debt as % of GDP (b) 96.4 95.4
Current account as % of GDP -2.0 -1.1

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 -2.4 -1.8
Consumption 1.5 -0.3 -4.0 -2.6
Investment : housing -0.4 -6.1 -6.7 -5.9
 : business 5.9 1.5 -7.9 -5.2
Government : consumption -0.4 -1.3 -2.6 -0.8
 : investment -16.3 -4.5 -12.3 1.2
Stockbuilding (a) 1.2 0.0 -0.4 -0.2
Total domestic demand 2.2 -0.8 -4.9 -2.8

Export volumes 11.2 6.9 2.0 0.0
Import volumes 12.3 1.4 -7.1 -2.9

Average earnings 2.2 1.1 1.2 1.1
Harmonised consumer prices 1.6 2.9 3.3 1.3
RPDI -0.8 -0.9 -4.8 -2.8
Unemployment, % 8.4 8.4 10.7 12.3

Govt. balance as % of GDP -4.5 -3.8 -3.0 -3.0
Govt. debt as % of GDP (b) 119.4 120.7 127 133.2
Current account as % of GDP -3.5 -3.1 -0.4 0.3

 Average
 2014 2015 2016-20

GDP 0.1 1.2 2.9
Consumption -0.4 0.1 1.1
Investment : housing -2.7 -1.2 8.9
 : business -1.3 0.6 7.7
Government : consumption -0.4 -0.4 1.1
 : investment 1.3 -0.1 1.3
Stockbuilding (a) 0.3 0.4 0.0
Total domestic demand -0.3 0.3 2.3

Export volumes 2.9 7.2 6.4
Import volumes 2.9 4.9 5.3

Average earnings -1.3 -0.8 1.5
Harmonised consumer prices 0.6 1.3 1.9
RPDI -1.0 -0.2 2.5
Unemployment, % 13.0 11.9 9.7

Govt. balance as % of GDP -2.8 -1.8 -0.8
Govt. debt as % of GDP (b) 135.1 132.8 116.3
Current account as % of GDP 0.6 2.0 5.1

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 -2.1
Investment : housing -11.4 -12.5 -8.7 -8.0
 : business 0.5 1.1 -8.0 -3.6
Government : consumption 1.5 -0.5 -4.8 -2.3
 : investment 0.0 0.0 -0.2 -1.4
Stockholding (a) 0.3 -0.1 0.0 0.0
Total domestic demand -0.6 -2.1 -4.1 -2.8

Export volumes 11.7 7.6 2.1 4.9
Import volumes 9.3 -0.1 -5.7 0.4

Average earnings 0.0 0.3 -0.4 0.7
Harmonised consumer prices 2.0 3.1 2.4 1.5
RPDI -4.8 -2.9 -4.5 -4.1
Unemployment, % 20.1 21.7 25.0 26.4

Govt. balance as % of GDP -9.4 -8.7 -6.8 -6.6
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 1.1 1.4 2.4
Consumption 1.5 1.1 0.9
Investment : housing -7.0 -7.7 3.3
 : business 5.9 3.6 9.2
Government : consumption -1.5 -2.0 2.7
 : investment -1.0 0.7 2.7
Stockholding (a) 0.0 0.0 0.0
Total domestic demand 0.4 0.0 2.4

Export volumes 6.5 8.4 5.6
Import volumes 4.9 4.9 6.1

Average earnings 1.3 2.0 3.2
Harmonised consumer prices -0.2 0.8 2.6
RPDI 0.6 1.4 1.5
Unemployment, % 25.4 24.6 19.2

Govt. balance as % of GDP -7.3 -7.0 -5.2
Govt. debt as % of GDP(b) 101.6 105.9 107.4
Current account as % of GDP 1.4 3.6 4.5

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

REFERENCES

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

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

NOTES

(1) The forecast was finalised on 24 April 2014 and does not include a 25 basis point increase by the Central Bank of New Zealand on 24 April 2014 and the 50 basis point increase by Russia's central bank on 25 April 2014.

(2) Federal Open Market Committee statement, the Federal Reserve, 19 March 2014.

Graham Hacche, with 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 Angus Armstrong, Dawn Holland, Simon Kirby and Jonathan Portes for helpful comments and discussion and Chizoba Obi for compiling the database underlying the forecast. The forecast was completed on 24 April, 2014. Exchange rate, interest rates and equity price assumptions are based on information available to 15 April 2014. Unless otherwise specified, the source of all data reported in tables and figures is the NiGEM database and NIESR forecast baseline.

Table 1. Forecast summary
Percentage change

 Real GDP (a)

 World OECD China EU-27 Euro USA Japan
 Area

2010 5.2 3.0 10.4 2.0 1.9 2.5 4.7
2011 3.9 2.0 9.4 1.7 1.6 1.8 -0.4
2012 3.2 1.5 7.7 -0.3 -0.6 2.8 1.4
2013 3.0 1.3 7.6 0.1 -0.4 1.9 1.5
2014 3.6 2.1 7.2 1.4 0.9 2.7 1.3
2015 3.9 2.5 7.0 1.9 1.7 2.9 1.3
2004-2009 3.8 1.5 10.9 1.2 1.0 1.4 0.1
2016-2020 4.0 2.7 6.6 2.3 2.1 3.0 0.8

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

2010 3.9 1.6 1.7 1.7 3.4 12.6
2011 3.4 2.0 0.6 1.1 2.5 6.0
2012 0.9 0.0 -2.4 0.3 1.7 2.8
2013 0.5 0.3 -1.8 1.7 2.0 2.8
2014 1.7 0.6 0.1 2.9 2.4 4.9
2015 1.9 1.6 1.2 2.4 2.4 7.4
2004-2009 0.8 1.0 0.0 1.1 1.6 4.8
2016-2020 1.8 1.7 2.9 2.5 2.6 6.5

 Private consumption deflator

 OECD Euro USA Japan Germany France Italy
 Area

2010 1.9 1.6 1.7 -1.7 2.0 1.1 1.5
2011 2.4 2.5 2.4 -0.8 2.0 2.1 2.8
2012 2.1 2.1 1.8 -0.8 1.6 1.9 2.8
2013 1.5 1.2 1.1 -0.2 1.6 0.6 1.3
2014 1.8 0.3 1.4 2.2 1.5 0.9 0.6
2015 2.0 1.1 2.0 1.5 1.8 0.8 1.3
2004-2009 2.1 1.8 2.2 -0.8 1.2 1.7 2.1
2016-2020 2.4 2.0 2.4 1.3 2.3 1.7 1.9

 Private Interest rates (c) Oil
 consumption deflator ($ per
 barrel)
 UK Canada USA Japan Euro (d)
 Area

2010 4.0 1.4 0.3 0.1 1.0 78.8
2011 3.9 2.1 0.3 0.1 1.2 108.5
2012 1.8 1.4 0.3 0.1 0.9 110.4
2013 2.2 1.1 0.3 0.1 0.6 107.1
2014 1.8 1.7 0.3 0.1 0.3 102.3
2015 1.9 1.8 0.5 0.1 0.3 97.1
2004-2009 2.5 1.3 2.8 0.2 2.6 63.2
2016-2020 1.9 1.6 2.8 0.6 1.6 101.0

Notes: Forecast produced using the NiGEM model, (a) GDP growth at
market prices. Regional aggregates are based on PPP shares, 2005
reference year, (b) Trade in goods and services, (c) Central bank
intervention rate, period average, (d) Average of Dubai and Brent spot
prices.

* A questions and comments related to the forecast and its underlying
assumptions should be addressed to Simon Kirby (s.kirby@niesr.ac.uk).
We would like to thank Angus Armstrong, Dawn Holland, Simon Kirby and
Jonathan Portes for helpful comments and discussion and Chizoba Obi
for compiling the database underlying the forecast. The forecast was
completed on 24 April, 2014. Exchange rate, interest rates and equity
price assumptions are based on information available to 15 April 2014.
Unless otherwise specified, the source of all data reported in tables
and figures is the NiGEM database and NIESR forecast baseline.