The world economy.

Holland, Dawn ; Delannoy, Aurelie ; Fic, Tatiana 等

Tensions on global financial markets, most notably those in Europe, have eased in recent months. A firm policy commitment to maintain the integrity of the Euro Area has allayed fears of a disorderly break-up, bringing yields on the most vulnerable sovereign bonds down. This in turn has softened the risk of an imminent and widespread banking crisis. Outside of Europe, policymakers in the US reached a last-minute fiscal agreement to avoid the most severe tightening measures that would have pushed the economy towards recession. While these actions have reduced the probability of the severe downside risks to our central forecast from emerging, the global economy remains extremely fragile. The improvement in financial market indicators has done little to address the debilitating factors underlying our modal forecast for the world economy: an impaired and opaque banking system, severe fiscal austerity introduced in a synchronised way in Europe, persistent policy uncertainty despite recent improvements, and a widespread lack of confidence among households and firms, which have been repeatedly disappointed following apparent short-term economic improvements since 2010. On top of this, world trade has slowed more markedly than expected, which will impede growth particularly in export-sensitive economies such as Germany and Japan.

A summary of our main global forecast figures is reported in table 1. The methodological approach to the forecast and key underlying assumptions are discussed in Appendix A, while detailed projections for 40 countries are reported in Appendix B at the end of this chapter. Our forecast continues to rely on the assumption that EMU remains intact, but that difficulties in the banking sector are not resolved until the end of 2014. Under these assumptions, the global economy is expected to expand by 3.3 per cent this year, and 3.7 per cent in 2014, compared to an estimate of trend growth at the global level of 4-4 1/4 per cent. The Euro Area as a whole is expected to remain in recession this year, with annual declines in output forecast for Greece, Portugal, Spain, Italy, Slovenia and France. Japan has struggled to successfully implement planned rebuilding measures in the wake of the tsunami and earthquake of 2011, and the economy contracted sharply in the second half of last year. Stimulus measures under discussion could improve prospects relative to the 0.6 per cent growth currently forecast, but this will rely on successful implementation. The agreed US fiscal measures for 2013 are slightly more stringent than we had allowed for in our previous forecast, but other indicators have improved in the US and we continue to forecast growth of about 2 per cent for this year. Indicators in China also point to a modest improvement in the short-term outlook, although we see little significant change to prospects in the other major emerging economies. Growth in most of the advanced economies will continue to remain below trend in 2014, with a stronger recovery expected only when confidence in the banking system is restored.

[FIGURE 1 OMITTED]

Risk aversion in financial and real sectors Financial market actors have clearly become less risk averse in recent months. It would be difficult to attribute this shift to a single policy action. Within Europe, the ECB announcement of an interest rate cut in July 2012 was closely followed by a bail-out of Spanish banks and the introduction of the Outright Monetary Transactions (OMT) policy in August. These actions within Europe were followed by a significant easing of monetary policy in the US in September 2012, and a loosening of the policy stance in Japan following elections last December. Without pointing to a direct causal effect from any of these policy actions, we can nonetheless observe a significant decline in financial risk aversion since August of last year. Figures 1 and 2 illustrate this through the recent movements in global share prices and government bond yields. Share prices have risen everywhere, suggesting a greater appetite for equity investment, as the appeal of safe-haven assets begins to wane and investors seek higher rates of return. While the equity market rises have been most significant in the crisis economies of Greece, Portugal, Italy and Spain, share prices have also risen by about 10 per cent in the US, UK and Canada, and by more than 20 per cent in Japan.

[FIGURE 2 OMITTED]

[FIGURE 3 OMITTED]

Government bond yields have dropped sharply in Greece (nearly 15 percentage points) and Portugal (nearly 5 percentage points) since the announcement of the OMT programme. Significant declines have also been observed in Spain, Italy and Ireland. On the other hand, we have observed a slight rise in the yields on what have generally been viewed as the safe-haven bonds--those in the US, Germany and the UK. In Germany, low interest rates and the weak euro have, arguably, given excessive stimulus to the economy over the past two years. The recent narrowing of bond spreads suggests that there is likely to be a partial withdrawal of this financial stimulus in Germany over the course of 2013, and this is reflected in our forecast. A rise in bond yields, albeit from very low levels, will also moderate the recovery in the US and the UK, as well as other low-risk countries such as Finland.

While risk aversion in financial markets appears to have subsided, there is far less evidence that this has affected the risk appetite associated with household saving and firm investment decisions. The dynamics of adjustment of risk aversion in the real economy are likely to be highly asymmetric. When triggered, risk aversion can rise very suddenly. But restoring confidence is likely to be a much more gradual process. We use the estimated equations underlying consumer behaviour in the National Institute's model, NiGEM, to identify any behavioural shifts in consumption patterns that may be related to a change in risk aversion.

Consumption decisions are presumed to depend on real disposable income and real wealth in the long run, and follow the pattern discussed in Barrell and Davis (2007). Total wealth is composed of both financial wealth and tangible (housing) wealth.

ln(C) = [alpha] + [beta] In(RPDI) + (1-[beta]) ln(RFN + RTW) (1)

where C is real consumption, RPDI is real personal disposable income, RFN is real net financial wealth and RTW is real tangible wealth. The dynamics of adjustment to this long run are estimated, and differ between countries to take account of differences in the relative importance of types of wealth and of liquidity constraints. The estimation was carried out over the pre-crisis period, so reflects average consumer behaviour prior to 2008. In a model of this type, risk aversion is assumed to be constant. Any shift in risk aversion will show up in the error term on the equation. Our primary interest, therefore, is in the error on this estimated relationship, to identify any significant shifts in behaviour that may be attributable to a change in risk aversion since 2007.

Figure 3 illustrates the change in the average percentage error on the estimated consumption equations on NiGEM that underlie our forecast. The figure compares the average error in 2012 to a pre-crisis trend (the average error over the period 2005-7) and the average error in 2011, to identify any short-term shifts. In all the countries illustrated, with the exceptions of Japan and Spain, the average error on the consumption equation in 2012 was lower than the precrisis trend. This can be interpreted as a rise in risk aversion relative to the pre-crisis trend, as consumers have changed their behaviour, and tend to consume less for a given income and asset position. This may also reflect heightened credit constraints or depleted savings after several years of weak growth or recession. Relative to 2011, the error term declined further in some countries (US, Germany, Italy) suggesting a further rise in consumer risk aversion last year. Whereas in others (Greece, Portugal, Spain) risk aversion appears to have moderated to some degree.

Box A. How powerful are automatic stabilisers?

A common refrain from international organisations such as the OECD
and the IMF is that, while current fiscal consolidation efforts
should remain on track, automatic stabilisers should be allowed to
operate fully to offset any negative shocks to the economy. In this
Box we consider the effectiveness of automatic stabilisers in the
Euro Area, and compare a measure of their magnitude across
countries. The term automatic stabiliser is used to describe the
extent to which fiscal rules and safety nets help to smooth the
business cycle. For example, when unemployment rises, the negative
impact on income is partially offset by unemployment benefits, and
the tax burden falls. The magnitude of automatic stabilisers can be
assessed through either the impact of the stabilisers on output or
the impact on the budget balance. OECD (1999) measures the size of
automatic stabilisers by the cyclical component of the budget
balance as a share of GDP. According to this measure, the
importance of stabilisers is increasing in the size of the output
gap. Barrell and Pina (2004) adopt an alternative approach, and
compare the volatility of output with and without automatic
stabilisers in place, as proposed by Smyth (1966).

We adopt a simple approach to assess the magnitude of automatic
stabilisers in Europe, based on a series of simulations using
NIESR's model, NiGEM. An external demand shock is applied with all
automatic stabilisers allowed to operate. Within NiGEM stabilisers
operate through three channels: unemployment benefits rise
endogenously with the unemployment rate, offsetting some of the
lost income; income tax liabilities fall as the aggregate level of
personal income declines; general government consumption and
investment expenditure is invariant to external shocks. We then
re-run the same shock, turning all of these channels off: aggregate
benefit payments are invariant to the state of the economy, capped
at the baseline level; income tax is treated as a fiat tax per head
of population and invariant to income levels; government
consumption and investment spending falls in line with private
sector consumption and investment, respectively.

Figure A1 illustrates the ratio of the impact of the shock on GDP
without automatic stabilisers and with automatic stabilisers. GDP
falls by more in response to a negative shock to the economy when
stabilisers are not allowed to operate, so this ratio is always
greater than one. On average, the estimated impact of automatic
stabilisers in the Euro Area countries is broadly in line with
Barrell and Pina (2004), who found that automatic stabilisers in
Europe decrease volatility by about II per cent. Our estimates
suggest that automatic stabilisers cushion the loss of output by
between 7-15 per cent in Finland, Austria, Portugal, the UK, the
Netherlands, Belgium, Germany and Italy. We find a more significant
impact in Ireland, Greece, Spain and France. The impact of
automatic stabilisers appears to be particularly high in countries
with very high unemployment, consistent with the OECD (1999)
approach that relates the size of automatic stabilisers to the
state of the economy. This suggests that, while in general
automatic stabilisers have only a small stabilising impact, they
may be more effective at present in some of the Euro Area economies
that remain deep in recession. However, where fiscal consolidation
plans involve deep cuts in government spending--which includes
Greece, Spain and Ireland--these stabilisers themselves are in the
process of being dismantled, and the results presented here will
clearly overstate the effectiveness of stabilising policies at present.

[FIGURE A1 OMITTED]

World trade and the stock cycle

The deterioration in world trade has been more pronounced than anticipated. This may in part be related to factors such as the US drought that adversely affected the grain harvest, disruption due to Hurricane Sandy and other severe storms, protectionist trade policies introduced in, for example, Brazil, and trade disputes between China and Japan. While not on the scale of the trade collapse in 2009, there are a number of worrying similarities. Figure 4 illustrates the growth rate of import demand in major economies and regions in 2011 and 2012. The slowdown in global demand is very widespread. Euro Area import volumes contracted sharply last year, but a slowdown in growth was also evident in the US and most emerging regions, most notably in Latin America and Central and Eastern Europe. Import growth in Japan remained stable. This is partly a reflection of the elevated demand for energy imports following the closure of nuclear power plants in the wake of the earthquake and tsunami of 2011. The Africa and Middle East region is the only major area to record an acceleration in import demand last year. This may be a delayed reflection of recycled oil revenues, following the sharp rise in the oil price in 2011. The more recent declines in the price of oil, discussed in more detail below, suggest that such strong import demand from this region is unlikely to persist into 2013.

[FIGURE 4 OMITTED]

A feature of the unexpectedly sharp drop in world trade in 2009 was the sharp rise in inventory levels, as firms failed to make expected export deliveries. Major capital exporters, such as Japan, suffered disproportionately from the collapse in world trade in 2009 and remain exposed to the current downturn. The recent slowdown has occurred alongside a rise in stock levels in countries such as the US, which may indicate that we should expect a period of destocking once world trade recovers. This is a downside risk to our forecast for 2014.

Longer-term implications of oil price movements

The price of Brent crude has come down by more than $10 per barrel since early 2012. This has eased inflationary pressures in the short term, and makes it less likely that inflation expectations will drift much above central bank targets in 2013-14. We forecast average inflation in the OECD as a whole of about 1 3/4 per cent per annum over this period.

Of more interest than the short-term oscillations in the oil price is a downward revision to the expected growth rate of the oil price over the longer term. Global oil prices have followed a general upward trend since 2003, after averaging $20-30 per barrel over the preceding 20 years. Oil prices in excess of $100 per barrel since 2011 have spurred technological development in extraction methods, notably from unconventional sources of fossil fuels such as shale gas and tight oil (also known as shale oil). According to BP, unconventional sources of oil are expected to provide all of the net growth in global oil supply to 2020, and over 70 per cent of growth to 2030 (BP, 2013). This is expected to come mainly from the US tight oil, Canadian oil sands, Brazilian deepwater, and biofuels. In the US, horizontal drilling and hydraulic fracturing--or 'fracking'--have unlocked vast reserves of shale gas and oil that were initially considered as uneconomic, notably in North Dakota and Montana.

The surge in shale gas has pushed US gas prices to record-lows, and the 'shale revolution' is now spreading to oil, reversing the past trend of falling US oil output. The US is expected to be fully self-sufficient in net energy by 2030, whereas in 2005, 30 per cent of energy was imported. This will lead to a 70 per cent decline in US oil imports between 2011 and 2030. New sources of fossil fuels are expected to put downward pressure on the price of oil over the next two decades. The US-based Energy Information Administration has revised its projections for average oil price growth over the next 20 years down from more than 3 per cent per annum to about 2 per cent per annum.

[FIGURE 5 OMITTED]

A lower oil price reduces the cost of production for all firms that used oil-based energy. This can be expected to raise the potential level of output in all such firms, and at the macro level. The potential gains are largely linked to the oil-intensity of production in each country. Oil-producing countries will suffer from the income loss associated with a lower oil price, offsetting some of these potential gains.

Figure 5 illustrates our estimated impact of lower oil price growth on the average annual potential rate of growth in selected economies. The analysis is undertaken through a simulation study using NIESR's model, NiGEM. The significant downward revision to expected oil price growth can be expected to raise potential output growth by 0.1-0.3 percentage points per annum over the next 15 years. Where oil exports amount to a significant share of total output, as in Norway and Russia, lower oil revenue can be expected to more than offset gains to non-oil production, and potential GDP growth may be 0.1-0.2 percentage points lower than previously assumed. In the short to medium term, this is expected to put downward pressure on inflation, as it will take time for the rise in potential growth to translate into stronger actual GDP growth.

Prospects for individual economies

United States

Economic indicators emanating from the United States have been largely positive in recent months. The housing market appears to have turned a corner, with easier financing conditions, rising home sales, an upturn in house prices and a rise in housing investment of an estimated 11 per cent in 2012. Firmer house prices together with a rise in share prices support an improvement in household balance sheets. Recent declines in the oil price dampen inflationary pressures. The unemployment rate has progressed gradually downward, in contrast to developments in most European economies. Monetary policy remains aggressively expansionary and fiscal policy is less restrictive than it would have been had policymakers failed to reach a timely agreement on the so-called 'fiscal cliff'. While the fiscal agreement for 2013 was slightly more stringent than we had allowed for in our previous forecast, other factors are generally more supportive, and we continue to forecast GDP growth of about 2 per cent for 2013 and 2.4 per cent for next year.

Given the subdued external environment and a relatively strong fiscal adjustment, it is difficult to see how growth rates in excess of trend can be achieved in the short term. Coupled with the decline in oil prices, this underlies our forecast for very moderate inflation of 1 1/4-1 3/4 per cent per annum over the next two years. Core inflation averaged just 1 1/2 per cent in the second half of 2012, and there is as yet no sign that the loose monetary stance has allowed inflation expectations to drift above 2 per cent per annum. The Federal Open Market Committee (FOMC) will continue to keep a vigilant watch on wage settlements, but is prepared to allow some upward drift in inflation expectations so long as the unemployment rate remains elevated.

Following the major loosening measures introduced last September, the FOMC announced an explicit target for the unemployment rate at its meeting in January, and committed to maintaining interest rates at current exceptionally low levels until the unemployment rate falls to 6.5 per cent. The unemployment rate has always played an important role in the Fed's targeting rule, but this is the first time an explicit target level for the unemployment rate has been openly announced. While this announcement does not materially alter the expected path of interest rates, as the Fed's forecast for the unemployment rate is in line with its previous assertion that interest rates would be maintained at exceptionally low levels until at least mid-2015, it acts as a transparent anchor for interest rate expectations.

[FIGURE 6 OMITTED]

Our current forecast for the unemployment rate is broadly in line with that of the Federal Reserve. We see the unemployment rate falling gradually to reach about 6 1/2 per cent in early 2015. The interest rate assumptions underlying our current forecast are also in line with the Federal Reserve. However, we continue to maintain that the Fed's projections for GDP growth are extremely optimistic. The central tendencies of the forecasts of the Federal Reserve Board members and Federal Reserve Bank presidents range from 2.8-3.2 for 2013 and 3.3-4 for 2014. It is difficult to see how this can be achieved unless driven by a significant expansion, rather than consolidation, of fiscal policy and a boom in investment that goes well beyond our current forecast.

The recent improvement in the unemployment rate has been achieved without further deterioration of the labour force participation rate (figure 6). Holland (2012) highlighted the significant deterioration in US labour force participation since 2008, and the longer-term implications if this labour force withdrawal proves to be permanent.

The change in the rate of participation since its average in 2008 implies that 5 million individuals have left the labour force compared with what we would have expected had the rate of participation remained unchanged. While we have yet to see any signs of a recovery in labour force participation, the rate of participation stabilised in the second half of 2012.

Fiscal cliff agreement

On 1 January 2013, policymakers reached an agreement to prevent the automatic enforcement procedures established by the Budget Control Act of 2011 and the expiration of a range of tax provisions from pushing the economy towards recession. Most of the 'temporary' Bush-era tax cuts from 2003 have been retained on a permanent basis. Tax provisions from the 2009 stimulus law have been extended to 2018. Expiring unemployment benefits and changes to medicare payments have been delayed until 2014. Other changes to tax and spending --including Obama's healthcare act--were sustained, while a final decision on $65 billion in spending cuts has been postponed until March. In total, we estimate that implemented fiscal tightening measures in 2013 amount to about 1.4 per cent of GDP, compared to potential tightening measures totalling 3.7 per cent of GDP had legislated policies been fully implemented this year. Our working assumption underlying our central forecast is that the $65 billion in spending cuts scheduled to be introduced between March-September 2013 will be eased in more gradually over the next three years.

Figures 7-8 illustrate four scenarios for the US economy. The 'baseline' scenario is our current forecast for the US, incorporating 1.4 per cent of GDP fiscal tightening measures in 2013 and measures amounting to 1.3 per cent of GDP in 2014. The fiscal adjustment is split roughly evenly between tax and spending measures in both years. The 'full fiscal cliff' scenario illustrates what our forecast would have been, had legislated policies been fully implemented this year (3.7 per cent of GDP tightening in 2013 and 0.9 per cent in 2014). 'Policy as in 2012' illustrates a forecast under unchanged tax and spending policies from those prevailing in 2012--so no fiscal adjustment in either year. Finally, 'full spending cuts March 2013' is an alternative scenario that may materialise if additional spending cuts to be discussed in March are fully implemented in this financial year.

Our estimates suggest that the implemented policies reduce GDP growth this year by about 1 percentage point, but if the full fiscal cliff had been implemented we would expect only 0.6 per cent growth this year. The fiscal position is expected to improve by 1.3 per cent of GDP as a result of implemented policy changes, but under the full fiscal cliff scenario we would have expected the deficit to narrow to 5.6 per cent of GDP this year. If the full spending cuts to be agreed in March are introduced in this financial year, our GDP growth forecast for this year will be adjusted downward by 0.4 percentage points, but this would be recovered by stronger growth in 2014-15.

Canada

Economic growth in Canada became more moderate last year, reflecting the ongoing consolidation in the public sector and a loss of global export market share. However, the financial system looks sound, with nonperforming loans and corporate leverage at low levels and a firm commitment to implement reforms to financial regulation standards. Domestic demand is forecast to remain stable, but the weak external environment will continue to weigh on the economy, and we forecast a modest slowdown in GDP growth to 1.7 per cent in 2013. As the fiscal position recovers and global demand picks up, we expect Canada to achieve trend growth in excess of 2 1/2 per cent per annum from 2015.

A downside risk to the outlook is a more rapid household balance sheet adjustment than currently forecast. Household debt has risen to around 165 per cent of GDP, linked to rapid house price growth in major urban areas. In order to tackle the risks emanating from the housing market, the government has enforced tighter mortgage regulation. This is expected to keep house price growth and housing investment from accelerating, but a more pronounced impact could dampen the outlook for household demand this year.

In response to the crisis, Canada enacted a swift and decisive fiscal stimulus, which resulted in a budget deficit of about 5 per cent of GDP in 2009-10. Now that the crisis is perceived to be weathered, the government aims to return to balanced budgets for federal and state governments. The planned pace of consolidation is relatively moderate. However, if downside risks materialise, additional tightening measures may be needed to achieve current targets. This is particularly true for some state governments, in particular the most populous state of Ontario.

Over the longer term, a policy challenge facing the Canadian economy is a need to diversify away from reliance on oil exports to the United States. Oil and gas are among Canada's main export products, accounting for about 15 per cent of total exports. Energy exports are almost exclusively directly towards the United States, which receives 98 per cent of the nation's oil exports. As the United States has been investing heavily in shale oil and gas, and is expected to become self-sufficient in energy by 2030, Canada will need to seek alternative markets for energy exports, or undergo a significant structural shift in industrial production.

Brazil

Economic growth in Brazil lags significantly behind the other BRIC economies. We estimate that the economy expanded by just over 1 per cent last year. Given that population growth is just below 1 per cent per annum, this implies a stagnation of per capita GDP growth. The slowdown comes despite a plethora of stimulus measures since mid-2011, which include a series of interest rate cuts, intervention in foreign exchange markets and an infrastructure investment programme. As these measures can be expected to have a positive lagged effect, annual growth is projected to rebound to about 3 1/4 per cent per annum in 2013 and 2014.

At its November meeting, the central bank decided to keep the headline policy rate unchanged, following ten consecutive rate cuts since July 2011. The bank signalled that, despite some inflationary pressures, the rate may remain at current levels for a sustained period of time. Low interest rates, by Brazilian standards, have supported credit-financed consumption and a rapid expansion of household debt.

The financial system has shown some signs of strain, such as a rise in non-performing loans, which is likely to restrain further credit expansion. However, low unemployment and firm wage growth will continue to support consumption this year.

While the rapid increase in wages will add a boost to consumption, it will also raise the costs of production. A deteriorating competitiveness is at the heart of the weak economy. Although exports amount to just 12 per cent of GDP in Brazil, compared to a global average of close to 25 per cent, the persistent loss of global export market share since 2007 acts as a significant drag on the economy.

In efforts to improve competitiveness, the government has actively intervened in currency markets on several occasions over the past two years. The Brazilian real currently stands close to its average level in 2007 in effective terms, and almost 20 per cent below its peak in 2011. In addition the Brazilian government has introduced protectionist trade policies, such as higher import taxes on cars and restrictions on the involvement of foreign firms in oil extraction. This was associated with a sharp drop in import volumes in the second half of 2012.

Japan

A recent landslide victory by the Liberal Democratic Party (LDP) brought to power a new government with an agenda to revitalise the ailing Japanese economy. The government unveiled a set of policies aimed at boosting output growth, weakening the yen and bringing an end to deflation. While in the short term the policies have already had a significant impact on the exchange rate and can be expected to support the economy, it remains to be seen whether any of these policies will have longer-lasting effects.

On the fiscal side, for the 2012 financial year, the Cabinet Office approved a 10.3 trillion yen (2.1 per cent of GDP) supplementary budget, of which 5.2 trillion yen is allocated for public works. The total package is expected to be worth about 20.2 trillion yen, after including projects to be funded by private companies and local governments. However, it will be difficult to fully implement proposed plans within the current fiscal year, as the final approval of the budget bill by the parliament is only expected in mid-February. Hence, most of the budget is expected to be carried over to the next financial year. The new supplementary budget must be spent within the 2013 financial year, as budget funds can be rolled over only for one fiscal year. Speedy implementation of new public works may be hindered by labour shortages, especially in the construction sector. In Tohoku, where reconstruction works are most needed, supplementary funds from the FY2011 are still not fully spent, due to labour and supply shortages.

[FIGURE 9 OMITTED]

On the monetary side, the government is putting pressure on the Bank of Japan (BOJ) to conduct a more aggressive monetary expansionary programme to combat deflation, weaken the yen and thereby help improve competitiveness of Japanese corporations. In December 2012, the BOJ increased its Asset Purchasing Programme (APP) by 10 trillion yen, thus setting the fund target to over 100 trillion. In January 2013, the BOJ went further and announced a 2 per cent inflation 'target' and an 'open-ended asset purchasing method', which will be implemented from January 2014, after the current APP programme comes to an end. While this announcement signals a commitment to loose monetary policy for the foreseeable future, it falls short of increasing the rate of monetary expansion in the short term, and the BOJ remains under pressure to introduce more short-term easing measures in the coming months.

The yen has depreciated by about 12 per cent against the dollar and 17 per cent against the euro since the third quarter of 2012, which is likely to reflect the government's support for a looser monetary stance. The yen also depreciated by about 19 per cent over the same period against the Korean won, which should support export-oriented sectors in Japan that compete with Korean counterparts.

Our current forecast does not include the latest supplementary budget as it has not yet been approved by parliament and exact details of the programme are undecided. However, we simulate the expected effects of the planned supplementary spending on public works, using NIESR's global econometric model, NiGEM. We raise government investment by 5.2 trillion yen (1 per cent of GDP), and use a working assumption that 80 per cent of the budget is spent in 2013 and 20 per cent in the first quarter of 2014. We assume there is no reaction from monetary policy for the first two years of the shock. The fiscal multiplier in Japan is relatively high (see Barrell et al., 2013), and the pass-through of investment to GDP is direct. Figure 9 illustrates the expected impact of the policy on GDP growth, inflation, the unemployment rate and the fiscal balance this year. The supplementary budget can be expected to add 1.3 percentage points to our forecast for GDP growth of 0.6 per cent this year, and reduce the rate of deflation by about 0.1 percentage point. It would also support employment, although the fiscal position would necessarily worsen in the short term.

China

Growth momentum has improved for the Chinese economy. While the cyclical rebound is welcome, it still does not eliminate economic imbalances, which should be addressed if the government's target of doubling 2010 GDP by 2020 is to be met. In 2012 GDP grew by 7.8 per cent, the slowest pace for the past ten years. However, GDP growth accelerated in the final quarter of 2012 (in year-on-year terms) for the first time in three years. According to the National Bureau of Statistics (NBS) consumption and investment accounted for 51.8 and 50.4 per cent of Chinese GDP in 2012, respectively. This translates into respective contributions of 4.1 and 3.9 percentage points to GDP growth, with net exports subtracting 0.2 percentage points. The split is indicative of the ongoing structural shifts already taking place in China. Over the period 2003-7, consumption accounted for less than 40 per cent of GDP, with net trade making a strong positive contribution to growth. As illustrated in figure 10, consumption, as a share of GDP, has been on an increasing trend since 2007 and overtook investment in 2011.

Less reliance on investment as an engine of growth is necessary to make the economy more balanced, but the road towards rebalancing can be very bumpy. The latest indicators of industrial production point to a slowdown in growth in industries suffering from excess capacity, for example ferrous metals and cement. These industries generally have a high degree of export orientation and a connection to property and/or infrastructure investment, which have been adversely affected by the current weak external demand and government policies aimed at cooling the housing market. However, if adjustment towards more consumption continues, there will be a permanent structural shift in demand away from these industries, and adjustments to capacity are therefore needed. This adjustment can be expected to lead to lower manufacturing investment and also slower growth in manufacturing production, a rise in non-performing loans and temporary job losses.

[FIGURE 10 OMITTED]

The recent announcement by NBS concerning a decline in the working-age population by a total of 3.45 million last year drew attention to demographic changes that are already materialising in China. According to the UN population projections (figure 11) the number of 15-64 year olds is expected to start declining in 2015 and the total population will begin to contract in 2030.

Employment growth and the movement of labour from rural to urban areas has contributed to the expansion of the economy in recent decades. A reduction in the population has a negative impact on trend output growth. However, the downward effect can be mitigated by improving workers' productivity, which should be one of the main goals of the government's reforms.

Our forecast of output growth of about 7 per cent per annum in the medium term assumes a continuation of the targeted expansionary fiscal and monetary policy and gradual reforms. According to our calculations, this is the minimum average growth rate required to achieve the government's 2020 GDP target.

[FIGURE 11 OMITTED]

India

Economic growth weakened markedly over the course of the first three quarters of last year, with the slowdown accelerating in the third quarter. However, recent high-frequency indicators point towards a turnaround in economic activity. Credit growth has rebounded; both domestic and foreign order flows lifted manufacturing and services PMI readings. A positive contribution to output growth from restocking is expected in the short term, as manufacturing businesses have been running down inventories in order to meet demand.

A recent decline in both headline and core wholesale price inflation raises hopes that the first signs of easing in underlying inflationary pressures are emerging. In light of this, at its last meeting, the Reserve Bank of India strongly hinted at the possibility of monetary easing in first quarter of this year.

In order to assess the impact of the expected 1/4 point cut in interest rates, we simulate a monetary easing in India using NIESR's model, NiGEM. A 1/4 point cut increases our GDP growth forecast by about 0.5 and 0.4 percentage points in 2013 and 2014, respectively, and significantly raises our inflation projection for 2013, as illustrated in figure 12. Despite this modest stimulus, spare capacity in the economy is expected to increase, as output growth is projected to stay below trend in the short run. This should restrain domestic price pressures and create more space for further monetary stimulus, providing that the currency does not depreciate further and there is no increase in imported inflation.

[FIGURE 12 OMITTED]

Russia

The Russian economy, and in particular its fiscal balance, is highly sensitive to the oil price, as roughly half of government revenue is reliant on taxes derived from oil and gas. A new fiscal rule links government spending to the long-term average oil price in preceding years and puts a limit on the non-oil fiscal deficit. The budget plan for the next three years relies on an average oil price of at least $100 per barrel. The recent softening in oil markets suggests that a modest fiscal tightening will be required to meet current fiscal targets. We forecast a modest deceleration in GDP growth to 3.2 per cent this year with growth expected to average about 3 1/2 per cent per annum over the medium-term horizon. A further drop in the price of oil poses a downside risk to this forecast. A tighter fiscal stance will keep inflation under control, and we expect the Central Bank of Russia to achieve its target of bringing inflation down to 4-5 per cent per annum by 2014.

Over the longer term, fiscal sustainability in Russia will require a reform of the pension system. A low pension age of 55 for women and 60 for men, coupled with pressures from an ageing population, will make it increasingly difficult to meet pension obligations. Generally, there are two possible ways to finance a pension system: the pay-as-you-go (PAYG) and the private insurance systems. In the PAYG system, current payments to pensioners are funded by contributions or taxes generated by the working population. Hence, working generations immediately pay for the retired. In a private insurance system, each individual invests into funds for a retirement in the future, which makes it independent of population structure.

In 2002, the Russian pension reform established a pension system that was funded partly through a 16 per cent PAYG contribution and partly through a 6 per cent individual contribution. The advantage of the PAYG system is its simplicity and the fact that it does not require pre-financing. However, as the share of retired increases, due to low fertility and longer life spans, the PAYG system becomes increasingly costly. Due to shortfalls in the PAYG budget, in autumn 2012 the privately funded pillar was reduced to 2 per cent, with the rest diverted to cover current pension liabilities. This has long-term implications for investment, as private pension funds are an important source of long-term financing of investment projects.

European Union

The macroeconomic prospects for the Euro Area are bleak and Europe is expected to remain in recession this year. While external demand may compensate for some of the domestic impediments to growth over the medium term, short-term external support is limited. Restoring health to the banking sector remains a key priority, and policy efforts are focused on establishing a Euro Area banking union and implementing new rules on prudent banking to improve the functioning of an integrated Europe.

Complementing the monetary union with its banking counterpart is a natural evolution of the European structures. The core elements of the banking union are: a single supervisory mechanism consisting of the ECB and national supervisors; a single bank resolution mechanism, including an independent resolution authority and a European resolution fund; and more harmonised and robust deposit-guarantee mechanisms across countries. The process of completing the banking union project is expected to be realised in three stages. The first stage is to ensure fiscal sustainability and break the vicious link between banks and sovereigns. The second stage is aimed at completing the integrated financial framework and promoting sound structural policies at the national level. And the final stage envisages establishing country-specific shock absorption mechanisms.

Additional measures that have been taken to strengthen financial integration within the EU, and a preliminary step towards deeper fiscal integration, include the introduction of a harmonised Financial Transaction Tax. The tax will be applied at the regional level, and the revenues that it will generate will be used to support development. Currently eleven countries will participate in the coordinated measure (Belgium, Germany, Estonia, Greece, Spain, France, Italy, Austria, Portugal, Slovenia and Slovakia), all of which are also members of the Euro Area.

The strong commitment to maintaining the integrity of the Euro Area that has been demonstrated by European policymakers has brought some respite to soaring bond yields, but has done little to rejuvenate growth prospects in the near term. The recovery in confidence is sluggish, reflecting continued policy uncertainty and a poorly capitalised banking system (see e.g. OECD, 2012), despite recent policy efforts. We have revised down our Euro Area GDP growth forecast for both this year and next. The recession in the Euro Area is expected to persist into 2013, and an annual decline in GDP of 0.2 per cent is forecast. Only moderate growth of 0.9 percent is forecast to materialise in 2014. Domestic demand is expected to contract sharply again this year, and the contribution of net exports will continue to be the sole source of support to the economy (figure 13).

As a result of the sharp contraction of domestic demand in the crisis countries, current account adjustments have gradually started taking place within the Euro Area. However, some degree of current account imbalances within the Euro Area remain, due to persistent differences in competitiveness.

Wide divergences between individual member states persist and remain a defining feature of the outlook. Factors underlying these differences span a number of dimensions, including the conditions of the banking sector, the fiscal situation, and labour market and competitiveness differentials. Financial fragmentation, coupled with wide growth and inflation differentials across individual member states, make the design and application of common policies challenging.

The ECB has recently taken a stronger stance to support economic growth in the current crisis situation. Recent policy actions and commitments have clearly eased tensions significantly. The softening of growth in Germany makes it more likely that the ECB may introduce further easing measures this year. This poses a slight upside risk to our GDP forecast for the Euro Area. The implications of an additional 1/4 point cut in interest rates this year are discussed in Box B below.

[FIGURE 13 OMITTED]

Box B. Further monetary easing in the Euro Area?

In July 2012, the European Central Bank (ECB) cut its key interest
rate by 25 basis points to 0.75 per cent in response to the
deteriorating economic outlook. Prior to this move, I per cent was
widely viewed as the floor to ECB policy rates, as the ECB showed
little inclination to cut to the levels of the Federal Reserve
(0.25 per cent) or the Bank of England (0.5 per cent). The decision
to cut interest rates in July now opens the door to potential
further rate cuts. Recent declines in commodity prices will dampen
inflationary pressures significantly, and our forecast sees
inflation remaining below target in both 2013 and 2014. Slightly
higher inflation projected in some individual Euro Area economies
is, for the most part, a reflection of planned rises in the VAT
rate (Spain, Ireland, Italy, Finland). While our central forecast
is based on the assumption that the ECB will hold its main
refinancing rate steady at 0.75 per cent until 2015, there is
clearly scope for an additional interest rate cut without putting
undue pressure on inflation. The recent deterioration of economic
conditions in the Euro Area's strongest economy, Germany, has made
such a move more likely.

A 1/4 point cut can only be expected to have a limited impact on the
real economy. However, it can act as a signal of the ECB's
continued readiness to support the economy, which may help to
regain confidence. It is difficult to isolate the effects of the
July 2012 interest rate cut on confidence indicators, as the action
occurred in close proximity to other major policy actions within
the Euro Area--such as the bail-out of Spanish banks later that
month and the announcement of the Outright Monetary Transactions
(OMT) policy in August. Nonetheless, the interest rate move did
appear to have a dampening effect on 'risk-free' borrowing costs,
e.g. 10-year government bond yields in Germany and France declined
by 0.2 and 0.3 percentage points, respectively, in the first two
weeks following the interest rate announcement. It is not clear
that there was a direct effect on bond yields in other Euro Area
countries.

In order to explore the expected impact of a further rate move by
the ECB, we simulate the effect of a 1/4 point decrease in Euro Area
interest rates using NIESR's global econometric model (NiGEM). Our
model simulations suggest that this would provide a very modest
stimulus to the economy, raising the level of GDP by about 0. I per
cent this year, and 1/4 per cent in 2014 (figure B1). Inflation
would be expected to rise by up to 1/4 point in 2013-14, although
this would be unlikely to push inflation above target according to
our forecast. Figure B2 illustrates the expected impact on the
level of GDP this year in individual economies, which all lie
within the range of 0. 1-0.2 per cent. The biggest effects would be
expected in Ireland, with Portugal expected to exhibit a more
modest reaction to an interest rate cut. Our simulation takes
account only of the direct impact of the decline in interest rates
and a weaker exchange rate when policy is loosened. If the action
were to lead to a significant revival in confidence as well, the
impacts on the economy could be greater.

[FIGURE B1 OMITTED]

[FIGURE B2 OMITTED]

Germany

The short-term macroeconomic outlook for Germany has deteriorated. While domestic demand has been underpinned by relatively strong consumption and housing investment, business investment is severely restrained by the prevailing uncertainty and marked slowdown in world trade. Over the medium term, trend growth is expected to be moderate given the demographic profile in Germany, but the fundamentals of the German economy remain sound and intact.

The fourth quarter of 2012 saw GDP in Germany contracting by 0.5 per cent on a quarterly basis. Prospects for the short term remain rather modest. We expect that the German economy will expand by 0.7 per cent this year and 1.5 per cent in 2013. Net trade is expected to continue to make a strong contribution to GDP growth despite the sensitivity of the German economy to the global slowdown in trade. Housing investment and government spending will also support the economy this year.

Housing investment is expected to record stable and dynamic growth. German house prices remained relatively fiat in the run up to the crisis. The wide divergences between northern and southern European member states that emerged after the crisis induced capital flows from the periphery countries to the core. This has also been visible in the evolution of house prices. Figure 14 shows house price developments in the pre- and post-crisis periods in selected southern and northern European economies. Since 2008, house prices in the northern European economies have risen significantly relative to those in the southern European economies. This development has contributed to internal rebalancing of the Euro Area economy.

[FIGURE 14 OMITTED]

Recent quarters have seen an upward pressure on consumer prices. The increase in prices has predominantly resulted from the rise in energy and food prices. The nonfood and non-energy inflation remained more subdued. We expect that over the forecast horizon the growth of consumer prices in Germany will remain slightly below the ECB's 2 per cent target.

Germany is one of very few Euro Area economies where public finances remain close to balance. The robust labour market and strong wage growth have boosted payroll tax revenues. However, the Euro Area stabilisation measures, and a conversion of the impaired assets of the West LB bank to its 'bad bank' equivalents, will have a negative impact on gross debt. Given the relatively strong fiscal position in Germany, there have been suggestions from some of the international organisations, such as the IMF, that a fiscal stimulus in Germany could help to support the beleaguered Euro Area economy. However, this proposal is not popular within Germany, and given the forthcoming election is unlikely to be enacted as policy.

France

France narrowly escaped recession in 2012. While the Euro Area financial and fiscal risks have softened, the economy is unlikely to strengthen this year, due to the persistently poor domestic performance, stalling recovery in the Euro Area and slowdown in world trade growth. The economy is expected to contract by 0.1 per cent in 2013, with a fragile return to growth from 2014. Downside risks remain, notably from periphery countries such as Italy, the government budget trajectory and an undercapitalised banking system.

We forecast a fall in domestic demand of 0.3 per cent this year, as uncertainty triggered by the debt crisis continues to weigh on both business and household demand. INSEE's latest economic indicators continue to point to low consumer confidence, an unfavourable business climate and deteriorating investment expectations in the manufacturing sector. The drastic 30 billion [euro] (1.5 per cent of GDP) fiscal tightening measures adopted for 2013, along with rising unemployment, weigh on household disposable income and hold back consumption and residential investment decisions. The strain on household income will be somewhat contained by easing inflation, owing to moderate energy prices, but the labour market will continue to deteriorate, with the unemployment rate forecast to average 10.7 per cent this year. Meanwhile, weak demand and low margins undermine business investment. Exports continue to contribute positively to growth, albeit at a relatively slow pace, dampened by the recession affecting two of its top three trading partners, i.e. Spain and Italy.

[FIGURE 15 OMITTED]

In addition to its fiscal commitment, the government needs to tackle the country's decline in competitiveness, which has dented its export market share over the past decade. Whilst its openness ratio (exports+imports/GDP) increased in the past decade, France's share of trade relative to the Euro Area dropped by almost 2 percentage points, from 16 per cent of total Euro Area exports and imports in 2002 to 14.2 per cent in 2012. In the meantime, Germany's share of trade rose by over 5 percentage points. At the core of the competitiveness issue are structural reforms of the labour market and a reduction in labour costs. Trade unions and employers recently reached an agreement that introduces both greater flexibility for companies and stronger safety nets for employees. The government also introduced the CICE, a measure included in the national pact for growth, competitiveness and employment in the form of a 20 billion [euro] package in tax credits for businesses as a way to lower labour costs. It will be allocated proportionally to businesses' gross wage bill for low earners, over 2014-16 for income declared between 2013 and 2015. The policy is meant to be fiscally neutral, financed through a rise in the main VAT rate from 19.6 to 20 per cent from January 2014. In return, businesses are expected to use the income derived from the tax credit for investment.

Figure 15 illustrates the expected impact of the simulated policy on key economic indicators for the first year. Using NIGEM, we raised the VAT base rate to 20 per cent, which raises tax revenues by approximately 5 billion [euro] in the first year. We apply an equivalent cut to employer's contributions, so that the ex-ante impact on the budget is broadly neutral. The figure illustrates the effect of the two policies separately, as well as the combined effect. The cut in employer social contributions reduces employer costs, and so allows employment to rise, the price level to come down, and supports GDP in the short run. The rise in the rate of VAT pushes the consumer price level up, eroding real income and restraining consumer spending. The combined policy is expected to have only a marginal impact on GDP, but should provide some support to the labour market in the short term, as the costs of employment fall for employers. Over time, we would expect the decline in real labour costs to be eroded, as lower unemployment pushes up wages, and this would eventually fully offset the cost savings from the decline in social contributions.

Italy

After being stuck in recession and almost shut out from the financial markets for most of the past 18 months, Italy has finally seen some improvement, with growing interest in Italian bonds and improved bank funding conditions. Yet the economic outlook remains bleak in the short term, reflecting rising unemployment and fiscal austerity. GDP should contract by 0.9 per cent this year, and rebound only slowly from 2014. There are also downside risks, as renewed political uncertainty caused by the coming elections could reverse the trend on financial markets.

Domestic demand is forecast to contract by a further 1 1/2 per cent this year. Consumer spending and residential investment will continue to contract throughout most of the year, due to the combined effect of the VAT rise in July, declining wages and rapidly rising unemployment. Figure 16 suggests that there has been a pass-through of lower bank funding costs since the announcement of the OMT programme to borrowing rates for businesses. This is good news, but is unlikely to trigger any upturn in investment in the short term, due to the lack of domestic demand and muted exports.

Moreover, the elections to be held in February 2013 could trigger new financial tensions in the short term, notably if there were concerns about the new coalition's commitment to fiscal consolidation and structural reforms. Current polls favour the centre-left, led by Luigi Bersani, who supports austerity whilst also reviewing labour policy. If elected, he will push for a payroll-tax cut, financed by raising taxes on the rich and tackling fiscal evasion.

[FIGURE 16 OMITTED]

Spain

Despite some modest signs of improvement in the banking sector, Spain's economic outlook overall continues to look dire. More than 1/4 of the labour force is unemployed, and further rises in unemployment are expected this year. The economy is held back by severe balance sheet adjustments by households, firms and the public sector. A positive contribution from net trade partially offset the 4 per cent contraction in domestic demand last year, and will continue to support the economy this year. A further sharp contraction in domestic demand is forecast for 2013, and we forecast a decline in GDP of 1.7 per cent. Only modest growth of 0.2 per cent is expected in 2014, with a stronger recovery anticipated in subsequent years, supported by the expansion of private investment from a very low base.

The restoration of credit growth is crucial to support a substantial improvement in the macroeconomic situation. However, the continued decline in house prices, compounded by sharply declining real incomes, will lead to a further erosion of the capital base in the banking sector. Nonetheless, there are some positive signs emerging from Spanish banks, such as lower borrowing costs and some capacity to partially recapitalise without further assistance. The announcement made by the central bank chiefs in January to extend Spain's deadline to meet liquidity requirements will boost confidence.

The financial sector reform is being implemented in a timely manner, with substantial progress in revising the regulatory and supervisory framework. A bank stress test has identified the banks in need of recapitalisation. In July, financial assistance to the Spanish banking sector was warranted by the Eurogroup. A total of 100 billion [euro] has been authorised to help banks with a shortfall in capital requirements. The funds are to be transferred via the government's recapitalisation fund, the so-called Fondo de Restructuracion Ordenado Bancaria (FROB). To date, about 39.5 billion [euro] of the available funds have been provided via the European Stability Mechanism (ESM). (1) This is the first time since its establishment in September 2012 that the permanent rescue fund has become active.

EU Programme Countries

Three European countries have received a direct bailout from the EU and IMF--Greece, Ireland and Portugal. They are often referred to together. However, all three are special cases and the reasons for their troubles, as well as progress with adjustment, are very different. What is similar is that all three countries experienced fiscal problems that resulted in a loss of financial market confidence and the inability of the sovereign to borrow on the open market. The cost of borrowing reached unsustainably high levels as the market's assessment of the risk of default (measured by CDS rates) rose dramatically.

The first country to request support in spring 2010 was Greece. Fast growth before the financial crisis, fuelled by inexpensive credit, allowed Greece to mask its fiscal problems. But as the global economic crisis limited access to credit, the depth of the problems, exacerbated by a long-term erosion of competitiveness, gradually became apparent. Market confidence in the economy's fiscal sustainability was dealt a further blow when significant irregularities in its bookkeeping practices were revealed and the fiscal gap turned out to be significantly larger than they had been led to believe.

The second country to ask for support in autumn 2010 was Ireland. The Irish economy suffered from a real estate bubble, which burst after the financial crisis. This resulted in major losses within the banking sector and a freeze in bank credit. To prevent a banking system collapse, the Irish government guaranteed liabilities of the six largest banks. As a result, banking sector losses ended up on the government's balance sheet, sharply increasing the fiscal deficit and debt.

[FIGURE 17 OMITTED]

The third country to request a bailout at the beginning of 2011 was Portugal. Before the crisis it had a large government deficit and an economy in need of structural reform. Inexpensive credit and EU structural support in the pre-crisis years were used to expand an inefficient government apparatus and social transfers, postponing necessary reforms. After the financial crisis, the government attempted to support the economy through fiscal stimulus, but the deterioration of public finances eventually shut the government out of financial markets.

All three countries subsequently introduced severe fiscal austerity programmes and tough structural reforms. Greece has also proposed an ambitious privatisation programme. Reforms are aimed at reducing the size of the government sector and improving competitiveness through internal devaluation.

Of these three countries, Greece suffers the deepest economic difficulties. Despite attempts to stabilise its fiscal position, it soon became apparent that the burden of government debt was unsustainable. At the end of 2011, private creditors agreed to accept a write-off of 100 billion [euro] of Greek debt--although final agreement on the structure of losses was not reached until several months later. Implementing unpopular reforms, in the midst of a deep recession with soaring unemployment, was unsurprisingly met with social unrest and political crisis. This has slowed the process of reforms and targets set by creditors have been repeatedly missed. To avoid contagion and give the newly elected government a chance to stabilise the situation, at the end of 2012 the Troika agreed to a new bailout deal that extends the maturity of the loans, reduces the interest rate on them, grants ten years of interest payment deferral. Overall this achieves 40 billion [euro] of debt relief. These measures are believed to be necessary to set Greek public debt on a sustainable track. Greece achieved the largest fiscal adjustment between 2009 and 2012--almost 9 per cent of GDP. But the economy remains in deep recession, and is forecast to contract by a further 3.8 per cent this year, with recovery expected to set in only in 2015. We are forecasting significant deflation in Greece in 2013-14, which will speed the process of internal devaluation.

[FIGURE 18 OMITTED]

Despite falling domestic demand, Ireland managed to expand in 2011 and is projected to achieve modest positive growth in 2012 and 2013. Strong external demand and successful internal devaluation has led to a reversal of the current account position since 2010. In addition, Ireland has consistently delivered on its commitments to structural reforms and outperformed fiscal targets agreed with the Troika, which differentiates it from the other troubled countries. It seems that setting and achieving credible targets is more important to markets than the magnitude of fiscal adjustment. While Ireland still has a larger fiscal deficit than both Portugal and Greece, it managed to return to market borrowing in July 2012, the first among the Programme countries. And in early January 2013 it attracted money at a rate below the bailout rate. Many were expecting Ireland to exit the bailout programme in 2013, in order to regain fiscal sovereignty. However, Irish and Portuguese authorities have announced that they will be requesting a bailout extension. This follows the softening of bailout conditions for Greece.

[FIGURE 19 OMITTED]

A key risk to stabilisation in Ireland remains the strong link between government and bank finances. After Spain's banks were directly recapitalised by the European Stability Mechanism (ESM), Ireland is hoping that the same mechanism can be applied to its banks, breaking the vicious links between bank and sovereign risk. However, so far Germany has rejected the possibility of retrospective application of the ESM instrument.

Portugal has made substantial progress in fiscal adjustment and passed a large number of growth enhancing structural reforms that should bear fruit in the medium term. The current account deficit has also narrowed dramatically. Markets have reacted positively to this progress, and government borrowing costs have declined substantially, although they remain significantly higher than those for Ireland (see Appendix figure A2). Given the severe fiscal consolidation, Portugal will remain in recession this year, with a contraction of 1.8 per cent forecast, but is expected to record modest growth in 2014.

[FIGURE 20 OMITTED]

New Member States

In line with our expectations, GDP growth in the EU's new member states has decelerated. We project that GDP growth in the group of ten economies as a whole will amount to about 1.3 and 2.5 per cent in 2013 and 2014, respectively. Significant growth differentials persist across individual countries. Slovenia is expected to remain in recession this year, and the Hungarian and Czech economies will essentially stagnate. Even in the best-performing economies of Lithuania, Latvia and Estonia, where GDP is expected to expand by 2 3/4-3 3/4 per cent this year, growth will remain below potential. The Polish and Slovakian economies are forecast to grow by about 1 3/4 per cent, and GDP in Romania and Bulgaria should increase by about 1/2 per cent this year. The performance of individual economies depends on their level of openness, the sensitivity of labour markets and the condition of the banking system.

Consumer price inflation ranged between 2 and 4 per cent in 2012, with the exception of Hungary, where inflation reached 5.7 per cent. The inflation performance within the three Euro Area countries, Slovenia, Slovakia and Estonia, was diverse, with lower inflation in Slovenia reflecting the severe recession, and higher inflation in Estonia partly a carry-over from the rapid growth of 8.3 per cent recorded in 2011.

[FIGURE 21 OMITTED]

Appendix A: Summary of key forecast assumptions

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 35 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, Hong Kong, Taiwan, Brazil, South Africa, Estonia, Latvia, Lithuania, Slovenia, Romania and Bulgaria. The rest of the world is modelled through regional blocks so that the model is global in scope. All models contain the determinants of domestic demand, export and import volumes, prices, current accounts and net assets. Output is tied down in the long run by factor inputs and technical progress interacting through production functions, but is driven by demand in the short to medium term. Economies are linked through trade, competitiveness and financial markets and are fully simultaneous. Further details on the NiGEM model are available on http://nimodel.niesr.ac.uk/.

There are a number of key assumptions underlying our current forecast. The interest rates and exchange rate assumptions are shown in tables A1-A2. Our short-term interest rate assumptions are generally based on current financial market expectations, as implied by the rates of return on treasury bills of different maturities. Long-term interest rate assumptions are consistent with forward estimates of short-term interest rates, allowing for a country-specific term premium in the Euro Area.

In this context, we note the latest ECB Governing Council's decision to maintain key interest rates unchanged at a record low of 0.75 per cent. The ECB is expected to hold interest rates at current levels until 2015, although deteriorating growth in the Euro Area's strongest economy, Germany, makes an additional rate cut this year more likely (see Box B above). The Bank of England recently voted to keep both its interest rate and programme of asset purchase unchanged. The main bank rate has been set at a record low of 0.5 per cent since 5 March 2009, whilst the size of the programme of asset purchase was increased by 50 billion [pounds sterling] in July 2012 to a total of 75 billion [pounds sterling]. The Bank of Japan recently announced a new inflation target of 2 per cent (up from a target of 1 per cent), supported by an "open-ended asset purchasing method". From January 2014 onwards, the Bank will start purchasing 13 trillion yen of financial assets every month until it meets its inflation target. The zero interest rate policy is expected to be maintained to 2015. In the US, the Federal Reserve has been easing monetary policy aggressively since September 2012. In addition to maintaining interest rates at an exceptionally low level until at least mid-2015, it will also continue to purchase additional agency mortgage-backed securities at the rate of $40 billion per month (QE3), whilst also purchasing longer-term Treasury securities at a rate of $45 billion per month. The US will maintain a highly accommodative stance to maintain low pressure on longer-term interest rates, support mortgage markets, and make financial conditions more accommodative. Canada maintained its target for the overnight rate at 1 per cent, anticipating sluggish global growth in the medium term and low inflationary pressures. In Australia, the monetary policy board decided to lower the benchmark rate by 25 basis points to 3 per cent in December to provide additional support to demand.

[FIGURE A1 OMITTED]

After softening monetary policy in response to easing inflationary pressures and a slowdown in activity, the monetary policy in many emerging economies remained roughly unchanged in the last quarter of 2012. The People's Bank of China recently announced that it would keep monetary policy stable this year to promote sustainable growth; its benchmark rate has been set at 6 per cent since July 2012.The main policy rates in Korea were reduced in October 2012 by 25 basis points to 2.75 per cent, but have since remained unchanged. After ten consecutive interest rate cuts since August 2011, the Brazilian main policy rate now stands at a record low of 7.25 per cent.

Figure A1 illustrates our projections for real long-term interest rates in the US, Euro Area, Japan and Canada. Long real rates have followed nominal rates in a sharp drop since the second quarter of 2011. Announced policies indicate that the monetary stance should remain highly expansionary until the end of 2014. Real interest rates in North America are expected to stabilise close to historical levels by 2017-18, while they are expected to 'normalise' earlier in the Euro Area, due to the high risk premium on borrowing in some Euro Area economies. We see real interest rates in Japan stabilising around a level rather below international rates of return.

Figure A2 depicts the spread between 10-year government bond yields of Spain, Italy, Portugal, Ireland and Greece over German yields, regarded as a safe haven in the Euro Area. Sovereign risks in the Euro Area have been a major macroeconomic issue for the global economy and financial markets over the past two years. The final agreement on the Private Sector Involvement in the Greek default in February 2012, and more recently the Outright Money Transactions (OMT) introduced by the ECB in August 2012, have brought some relief to bond yields in the vulnerable economies. In our forecast, we have assumed spreads remain at current levels until the end of 2014, and start to recede in 2015.

Nominal exchange rates against the US dollar are assumed to remain constant at the rate prevailing on 9 January 2013 until the end of September 2013. After that, they follow a backward-looking uncovered-interest parity condition, based on interest rate differentials relative to the US. Figure A3 illustrates the effective exchange rate projections for the US, Euro Area, Japan, Canada and the UK. The Euro Area effective exchange rate depreciated steadily from early 2011 to mid-2012, amid growing concerns about growth and financial markets, but saw a modest recovery towards the end of 2012. This may be a cumulative effect of both the ultra-loose monetary stance in the US, and a decline in the Euro Area risk premium. Meanwhile, the aggressive stance of Japan's new government has been associated with a sharp drop in the yen, which fell by more than 10 per cent in effective terms at the turn of the year. Sterling lost nearly 20 per cent of its value between the end of 2007 and the end of 2009, but strengthened by over 6 1/2 per cent in effective terms between mid-2011 and the third quarter of 2012.

[FIGURE A2 OMITTED]

[FIGURE A3 OMITTED]

Our oil price assumptions for the short term are based on those of the US Energy Information Administration, who use information from forward markets as well as an evaluation of supply conditions. In the longer term, we assume that real oil prices will rise in line with the real interest rate. The oil price assumptions underlying our current forecast are reported in figure A4 and in table 1 at the beginning of this chapter. Annual average oil prices, based on the average of Brent and Dubai spot prices, rose by almost 40 per cent between 2010 and 2011. Tight demand and supply balances and the Libyan crisis triggered this rise. More recently the oil price has dropped back by more than $10 per barrel. This is partly related to the rise in new extraction methods for oil and gas, especially in the US. This new source of supply is expected to restrain oil price growth over the next two decades.

[FIGURE A4 OMITTED]

Our equity price assumptions for the US reflect the expected return on capital. Other equity markets are assumed to move in line with the US market, but are adjusted for different exchange rate movements and shifts in country-specific equity risk premia. Figure A5 illustrates the key equity price assumptions underlying our current forecast. Global share prices dropped sharply in mid-2011 in response to the deepening of the Euro Area debt crisis and the downgrade of US government debt. However, we have seen a rebound in most of the advanced economies over the past year, especially since the OMT programme was announced last August (see discussion in the World Overview section). Share prices in the most vulnerable Euro Area economies have seen the strongest improvement since August. In Japan, share prices have recovered none of the losses suffered at the height of the financial crisis, and stand about 45 per cent below their average level in 2007.

Fiscal policy assumptions for 2012-14 follow announced policies. Average personal sector tax rates and effective corporate tax rate assumptions underlying the projections are reported in table A3. Government revenue as a share of GDP reported in the table reflects these tax rate assumptions and our forecast projections for income and profits, as well as our projections for consumption tax revenue. Consumption tax revenue depends on the VAT rate. Our forecast incorporates planned/enacted VAT rate rises in 2013-14 for Finland, Ireland, Italy, Japan. Government spending in 2013 is expected to decline as a share of GDP in most countries reported in the table, with the exceptions of Austria, Denmark, Germany, Greece and the Netherlands. We expect the burden of government interest payments to rise in the vulnerable Euro Area economies of Ireland, Spain, Greece, Portugal and Italy, as well as in the UK.

[FIGURE A5 OMITTED]

Table AI. Interest rates

Per cent per annum

 Central bank intervention rates

 US Canada Japan Euro Area UK

2010 0.25 0.59 0.10 1.00 0.50
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 0.75 0.50
2014 0.31 1.19 0.10 0.75 0.50
2015 1.06 1.82 0.17 0.93 0.86
2016-2020 2.79 3.30 0.77 2.38 2.59

2012 Q1 0.25 1.00 0.10 1.00 0.50
2012 Q2 0.25 1.00 0.10 1.00 0.50
2012 Q3 0.25 1.00 0.10 0.78 0.50
2012 Q4 0.25 1.00 0.10 0.75 0.50

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

2014 Q1 0.25 1.00 0.10 0.75 0.50
2014 Q2 0.25 1.00 0.10 0.75 0.50
2014 Q3 0.25 1.25 0.10 0.75 0.50
2014 Q4 0.48 1.50 0.10 0.75 0.50

2015 Q1 0.71 1.63 0.10 0.75 0.64
2015 Q2 0.94 1.75 0.15 0.87 0.79
2015 Q3 1.18 1.88 0.20 0.99 0.93
2015 Q4 1.41 2.00 0.25 1.11 1.08

 10-year government bond yields

 US Canada Japan Euro Area UK

2010 3.2 3.2 1.2 3.3 3.6
2011 2.8 2.8 1.1 3.9 3.1
2012 1.8 1.9 0.8 3.2 1.8
2013 2.1 2.2 0.9 2.9 2.2
2014 2.6 2.8 1.0 3.4 2.7
2015 3.1 3.3 1.2 3.7 3.1
2016-2020 3.9 4.0 1.8 4.1 3.9

2012 2.0 2.0 1.0 3.5 2.1
2012 1.8 1.9 0.9 3.4 1.8
2012 1.6 1.8 0.8 3.2 1.7
2012 1.7 1.8 0.8 2.8 1.8

2013 1.9 1.9 0.8 2.7 2.0
2013 2.0 2.1 0.8 2.8 2.2
2013 2.2 2.3 0.9 2.9 2.3
2013 2.3 2.4 0.9 3.1 2.4

2014 2.5 2.6 0.9 3.3 2.5
2014 2.6 2.7 1.0 3.4 2.6
2014 2.7 2.9 1.0 3.5 2.7
2014 2.8 3.0 1.1 3.6 2.8

2015 3.0 3.1 1.1 3.6 3.0
2015 3.1 3.2 1.2 3.6 3.0
2015 3.2 3.3 1.2 3.7 3.2
2015 3.3 3.4 1.3 3.7 3.2

Table A2. Nominal exchange rates

 Percentage change
 in effective rate

 US Canada Japan Euro
 Area

2010 -3.1 9.5 4.6 -6.1
2011 -3.0 2.1 7.2 2.3
2012 3.5 0.9 2.3 -3.5
2013 -0.3 0.9 -10.0 1.1
2014 0.5 -0.5 -0.6 0.2
2015 0.7 -0.7 -0.4 0.5

2012 Q1 -0.4 3.2 -2.3 -2.8
2012 Q2 2.0 -2.8 -0.1 -1.2
2012 Q3 -0.4 5.1 2.5 -1.8
2012 Q4 -0.9 -1.7 -4.5 2.3

2013 Q1 0.1 0.4 -7.8 0.6
2013 Q2 -0.1 0.0 -0.2 -0.1
2013 Q3 -0.1 0.0 -0.1 -0.1
2013 Q4 0.2 -0.1 -0.2 0.1

2014 Q1 0.2 -0.1 -0.2 0.1
2014 Q2 0.2 -0.1 -0.2 0.1
2014 Q3 0.2 -0.1 -0.1 0.1
2014 Q4 0.2 -0.2 -0.1 0.1

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

 Percentage change
 in effective rate

 Germany France Italy UK

2010 -3.6 -2.8 -3.3 -0.2
2011 0.7 1.1 1.4 0.0
2012 -1.9 -1.9 -1.7 4.4
2013 0.5 0.6 0.7 0.2
2014 0.0 0.1 0.2 0.3
2015 0.2 0.3 0.4 0.5

2012 -1.5 -1.2 -1.4 1.3
2012 -0.5 -0.6 -0.5 2.5
2012 -1.0 -0.9 -0.7 1.2
2012 1.1 1.2 1.2 -0.6

2013 0.4 0.4 0.3 -0.5
2013 0.0 0.0 0.0 -0.1
2013 0.0 0.0 0.0 0.0
2013 0.0 0.0 0.1 0.1

2014 0.0 0.0 0.1 0.1
2014 0.0 0.0 0.1 0.1
2014 0.0 0.0 0.1 0.1
2014 0.0 0.1 0.1 0.1

2015 0.0 0.1 0.1 0.1
2015 0.1 0.1 0.1 0.1
2015 0.1 0.1 0.1 0.1
2015 0.1 0.1 0.1 0.1

 Bilateral rate per US $

 Canadian Yen Euro Sterling
 $

2010 1.026 87.8 0.755 0.647
2011 0.995 79.8 0.719 0.624
2012 0.998 79.8 0.778 0.631
2013 0.988 87.9 0.766 0.624
2014 0.994 88.7 0.769 0.625
2015 1.003 89.4 0.771 0.626

2012 0.994 79.3 0.763 0.636
2012 1.027 80.1 0.780 0.632
2012 0.979 78.6 0.799 0.633
2012 0.991 81.2 0.771 0.623

2013 0.988 87.8 0.765 0.624
2013 0.988 87.9 0.765 0.624
2013 0.988 87.9 0.765 0.624
2013 0.990 88.1 0.766 0.624

2014 0.991 88.3 0.767 0.625
2014 0.993 88.6 0.768 0.625
2014 0.995 88.8 0.769 0.626
2014 0.998 89.0 0.770 0.626

2015 1.000 89.2 0.771 0.626
2015 1.002 89.4 0.771 0.626
2015 1.004 89.4 0.771 0.626
2015 1.006 89.5 0.770 0.625

Table A3. Government revenue assumptions

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

 2012 2013 2014 2012 2013 2014

Australia 14.5 14.6 14.5 25.7 25.7 25.7
Austria 31.5 31.4 31.1 19.9 19.9 19.9
Belgium 33.9 34.3 34.9 16.7 16.7 16.7
Canada 21.6 21.6 21.5 19.7 20.1 20.9
Denmark 38.0 38.0 38.2 18.1 18.1 18.1
Finland 31.7 31.9 32.1 22.5 22.4 22.6
France 29.7 29.8 29.8 17.6 23.6 23.6
Germany 27.9 27.7 27.6 16.8 16.8 16.8
Greece 17.6 17.7 18.4 13.5 13.5 13.5
Ireland 25.1 25.7 24.9 9.8 9.8 9.8
Italy 28.4 28.4 28.4 26.4 26.4 26.4
Japan 22.8 22.9 23.2 29.2 29.5 29.7
Netherlands 32.8 32.8 32.8 8.1 8.3 8.4
Portugal 21.0 21.3 21.2 18.6 18.6 18.6
Spain 25.5 25.5 26.3 25.2 25.2 25.2
Sweden 29.9 29.8 29.5 30.4 30.4 30.4
UK 23.2 23.6 24.0 17.6 16.3 14.6
US 17.3 17.6 18.2 28.5 28.6 28.9

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

 2012 2013 2014

Australia 31.9 32.5 32.6
Austria 39.0 40.1 40.3
Belgium 44.4 44.0 44.0
Canada 35.1 34.7 34.8
Denmark 46.7 47.5 47.3
Finland 45.1 44.7 44.8
France 46.0 46.7 47.1
Germany 45.7 45.1 44.7
Greece 47.0 48.1 48.3
Ireland 29.7 29.4 30.3
Italy 45.5 45.9 45.7
Japan 31.6 31.3 31.9
Netherlands 42.4 42.8 42.7
Portugal 38.5 39.1 38.8
Spain 35.3 37.2 37.8
Sweden 44.8 44.2 43.5
UK 37.1 38.7 38.3
US 27.5 27.7 28.2

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 Gov't interest Deficit
 excluding payments projected to
 interest payments (% of GDP) fall below
 3%
 2012 2013 2014 2012 2013 2014 of GDP(b)

Australia 33.0 32.3 31.7 1.7 1.7 1.6 2012
Austria 39.7 40.4 40.1 2.5 2.4 2.3 2013
Belgium 43.7 43.7 43.6 3.5 3.3 3.0 2014
Canada 34.7 34.3 33.8 3.4 3.1 2.9 2013
Denmark 48.7 49.3 48.3 1.8 1.7 1.7 2014
Finland 45.0 44.5 44.0 1.4 1.2 1.1 --
France 47.7 47.6 47.5 2.7 2.7 2.6 2014
Germany 43.5 43.6 44.0 2.1 1.8 1.5 2011
Greece 46.6 47.3 46.7 7.4 7.8 8.2 2019
Ireland 33.3 32.1 30.5 4.1 4.3 4.4 2019
Italy 43.1 43.0 41.9 5.3 5.6 5.6 2013
Japan 39.3 39.0 38.2 2.0 1.9 1.8 --
Netherlands 44.1 44.3 43.7 2.0 1.9 1.8 2014
Portugal 38.4 37.7 36.9 4.4 4.7 4.7 2014
Spain 39.9 39.8 38.9 3.2 3.9 4.2 2017
Sweden 44.0 43.9 43.1 1.1 1.0 0.9 --
UK 39.8 39.5 38.8 3.0 3.2 3.2 2017
US 33.5 32.8 32.2 2.7 2.5 2.4 --

Notes: (a) Expenditure shares reflect NiGEM aggregates, which
may differ from official government figures. (b) The deficit
in Finland and Sweden has not exceeded 3 per cent of GDP in
recent history. In Japan and the US, deficits are not expected
to fall below 3 percent of GDP within our forecast horizon.

Appendix B: Forecast detail

[FIGURE B1 OMITTED]

[FIGURE B2 OMITTED]

[FIGURE B3 OMITTED]

[FIGURE B4 OMITTED]

Table BI. Real GDP growth and inflation

 Real GDP growth (percent)

 2010 2011 2012 2013 2014 2015-19

Australia 2.6 2.4 3.5 2.5 2.7 3.6
Austria (a) 2.2 2.7 0.7 0.9 1.6 2.4
Belgium (a) 2.4 1.8 0.0 0.5 0.8 1.9
Bulgaria (a) 0.5 1.8 0.6 1.5 3.2 2.9
Brazil 7.5 2.7 1.1 3.3 3.2 4.4
China 10.4 9.3 7.8 8.0 7.3 7.0
Canada 3.2 2.6 2.0 1.7 2.1 2.6
Czech Rep. 2.3 1.9 -1.0 0.3 1.9 2.1
Denmark (a) 1.6 1.1 -0.3 1.2 1.4 1.7
Estonia (a) 3.4 8.3 3.6 3.3 3.4 1.9
Finland (a) 3.3 2.7 0.1 1.5 1.7 1.8
France (a) 1.6 1.7 0.1 -0.1 0.6 1.6
Germany (a) 4.0 3.1 0.9 0.7 1.4 1.1
Greece (a) -4.9 -7.1 -5.9 -3.8 -0.1 1.7
Hong Kong 6.8 4.9 1.2 3.6 4.3 3.3
Hungary (a) 1.3 1.6 -1.4 0.2 1.6 2.9
India 10.4 7.9 4.4 5.7 6.8 6.8
Ireland (a) -0.8 1.4 0.7 0.7 2.3 3.0
Italy (a) 1.8 0.6 -2.0 -0.9 0.5 2.2
Japan 4.7 -0.5 2.1 0.6 1.4 1.1
Lithuania (a) 1.5 6.0 3.7 2.7 3.1 2.6
Latvia (a) -1.4 5.2 5.2 3.8 3.3 2.2
Mexico 5.3 3.9 4.1 3.0 3.2 3.5
Netherlands (a) 1.6 1.1 -0.7 0.1 1.3 1.7
New Zealand 0.9 1.5 2.2 2.1 2.3 2.4
Norway 0.2 1.3 3.2 2.3 2.0 2.1
Poland (a) 3.9 4.3 2.2 1.8 2.8 3.8
Portugal (a) 1.9 -1.6 -2.9 -1.8 0.6 2.5
Romania (a) -1.7 2.5 1.0 1.6 3.4 2.4
Russia 4.3 4.4 3.8 3.2 3.4 3.4
South Africa 3.1 3.5 2.6 3.2 4.0 3.2
S. Korea 6.3 3.6 2.1 2.7 3.1 3.4
Slovakia (a) 4.4 3.2 2.5 1.7 3.7 2.7
Slovenia (a) 1.1 1.0 -1.9 -0.7 1.0 1.5
Spain (a) -0.3 0.4 -1.5 -1.7 0.2 2.3
Sweden (a) 6.3 3.8 1.2 1.4 2.0 2.2
Switzerland 3.0 1.9 1.0 1.3 2.1 2.0
Taiwan 10.8 4.1 1.2 3.2 3.5 3.0
UK (a) 1.8 0.9 0.0 0.7 1.5 2.3
US 2.4 1.8 2.2 2.1 2.4 2.8
Euro Area (a) 2.0 1.5 -0.4 -0.2 0.9 1.7
EU-27 (a) 2.1 1.6 -0.2 0.2 1.2 1.9
OECD 3.0 1.8 1.4 1.3 1.9 2.4
World 5.1 3.8 3.1 3.3 3.7 4.0

 Annual inflation(a) (per cent)

 2010 2011 2012 2013 2014 2015-19

Australia 2.5 2.4 2.0 2.5 2.7 3.3
Austria (a) 1.7 3.6 2.6 2.2 1.4 2.2
Belgium (a) 2.3 3.5 2.6 1.5 1.5 2.3
Bulgaria (a) 3.0 3.4 2.4 2.3 2.3 2.3
Brazil 5.1 6.6 5.2 4.2 3.6 4.4
China 3.3 5.4 2.7 2.7 2.9 1.6
Canada 1.4 2.1 1.4 1.6 2.1 2.3
Czech Rep. 1.2 2.1 3.5 2.5 2.3 1.9
Denmark (a) 2.2 2.7 2.4 1.4 1.6 1.8
Estonia (a) 2.7 5.1 4.2 2.6 2.6 3.9
Finland (a) 1.7 3.3 3.2 2.7 2.4 1.5
France (a) 1.7 2.3 2.2 1.6 1.7 1.6
Germany (a) 1.2 2.5 2.1 2.0 1.9 1.5
Greece (a) 4.7 3.1 1.0 -0.4 -1.6 0.3
Hong Kong 1.4 4.0 3.0 3.0 3.1 2.8
Hungary (a) 4.7 3.9 5.7 3.6 3.5 2.0
India 12.0 8.8 9.3 8.5 5.4 4.2
Ireland (a) 1.6 1.2 1.9 1.1 0.9 1.7
Italy (a) 1.6 2.9 3.3 1.5 1.7 2.9
Japan -1.7 -0.8 -0.7 -0.6 0.8 0.6
Lithuania (a) 1.2 4.1 3.2 2.3 4.9 5.0
Latvia (a) -1.2 4.2 2.3 2.7 2.3 2.6
Mexico 4.2 3.4 4.0 3.1 2.8 2.1
Netherlands (a) 0.9 2.5 2.8 2.1 1.4 2.3
New Zealand 1.6 3.0 1.1 0.8 2.7 3.0
Norway 2.3 1.3 0.9 1.2 2.0 2.6
Poland (a) 2.7 3.9 3.7 2.4 2.5 2.0
Portugal (a) 1.4 3.6 2.8 1.0 1.2 2.1
Romania (a) 6.1 5.8 3.4 2.6 2.0 2.2
Russia 6.9 8.4 5.2 4.4 4.6 4.2
South Africa 3.9 5.0 5.5 5.1 4.5 5.1
S. Korea 2.9 4.0 2.2 2.1 2.5 2.5
Slovakia (a) 0.7 4.1 3.7 3.1 2.7 3.6
Slovenia (a) 2.1 2.1 2.8 2.1 2.4 2.7
Spain (a) 2.0 3.1 2.5 1.9 1.6 1.8
Sweden (a) 1.9 1.4 0.9 1.0 1.3 1.9
Switzerland 0.9 0.1 -0.4 0.1 0.9 2.2
Taiwan 0.7 0.8 1.4 1.7 1.6 1.8
UK (a) 3.3 4.5 2.8 2.4 2.3 2.0
US 1.9 2.4 1.8 1.8 1.3 2.2
Euro Area (a) 1.6 2.7 2.5 1.7 1.6 1.9
EU-27 (a) 2.1 3.1 2.7 1.9 1.8 1.9
OECD 1.7 2.3 1.8 1.7 1.6 2.0
World 4.1 5.2 4.2 3.4 2.9 2.8

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

Table B2. Fiscal balance and government debt

 Fiscal balance
 (percent of GDP)(a)

 2010 2011 2012 2013 2014 2019

Australia -4.7 -4.0 -2.8 -1.5 -0.6 -0.9
Austria (a) -4.5 -2.5 -3.2 -2.6 -2.2 -1.8
Belgium (a) -3.9 -3.9 -2.8 -3.0 -2.6 -1.8
Bulgaria -3.1 -2.0 -1.5 -0.5 -0.4 -0.9
Canada -5.3 -4.1 -3.0 -2.6 -1.9 -1.7
Czech Rep. -4.8 -3.3 -3.5 -3.7 -3.3 -2.7
Denmark (a) -2.5 -1.8 -3.7 -3.5 -2.7 -1.6
Estonia 0.2 1.1 -2.0 -1.0 -0.1 -1.2
Finland (a) -2.8 -0.9 -1.3 -1.0 -0.2 -1.4
France (a) -7.1 -5.2 -4.5 -3.6 -3.0 -2.2
Germany (a) -4.1 -0.8 0.1 -0.2 -0.8 -2.2
Greece (a) -10.8 -9.5 -6.9 -7.0 -6.6 -3.0
Hungary -4.5 4.2 -3.4 -2.9 -1.8 -1.2
Ireland (a,c) -30.9 -13.3 -7.6 -7.0 -4.7 -2.7
Italy (a) -4.5 -3.9 -3.0 -2.7 -1.9 -0.9
Japan -8.4 -9.2 -9.7 -9.6 -8.1 -5.6
Lithuania -7.2 -5.5 -4.1 -3.4 -2.6 -1.5
Latvia -8.1 -3.4 -2.2 -2.4 -2.3 -I.I
Netherlands (a) -5.0 -4.4 -3.8 -3.5 -2.9 -2.2
Poland -7.9 -5.0 -3.6 -3.2 -2.8 -1.8
Portugal (a) -9.8 -4.4 -4.4 -3.4 -2.9 -1.5
Romania -6.8 -5.5 -3.6 -2.6 -2.2 -1.7
Slovakia -7.7 -4.9 -3.5 -2.4 -1.5 0.0
Slovenia -5.7 -6.4 -5.6 -4.6 -3.7 -0.7
Spain (a) -9.4 -8.6 -7.8 -6.4 -5.3 -1.0
Sweden (a) 0.3 0.4 -0.3 -0.7 -0.5 -0.9
UK (a) -10.2 -7.8 -6.8 -6.3 -5.8 -0.6
US -11.4 -10.2 -8.7 -7.6 -6.4 -3.8

 Government debt (percent of
 GDP, end year)(b)

 2010 2011 2012 2013 2014 2019

Australia 22.9 26.2 28.3 28.5 27.7 21.8
Austria (a) 71.7 72.2 75.4 76.2 76.1 65.9
Belgium (a) 95.5 97.8 102.9 102.4 101.0 90.0
Bulgaria -- -- -- -- -- --
Canada 81.3 81.7 83.4 82.1 80.1 70.3
Czech Rep. 37.8 40.8 45.0 48.7 50.4 54.2
Denmark (a) 42.7 46.4 48.4 51.9 53.2 54.6
Estonia -- -- -- -- -- --
Finland (a) 48.7 49.1 51.9 50.4 48.2 44.2
France (a) 82.4 86.0 92.2 93.4 94.0 90.9
Germany (a) 82.5 80.5 81.1 78.5 77.1 76.1
Greece (a) 148.3 170.5 158.0 171.5 179.8 181.5
Hungary 81.8 81.4 78.7 73.1 69.1 58.5
Ireland (a,c) 92.1 106.4 112.7 117.6 116.4 110.0
Italy (a) 119.3 120.6 128.0 129.6 127.8 99.7
Japan 193.0 203.3 213.0 217.5 219.3 229.2
Lithuania -- -- -- -- -- --
Latvia -- -- -- -- -- --
Netherlands (a) 63.2 65.4 71.4 74.1 74.7 71.4
Poland 54.8 56.4 56.7 55.9 56.2 50.3
Portugal (a) 93.5 108.1 121.5 125.4 125.8 106.6
Romania -- -- -- -- -- --
Slovakia -- -- -- -- -- --
Slovenia -- -- -- -- -- --
Spain (a) 61.5 69.3 83.3 91.7 94.9 87.6
Sweden (a) 39.5 38.4 37.5 37.1 36.3 32.8
UK (a) 79.4 85.3 89.7 93.8 95.9 87.5
US 96.2 100.5 108.5 111.4 113.6 107.6

Notes: (a) General government financial balance; Maastricht
definition for EU countries. (b) Maastricht definition for
EU countries. (c) The deficit for Ireland in 2010 includes
outlay on bank recapitalisation amounting to 20 per cent of
GDP. The outlays are in the form of promissory notes and do
not require upfront financing.

Table B3. Unemployment and current account balance

 Standardised unemployment rate

 2010 2011 2012 2013 2014 2015-19

Australia 5.2 5.1 5.2 5.2 4.9 4.0
Austria 4.4 4.2 4.4 4.8 5.0 3.9
Belgium 8.3 7.2 7.3 7.4 7.2 7.0
Bulgaria 10.3 11.3 12.2 12.5 10.1 7.1
Canada 8.0 7.5 7.3 7.2 7.1 6.2
China -- -- -- -- -- --
Czech Rep. 7.3 6.8 7.0 7.6 7.8 6.5
Denmark 7.5 7.6 7.7 7.8 7.2 6.9
Estonia 16.9 12.5 10.0 10.1 9.7 9.6
Finland 8.4 7.8 7.7 8.0 8.0 7.8
France 9.8 9.6 10.2 10.7 10.5 9.6
Germany 7.1 5.9 5.5 5.7 5.4 5.6
Greece 12.6 17.7 24.3 26.8 26.8 24.5
Hungary 11.2 10.9 10.9 10.2 8.6 7.5
Ireland 13.9 14.7 14.9 14.7 12.5 10.7
Italy 8.4 8.4 10.6 11.6 11.2 9.7
Japan 5.1 4.6 4.3 4.4 4.3 4.7
Lithuania 18.0 15.2 12.9 14.3 14.3 14.2
Latvia 19.8 16.3 14.8 14.0 13.6 12.5
Netherlands 4.5 4.4 5.2 5.6 5.5 4.8
Poland 9.6 9.6 10.2 10.7 10.4 7.4
Portugal 12.1 12.9 15.7 16.4 16.4 12.0
Romania 7.3 7.4 7.1 7.1 6.3 6.5
Slovakia 14.5 13.6 14.0 13.4 12.1 11.8
Slovenia 7.3 8.2 9.0 8.8 7.8 7.8
Spain 20.1 21.6 25.3 29.4 28.2 21.9
Sweden 8.4 7.5 7.6 7.0 6.7 7.0
UK 7.9 8.1 7.9 8.1 8.0 6.8
US 9.6 8.9 8.1 7.4 6.8 5.6

 Current account balance (per cent of GDP)

 2010 2011 2012 2013 2014 2015-19

Australia -2.8 -2.2 -3.6 -3.9 -3.5 -2.6
Austria 3.5 0.5 0.9 -0.4 1.3 0.0
Belgium 1.9 -1.4 1.6 0.8 0.6 0.5
Bulgaria -1.6 0.4 -6.0 -5.3 -3.5 -4.4
Canada -3.6 -3.0 -3.6 -2.0 -1.6 -1.4
China 4.4 3.1 4.1 5.7 5.2 2.9
Czech Rep. -3.8 -2.8 1.6 -0.8 -3.5 -4.0
Denmark 5.9 5.6 5.0 1.2 0.9 0.8
Estonia 3.0 2.1 -3.7 -5.5 -2.3 -1.0
Finland 2.4 -0.7 -1.9 -1.3 -0.5 -1.0
France -1.6 -2.0 -1.9 -1.4 -1.3 -2.1
Germany 5.9 5.7 7.1 9.7 10.8 12.6
Greece -10.1 -9.9 -6.6 -6.2 -6.0 -4.0
Hungary 1.1 0.9 -0.5 1.8 2.9 0.0
Ireland 1.2 1.1 4.0 4.6 3.7 1.7
Italy -3.5 -3.1 -1.6 -1.7 -2.1 -2.1
Japan 3.7 2.0 1.1 1.2 1.5 3.0
Lithuania 1.5 -1.5 -1.1 -5.0 -7.6 -9.2
Latvia 3.3 -2.4 -3.0 -4.3 -5.7 -8.4
Netherlands 7.7 9.7 8.7 9.5 10.0 5.4
Poland -4.7 -4.3 -3.2 0.2 0.8 -1.2
Portugal -10.0 -6.5 -2.9 -2.0 -1.5 -1.6
Romania -6.3 -6.2 -5.4 -10.5 -13.3 -16.7
Slovakia -3.1 0.0 2.4 0.6 0.2 -4.2
Slovenia -0.6 0.0 0.2 0.6 3.0 3.8
Spain -4.5 -3.5 -2.8 -1.8 -0.2 -0.6
Sweden 6.4 6.5 7.2 7.1 7.0 6.9
UK -2.5 -1.3 -3.3 -2.1 -1.4 -1.1
US -3.0 -3.1 -3.0 -2.8 -2.5 -2.5

Table B4. United States

Percentage change

 2009 2010 2011 2012

GDP -3.1 2.4 1.8 2.2
Consumption -1.9 1.8 2.5 1.9
Investment : housing -22.4 -3.7 -1.4 11.0
 business -18.1 0.7 8.6 7.3
Government : consumption 4.3 0.9 -2.3 -0.7
 investment 0.6 -0.6 -7.2 -3.9
Stockbuilding (a) -0.8 1.5 -0.2 0.1
Total domestic demand -4.2 2.8 1.8 2.2

Export volumes -9.1 11.1 6.7 3.6
Import volumes -13.5 12.5 4.8 3.0

Average earnings 2.6 2.0 2.3 1.3
Private consumption deflator 0.1 1.9 2.4 1.8
RPDI -2.6 2.2 1.6 1.1
Unemployment, % 9.3 9.6 8.9 8.1

General Govt. balance as % of GDP -11.9 -11.4 -10.2 -8.7
General Govt. debt as % of GDP (b) 87.8 96.2 100.5 108.5

Current account as % of GDP -2.7 -3.0 -3.1 -3.0

 Average

 2013 2014 2015-19

GDP 2.1 2.4 2.8
Consumption 1.9 1.9 2.1
Investment : housing 5.5 6.0 8.0
 business 4.6 6.2 6.7
Government : consumption 0.7 0.7 1.9
 investment 1.0 1.6 2.3
Stockbuilding (a) 0.1 0.0 0.0
Total domestic demand 2.2 2.3 2.8

Export volumes 3.6 5.6 5.3
Import volumes 4.1 4.4 4.6

Average earnings 1.9 2.1 3.5
Private consumption deflator 1.8 1.3 2.2
RPDI 1.2 1.7 2.1
Unemployment, % 7.4 6.8 5.6

General Govt. balance as % of GDP -7.6 -6.4 -4.6
General Govt. debt as % of GDP (b) 111.4 113.6 111.0

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

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

Table B5. Canada

Percentage change

 2009 2010 2011 2012

GDP -2.8 3.2 2.6 2.0

Consumption 0.2 3.4 2.4 2.0
Investment : housing -6.4 7.9 1.9 6.2
 business -19.5 14.4 10.4 5.5
Government : consumption 3.4 3.0 1.0 0.2
 investment 8.7 9.3 -3.3 -6.3
Stockbuilding (a) -0.9 0.4 0.1 0.4
Total domestic demand -2.3 5.2 2.8 2.3

Export volumes -12.8 6.5 4.6 1.7
Import volumes -12.4 13.6 5.8 2.8

Average earnings 2.1 1.6 3.0 2.6
Private consumption deflator 0.4 1.4 2.1 1.4
RPDI 0.7 2.1 1.5 2.1
Unemployment, % 8.3 8.0 7.5 7.3

General Govt. balance as % of GDP -4.8 -5.3 -4.1 -3.0
General Govt. debt as % of GDP (b) 79.5 81.3 81.7 83.4

Current account as % of GDP -3.0 -3.6 -3.0 -3.6

 Average
 2013 2014 2015-19

GDP 1.7 2.1 2.6

Consumption 2.5 2.4 2.5
Investment : housing 4.3 5.5 4.4
 business 3.0 3.0 2.9
Government : consumption 0.2 0.0 2.5
 investment -0.6 0.5 2.1
Stockbuilding (a) 0.2 0.0 0.0
Total domestic demand 2.3 2.1 2.7

Export volumes 1.2 4.1 4.6
Import volumes 3.0 3.9 4.6

Average earnings 3.1 3.9 4.5
Private consumption deflator 1.6 2.1 2.3
RPDI 2.6 2.7 2.7
Unemployment, % 7.2 7.1 6.2

General Govt. balance as % of GDP -2.6 -1.9 -1.7
General Govt. debt as % of GDP (b) 82.1 80.1 73.2

Current account as % of GDP -2.0 -1.6 -1.4

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

Table B6. Japan
Percentage change

 2009 2010 2011 2012

GDP -5.5 4.7 -0.5 2.1
Consumption -0.7 2.8 0.5 2.2
Investment : housing -16.3 -4.8 5.5 1.8
 business -14.2 0.7 3.3 2.9
Government : consumption 2.3 1.9 1.4 2.3
 investment 7.8 0.0 -7.0 9.2
Stockbuilding (a) -1.5 0.9 -0.4 0.2
Total domestic demand -3.8 2.9 0.4 2.8

Export volumes -24.4 24.5 -0.4 1.3
Import volumes -15.8 11.1 5.9 6.3

Average earnings -0.4 -1.3 0.8 -1.4
Private consumption deflator -2.4 -1.7 -0.8 -0.7
RPDI 1.4 2.1 0.7 0.9
Unemployment, % 5.1 5.1 4.6 4.3

Govt. balance as % of GDP -8.8 -8.4 -9.2 -9.7
Govt. debt as % of GDP (b) 187.6 193.0 203.3 213.0

Current account as % of GDP 2.9 3.7 2.0 1.1

 Average
 2013 2014 2015-19

GDP 0.6 1.4 1.1
Consumption 0.7 0.9 -0.1
Investment : housing 3.3 3.6 3.3
 business 2.9 4.0 3.6
Government : consumption 0.2 -0.4 0.6
 investment -6.0 -2.9 0.7
Stockbuilding (a) 0.4 0.0 0.0
Total domestic demand 1.0 1.0 0.7

Export volumes 1.6 6.8 6.1
Import volumes 4.9 4.8 4.3

Average earnings -0.2 0.1 0.8
Private consumption deflator -0.6 0.8 0.6
RPDI 0.3 -0.4 -0.3
Unemployment, % 4.4 4.3 4.7

Govt. balance as % of GDP -9.6 -8.1 -6.3
Govt. debt as % of GDP (b) 217.5 219.3 226.2

Current account as % of GDP 1.2 1.5 3.0

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

Table B7. Euro Area

Percentage change

 2009 2010 2011 2012

GDP -4.3 2.0 1.5 -0.4

Consumption -0.9 0.9 0.1 -1.2
Private investment -14.4 0.2 2.1 -4.5
Government : consumption 2.6 0.7 -0.1 -0.3
 investment 0.9 -3.7 -2.3 -3.6
Stockbuilding (a) -0.9 0.7 0.2 -0.4
Total domestic demand -3.7 1.4 0.6 -2.0

Export volumes -12.4 11.0 6.5 3.3
Import volumes -11.0 9.5 4.3 -0.5

Average earnings 3.1 1.0 1.7 1.4
Harmonised consumer prices 0.3 1.6 2.7 2.5
RPDI 0.0 -0.6 -0.7 -1.1
Unemployment, % 9.6 10.1 10.1 11.4

Govt. balance as % of GDP -6.3 -6.2 -4.1 -3.2
Govt. debt as % of GDP(b) 80.0 85.4 87.3 93.0

Current account as % of GDP -0.2 0.0 0.1 0.9

 Average
 2013 2014 2015-19

GDP -0.2 0.9 1.7

Consumption -0.7 -0.1 0.6
Private investment -2.6 2.6 5.3
Government : consumption -1.4 0.0 1.3
 investment -1.6 -0.2 1.6
Stockbuilding (a) 0.0 0.1 0.1
Total domestic demand -1.2 0.5 1.7

Export volumes 3.0 4.1 4.4
Import volumes 0.8 3.6 4.7

Average earnings 1.4 1.1 2.6
Harmonised consumer prices 1.7 1.6 1.9
RPDI -0.9 0.0 1.1
Unemployment, % 12.4 12.0 10.5

Govt. balance as % of GDP -2.8 -2.4 -1.9
Govt. debt as % of GDP(b) 93.9 93.4 88.9

Current account as % of GDP 2.5 3.1 2.8

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

Table B8. Germany

Percentage change

 2009 2010 2011 2012

GDP -5.1 4.0 3.1 0.9
Consumption 0.3 0.8 1.7 0.6
Investment : housing -2.5 4.4 6.5 3.1
 business -17.2 6.9 7.3 -4.8
Government : consumption 3.0 1.7 1.0 1.1
 investment 5.7 0.3 -0.2 -8.8
Stockbuilding(a) -0.9 0.7 0.3 -0.5
Total domestic demand -2.4 2.6 2.7 -0.5

Export volumes -12.8 13.4 7.9 4.8
Import volumes -8.0 10.9 7.5 2.4

Average earnings 2.9 0.8 2.9 3.0
Harmonised consumer prices 0.2 1.2 2.5 2.1
RPDI -0.5 0.9 1.2 1.2
Unemployment, % 7.8 7.1 5.9 5.5

Govt. balance as % of GDP -3.1 -4.1 -0.8 0.1
Govt. debt as % of GDP (b) 74.4 82.5 80.5 81.1

Current account as % of GDP 5.9 5.9 5.7 7.1

 Average
 2013 2014 2015-19

GDP 0.7 1.4 1.1
Consumption 0.2 -0.2 0.0
Investment : housing 1.1 1.1 4.4
 business -7.1 2.2 1.8
Government : consumption 1.2 1.1 0.9
 investment 3.2 1.2 0.5
Stockbuilding(a) -0.2 0.0 0.1
Total domestic demand -0.5 0.4 0.8

Export volumes 3.1 4.0 4.5
Import volumes 0.9 2.5 4.6

Average earnings 3.1 1.9 2.3
Harmonised consumer prices 2.0 1.9 1.5
RPDI 0.1 -0.3 -0.8
Unemployment, % 5.7 5.4 5.6

Govt. balance as % of GDP -0.2 -0.8 -1.8
Govt. debt as % of GDP (b) 78.5 77.1 76.0

Current account as % of GDP 9.7 10.8 12.6

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

Table B9. France

Percentage change

 2009 2010 2011 2012

GDP -3.1 1.6 1.7 0.1

Consumption 0.2 1.4 0.2 -0.1
Investment : housing -12.1 -0.3 3.2 0.9
 business -12.9 4.4 5.1 0.2
Government : consumption 2.6 1.7 0.2 1.1
 investment 2.5 -8.2 -1.8 1.5
Stockbuilding (a) -1.2 0.5 0.9 -0.5
Total domestic demand -2.6 1.9 1.7 -0.2
Export volumes -11.8 9.2 5.5 3.0
Import volumes -9.5 8.4 5.2 0.4
Average earnings 3.1 1.9 3.0 1.7
Harmonised consumer prices 0.1 1.7 2.3 2.2
RPDI 1.5 0.9 0.2 0.2
Unemployment, % 9.5 9.8 9.6 10.2
Govt. balance as % of GDP -7.5 -7.1 -5.2 -4.5
Govt. debt as % of GDP (b) 79.2 82.4 86.0 92.2
Current account as % of GDP -1.3 -1.6 -2.0 -1.9

 Average
 2013 2014 2015-19

GDP -0.1 0.6 1.6

Consumption 0.2 0.8 1.4
Investment : housing 0.4 2.3 5.9
 business 0.9 0.9 1.8
Government : consumption -2.0 -0.6 1.6
 investment -2.2 -0.1 2.0
Stockbuilding (a) 0.0 0.0 0.0
Total domestic demand -0.3 0.5 1.7
Export volumes 2.0 3.9 4.8
Import volumes 0.8 3.6 5.1
Average earnings 2.0 2.2 3.0
Harmonised consumer prices 1.6 1.7 1.6
RPDI 0.0 1.0 2.0
Unemployment, % 10.7 10.5 9.6
Govt. balance as % of GDP -3.6 -3.0 -2.5
Govt. debt as % of GDP (b) 93.4 94.0 92.6
Current account as % of GDP -1.4 -1.3 -2.1

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

Table B10. Italy

Percentage change

 2009 2010 2011 2012

GDP -5.5 1.8 0.6 -2.0

Consumption -1.6 1.2 0.1 -4.1
Investment : housing -8.4 -2.1 -2.1 -7.1
 business -15.3 5.6 -0.6 -10.5
Government : consumption 0.8 -0.6 -0.8 -0.9
 investment -3.3 -5.9 -4.4 -8.3
Stockbuilding (a) -1.3 1.3 -0.5 -0.4
Total domestic demand -4.4 2.2 -0.9 -4.8

Export volumes -17.7 11.2 6.7 2.1
Import volumes -13.6 12.3 1.2 -7.6

Average earnings 1.7 1.8 1.1 -0.4
Harmonised consumer prices 0.8 1.6 2.9 3.3
RPDI -3.0 -0.7 -0.9 -2.7
Unemployment, % 7.8 8.4 8.4 10.6

Govt. balance as % of GDP -5.4 -4.5 -3.9 -3.0
Govt. debt as % of GDP (b) 116.5 119.3 120.6 128.0

Current account as % of GDP -2.0 -3.5 -3.1 -1.6

 Average
 2013 2014 2015-19

GDP -0.9 0.5 2.2

Consumption -1.6 0.2 0.7
Investment : housing -3.4 1.9 8.3
 business -1.5 5.5 9.7
Government : consumption -1.0 -0.4 1.1
 investment -3.6 1.3 1.7
Stockbuilding (a) 0.2 0.2 0.1
Total domestic demand -1.5 1.0 2.4

Export volumes 1.9 2.9 4.1
Import volumes 0.3 5.0 5.2

Average earnings -1.3 -1.0 2.8
Harmonised consumer prices 1.5 1.7 2.9
RPDI -2.2 -1.0 1.7
Unemployment, % 11.6 11.2 9.7

Govt. balance as % of GDP -2.7 -1.9 -0.8
Govt. debt as % of GDP (b) 129.6 127.8 110.6

Current account as % of GDP -1.7 -2.1 -2.1

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

Table B11. Spain

Percentage change

 2009 2010 2011 2012

GDP -3.7 -0.3 0.4 -1.5

Consumption -3.8 0.7 -1.0 -1.7
Investment : housing -23.1 -10.1 -6.7 -8.1
business -16.7 -3.7 -5.7 -13.7
Government: consumption 3.7 1.5 -0.5 -5.2
investment 0.3 0.0 0.0 -0.2
Stockbuilding(a) 0.0 0.1 -0.1 0.0
Total domestic demand -6.3 -0.7 -1.9 -4.1

Export volumes -10.0 11.3 7.6 3.8
Import volumes -17.2 9.2 -0.9 -4.6

Average earnings 4.0 -0.1 -0.5 -0.2
Harmonised consumer prices -0.2 2.0 3.1 2.5
RPDI 1.0 -4.8 -3.3 -6.2
Unemployment, % 18.0 20.1 21.6 25.3

Govt. balance as % of GDP -11.2 -9.4 -8.6 -7.8
Govt. debt as % of GDP(b) 53.9 61.5 69.3 83.3

Current account as % of GDP -4.8 -4.5 -3.5 -2.8

 Average
 2013 2014 2015-19

GDP -1.7 0.2 2.3

Consumption -2.7 -2.6 -0.2
Investment : housing -9.0 2.8 8.1
business -4.1 5.6 11.9
Government: consumption -9.2 -0.6 2.8
investment -1.7 -2.1 2.7
Stockbuilding(a) -0.1 0.0 0.0
Total domestic demand -4.8 -1.1 2.5

Export volumes 7.4 5.3 3.7
Import volumes -2.2 2.0 4.7

Average earnings 0.4 -0.4 1.5
Harmonised consumer prices 1.9 1.6 1.8
RPDI -4.2 -1.4 1.9
Unemployment, % 29.4 28.2 21.9

Govt. balance as % of GDP -6.4 -5.3 -2.5
Govt. debt as % of GDP(b) 91.7 94.9 93.2

Current account as % of GDP -1.8 -0.2 -0.6

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

ACKNOWLEDGEMENTS

We would like to thank Simon Kirby for helpful comments and discussion and All Orazgani for statistical assistance.

This forecast was completed on 25 January, 2013.

Exchange rate, interest rates and equity price assumptions are based on information available to 10 January 2013. Unless otherwise specified, the source of all data reported in tables and figures is the NiGEM database and NIESR forecast baseline.

REFERENCES

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

Barrell, R. and Davis, E.P. (2007), 'Financial liberalisation consumption and wealth effects in seven OECD countries' Scottish Journal of Political Economy, 54, pp. 254-67.

Barrell, R. and Pina, A. (2004), 'How important are automatic stabilisers in Europe?', Economic Modelling, 21, I, pp. 1-35. BP (2013), Energy Outlook 2030.

Holland, D. (2012), 'Reassessing productive capacity in the United States', National Institute Economic Review, 220, April, F38-44. OECD (1999), 'The size and role of automatic fiscal stabilisers', OECD Economic Outlook, 66, pp. 137-49.

--(2012), 'Estimated additional capital needs in large euro area banks', Box 1.5 in OECD Economic Outlook, 2012/2, p. 5 I. Smyth, D.J. (1966), 'Built-in flexibility of taxation and automatic stabilization', Journal of Political Economy, 74(4), pp. 396-400.

NOTE

(1) The targeted banks are BFA-Bankia, Catalunya-Caixa, NCG Banco and Banco de Valencia.

Table I. Forecast summary

Percentage change

 Real GDP(a)

 World OECD China EU-27 Euro USA Japan
 Area

2009 -0.6 -3.6 9.0 -4.3 -4.3 -3.1 -5.5
2010 5.1 3.0 10.4 2.1 2.0 2.4 4.7
2011 3.8 1.8 9.3 1.6 1.5 1.8 -0.5
2012 3.1 1.4 7.8 -0.2 -0.4 2.2 2.1
2013 3.3 1.3 8.0 0.2 -0.2 2.1 0.6
2014 3.7 1.9 7.3 1.2 0.9 2.4 1.4
2003-2008 4.4 2.3 11.0 2.1 1.9 2.2 1.4
2015-2019 4.0 2.4 7.0 1.9 1.7 2.8 1.1

 World
 Germany France Italy UK Canada trade(b)
2009
2010 -5.1 -3.1 -5.5 -4.0 -2.8 -10.4
2011 4.0 1.6 1.8 1.8 3.2 12.5
2012 3.1 1.7 0.6 0.9 2.6 5.8
2013 0.9 0.1 -2.0 0.0 2.0 3.2
2014 0.7 -0.1 -0.9 0.7 1.7 4.6
2003-2008 1.4 0.6 0.5 1.5 2.1 5.9
2015-2019 1.5 1.6 0.9 2.5 2.4 7.7
 1.1 1.6 2.2 2.3 2.6 5.6

 Private consumption deflator

 OECD Euro USA Japan Germany France Italy
 Area

2009 0.2 -0.5 0.1 -2.4 0.0 -0.7 -0.1
2010 1.7 1.7 1.9 -1.7 2.0 1.1 1.6
2011 2.3 2.5 2.4 -0.8 2.0 2.1 2.8
2012 1.8 2.2 1.8 -0.7 1.7 1.8 2.7
2013 1.7 1.9 1.8 -0.6 2.3 1.8 1.7
2014 1.6 1.5 1.3 0.8 1.9 1.7 1.5
2003-2008 2.2 2.2 2.7 -0.5 1.4 2.1 2.6
2015-2019 2.0 1.9 2.2 0.6 1.5 1.6 2.7

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

2009 1.4 0.4 0.3 0.1 1.3 61.8
2010 3.7 1.4 0.3 0.1 1.0 78.8
2011 4.5 2.1 0.3 0.1 1.2 108.5
2012 2.7 1.4 0.3 0.1 0.9 110.5
2013 2.0 1.6 0.3 0.1 0.8 103.9
2014 1.9 2.1 0.3 0.1 0.8 98.1
2003-2008 2.5 1.5 3.0 0.2 2.8 57.5
2015-2019 2.0 2.3 2.2 0.6 1.9 102.1

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

Figure 7. GDP growth--4 scenarios

 2013 2014

Baseline 2.1 2.4
Full fiscal cliff 0.6 3.2
Policy as in 2012 3.1 2.8
Full spending cuts March 2013 1.7 2.6

Note: Table made from bar graph.

Figure 8. General government budget
balance--4 scenarios

 2013 2014

Baseline -7.6 -6.4
Full fiscal cliff -5.6 -4.5
Policy as in 2012 -8.9 -8.8
Full spending cuts March 2013 -7.3 -6.2

Note: Table made from bar graph.