The world economy.

Hacche, Graham ; Delannoy, Aurelie ; Fic, Tatiana 等

World Overview

Global growth projections for 2013-14 are unchanged, overall, from three months ago, with some upward revisions, most notably for Japan, offset by some downward revisions, including for the group of non-OECD countries. With world output growth again projected at 3.3 per cent in 2013 and 3.7 per cent in 2014, the forecast again points to a global recovery that is hesitant, below par, and uneven.

This outlook reflects, especially in the advanced economies, weak demand resulting from several factors, especially continuing fiscal consolidation and deleveraging by private sectors, impaired credit intermediation in many cases, and significant policy uncertainties. Of most concern is the continuing slump in the Euro Area, which is expected to remain in recession in 2013 and seems unlikely, on current policies, to experience better than weak growth next year. In the United States, private sector demand has continued to be strengthened by a substantial improvement in the financial positions of banks and households, but this is being partly offset by accelerated fiscal adjustment. Our growth projections for Japan have been raised to 2 per cent per annum in 2013-14 to take account of the announcement of significant fiscal and monetary stimulus measures. But the main drivers of global growth remain the developing and emerging market economies, especially in Asia; prospects seem good for a broad strengthening of growth in these economies this year and next, following the moderate slowdown experienced in 2012.

Our global projections are summarised 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.

The growth of world trade in goods and services in 2012, at 2.8 per cent, fell below the growth of world output; and the World Trade Organization's estimates indicate that world merchandise trade last year grew by only 2.0 per cent, the second lowest annual growth rate in 32 years of comparable data. We project only a moderate recovery in trade growth in 2013-14. The recent weak growth of trade, a vital engine of global growth, points to the importance of resisting protectionist pressures and reviving negotiations on multilateral trade liberalisation. Crafts (2013) in this Review emphasises the importance of avoiding policy mistakes that were made in the interwar period, when a steep rise in protection contributed to the Great Depression.

In the advanced economies, output and employment gaps generally remain wide. In the Euro Area, unemployment reached a new peak of 12 per cent in February, while in the United States continued moderate declines in unemployment --to 7.6 per cent in March- have been partly due to reduced labour-force participation. The employment situation in emerging market and developing countries is more mixed, with indications of capacity constraints in some cases. These countries, nevertheless, account for three-quarters of the increase of about 4 million in global unemployment in 2012, to a total of about 197 million. (1)

Inflation and inflation expectations globally remain generally subdued, helped by a stabilisation of commodity prices over the past two years; the expansionary monetary policies in operation in many countries seem to have had no significant inflationary effects. Consumer price inflation in the advanced economies is projected to remain around 1.8 per cent annually in 2013-14-in most cases, close to or below central banks' targets--with continuing declines elsewhere lowering the global average towards 3-3 1/2 per cent a year from 4.2 per cent in 2012.

The improvement in financial markets that began in late 2012 has been broadly maintained, with government bond yields in the major advanced economies remaining near historic lows and significant gains in major equity markets, with some stock markets reaching all-time peaks in early April. Neither the financial crisis in Cyprus in March nor the continuing failure to reach a political agreement on the federal budget in the United States appears to have had a significant impact on major markets. In emerging markets, risk spreads on sovereign and corporate bonds have narrowed with rising capital inflows. These favourable conditions in financial markets may augur well for the global economy, but they may also be vulnerable to disappointments about policies as well as economic and financial developments. The financial market assumptions underlying the forecast are discussed in Appendix A. The possibility of a partial reversal of the recent improvement in markets poses a clear downside risk to the outlook.

A major factor underlying improved financial market conditions is the stance of monetary policy in the advanced economies, which has not only kept short-term interest rates at exceptionally low levels for more than four years, but also worked through unconventional measures, including official operations in government bond markets and other asset markets, to reduce yields on longer-term and, in some cases, riskier assets. These policies have brought essential benefits in supporting demand and activity, but they also carry greater risks the longer they are in place. Thus, while reducing banking sector vulnerabilities in the short term, they may over time be delaying the repair of banks' balance sheets by encouraging the rolling over of nonperforming loans. They may also, more broadly, encourage risk-taking, leverage, and asset bubbles. Thus in the United States, there has recently been a significant increase in the issuance of high-yield corporate bonds, unusual for such an early stage in a cyclical upswing. (2) Moreover, the eventual (or anticipated) unwinding of easy monetary conditions, and associated reversals in bond markets, could expose financial vulnerabilities among companies and households facing higher long-term interest rates.

Easy monetary policies in the advanced economies are also having international spillovers, especially in the form of capital flows to emerging market and developing economies. Concerns have arisen about the danger that associated upward pressures on these countries' currency values can lead either to currency appreciation and associated unwarranted losses of international competitiveness, or to excessive domestic credit growth if the currency pressure is resisted through official intervention in the foreign exchange market or easier domestic monetary conditions. In China, for example, recent months have seen both increased concerns about domestic credit growth and a resumption of large-scale accumulation of foreign exchange reserves to absorb exchange market pressure. There has even been talk of 'currency wars'. To some extent, the recovery of capital flows to emerging markets is a natural process reflecting their relatively strong growth performance and prospects, and in some cases appreciation of their currencies is a desirable part of the global rebalancing that is needed. Also, while easy monetary policies in the advanced economies may indeed put additional upward pressure on emerging market economies' currencies, sight should not be lost of the beneficial spillovers of the improved growth in demand in the advanced economies that their monetary expansion engenders. Federal Reserve Chairman Bernanke, in a recent speech in London, noted that the Fed's models suggest that these effects are roughly offsetting, so that accommodative monetary policies in the advanced economies do not appear to have adverse consequences for output and exports in the emerging market economies. (3) The National Institute's model, NiGEM, indicates that the benefits tend to outweigh the costs, at least beyond the short term (see Box A for further discussion). Thus the effects of exchange rate changes brought about in association with monetary expansion in some countries are not to be viewed as akin to 'beggar-thy-neighbour' exchange rate policies that do not involve demand expansion.

Box A. Impact of loose monetary policy in advanced economies on
emerging markets

By Dawn Holland

A loosening of the monetary policy stance at home generally causes
a depreciation of the domestic currency in foreign exchange
markets, whether under the assumption of uncovered interest parity
or in more general portfolio balance models. A depreciation of the
domestic currency, in turn, necessarily implies an appreciation of
foreign currencies. The recent ultra-loose monetary stance in the
advanced economies has raised concerns in emerging markets about
its effects on their competitiveness and capital inflows, leading
to talk of currency wars. Federal Reserve Chairman Bernanke has
noted that the Federal Reserve's models suggest that the effects of
upward pressure on emerging market economies' currencies are
largely offset by the improved growth in demand in the advanced
economies that results from the looser monetary stance. While this
may be true for some countries, the emerging market economies are a
heterogeneous group, and the effects in individual economies may
differ.

In this box we use the National Institute's model, NiGEM, to assess
the expected impact of a loose monetary stance in the advanced
economies on the major emerging market economies of China, India,
Russia and Brazil. The impact on their respective GDPs in the first
year of a temporary monetary loosening in the US, Japan, Euro Area
and UK, depends to a large extent on the sensitivity of domestic
demand to export revenue. Export volumes from each of the emerging
market economies would be expected to rise in response to the
shock, as the estimated rise in external demand of I-I 1/2 per cent
would tend to offset any loss of competitiveness. The emerging
market economies tend to be global price takers, rather than price
setters, and their relative export prices would be expected to rise
by less than I per cent in response to a 4-6 per cent appreciation
of the exchange rate. However, nominal export values would be
expected to fall once the revenue from exports is converted into
domestic currency at the higher rate of exchange (figure A I).

Based on historical behaviour, the estimated relationships
underlying the NiGEM model suggest that domestic demand in Russia
and India is more sensitive to export revenue than domestic demand
in China or Brazil. As a result, the model projects a small
negative impact on GDP growth in Russia and India in the first year
following a monetary expansion in the advanced economies. This
negative effect dissipates by the second year. A positive impact on
GDP growth is expected in Brazil and China.

In the case of China, the stronger positive impact on GDP projected
by NiGEM is partly a reflection of the exchange rate regime, which
fluctuates within a relatively narrow band of I per cent against a
targeted value relative to the US$. As a result, monetary stimulus
in the US is effectively a monetary stimulus in China as well. This
is one factor behind the rising inflationary pressures observed in
China recently, as the average impacts on GDP growth and inflation
are likely to be matched roughly I for I in the first three years.

[FIGURE A1 OMITTED]

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At the same time, however, emerging market countries need to be alert to the risks associated with increased capital inflows, including not only possibly excessive currency appreciation and domestic credit growth but also rising external debt and foreign currency exposure. The appropriate policy response will depend on the circumstances, and may or may not involve intervention in the foreign exchange market, adjustments of the stance and mix of macroeconomic policies, the use of macroprudential instruments, and capital controls. These economies will also need to ensure that they have sound defences against capital flow reversals, including appropriate macroprudential policies, and sound banking regulation and supervision.

In the context of talk of 'currency wars', weak trade growth, dormant multilateral trade talks, and pervasive protectionist pressures, it was appropriate and encouraging that G-20 finance ministers and central bank governors have agreed, as noted in their February and April 2013 Communiques, that 'Monetary policy should be directed toward domestic price stability and continuing to support economic recovery', that they would 'refrain from competitive devaluation', 'not target our exchange rates for competitive purposes ...', and 'be mindful of unintended negative effects stemming from extended periods of monetary easing'; and also that they agreed to 'resist all forms of protectionism and keep our markets open'.

With the global economy now in its fifth year of working its way out of the largest financial crisis for several decades, prospects for the medium term are unusually uncertain. In many cases, progress with fiscal consolidation, private sector deleveraging, and the repair of financial sectors has far to go; all these factors form constraints on growth that may remain for several more years. In some advanced economies, major questions have arisen about the true size of output gaps, possible structural shifts in the sensitivity of inflation to output and employment gaps, and trend rates of productivity growth. In the Euro Area, there are major uncertainties about feasible progress towards completion of the economic and monetary union particularly through the establishment of a banking union and fiscal union--and about progress with adjustment toward sustainable external and internal balances, including reasonably high levels of employment in the weakest economies. In addition, there are uncertainties surrounding the inevitable slowing of trend growth in the economies that in recent years have been the most dynamic, especially China.

Our medium-term projections for 2015-19 reflect particular assumptions about both demand-side policies and supply conditions. On the demand side, fiscal consolidation is expected to continue through the period in many of the major economies, given debt levels close to or above 100 per cent of GDP. Our assumptions about supply conditions relate to productivity growth, demographic developments, labour market participation, and factors driving the capital-output ratio. In Box B, our medium-term projections for the major economies are decomposed into labour productivity growth and the underlying assumptions explaining labour input dynamics. We expect a slight slowing of global growth in 2015-19, to 4.2 per cent a year, as compared with 4.4 per cent in the pre-crisis period 2003-8. This is more than accounted for by a projected slowing of growth in non-OECD economies as their productivity levels converge further towards the advanced economies. Most notably, average growth in China in 2015-19 is projected at about 7 per cent a year, down from 11 per cent in 2003-8. The partly offsetting rise in medium-term growth in the OECD group of countries, to 2.6 per cent from 2.3 per cent a year, is mainly accounted for by faster growth in the United States, reflecting a gradual closing of the output gap and some recovery in labour force participation.

Box B. Decomposition of medium-term growth projections

By Dawn Holland and Miguel Sanchez-Martinez

Our medium-term projections reflect assumptions about both
demand-side policies and supply conditions. On the demand side,
fiscal consolidation is expected to persist throughout much of the
next decade in many of the major economies, given debt levels in
excess of 100 per cent of GDP. Supply conditions depend on our
assumptions on productivity growth, demographic developments,
labour market participation and factors driving the desired
capital-output ratio. In this box we decompose our medium-term
growth projections to 2019 into measures of the growth of labour
productivity and labour input, to give some insight into the
assumptions underlying these forecasts. We model trend productivity
growth in NiGEM as a very gradual approach towards an expanding
global technology frontier, with a significant degree of inertia,
so that recent productivity trends have an important role in the
short- to medium-term.

BRIC economies

Figure B I decomposes GDP growth in each of the BRIC economies into
growth in GDP per capita (a proxy for productivity) and population
growth, for a pre-crisis period, the period since the financial
crisis and our forecast to 2019.

China has undergone a period of rapid catching up over the past two
decades. GDP per working age person has increased at an average
rate of close to 9 per cent per annum since 2001, much more
rapidly than in any of the other BRIC economies, and indeed
elsewhere in the world. While this is not too surprising given the
distance from the technology frontier of the Chinese economy in the
1990s, if this pace of productivity growth were to persist, GDP per
Worker (1) in China would be expected to exceed that in the US by 2021,
making China the new global technology leader. This would seem
very unlikely, and we have therefore assumed a moderation in
productivity growth in China over the forecast period. Our
medium-term forecast for China sees GDP growth of about 7 per cent
per annum on average over 2015-19, which reflects this moderation
in productivity growth as well as the demographic turning point in
China related to the one-child policy introduced in 1979. By
contrast, the IMF forecasts average annual growth in China over
2015-18 of 8.5 per cent, which would require a rate of productivity
growth that would rapidly narrow the productivity gap between the
US and China, which currently stands at 45-50 per cent.

Population growth in Brazil and India is also expected to moderate
slightly over the forecast horizon, but not to the extent expected
in China. Russia, on the other hand, has a demographic outlook more
similar to some of its European neighbours, with population on a
downward trajectory. Productivity growth in India is expected to
remain high, but to ease gradually over the coming years as the
economy converges towards the technology frontier. Productivity
growth in Brazil has been comparatively weak since 2001, but has
accelerated moderately since 2007, in stark contrast to
developments in Russia. Our forecast assumes some convergence in
GDP per capita growth rates across the BRIC economies, although we
do not anticipate any rapid shifts away from recent historical
patterns.

[FIGURE B1 OMITTED]

Advanced Economies

Figure B2 disaggregates our forecast for GDP growth for 2013-19 in
major advanced economies into the contributions from labour
productivity and labour input, measured as total hours worked.
Germany stands out as the only country where labour input is
expected to decline over the forecast horizon. However, the
weakness in growth of labour supply is expected to be partly offset
by relatively strong growth in labour productivity. However, the
latter will not be sufficient to allow average GDP growth of more
than about 1.2 per cent per annum over our forecast period.

The US is expected to exhibit the highest growth in real output
among the G-7 economies. This is underpinned by the combination of
a growing working age population, anticipated declines in
unemployment and steady advances in workers' productivity levels,
at rates similar to that expected in Germany. Labour productivity
growth in Japan and the UK is expected to remain moderate, at about
1.4 and 1.2 per cent per annum, respectively, while in Italy labour
productivity is forecast to grow by less than I per cent per annum
on average, given its relatively flat profile since 2000.
Productivity growth in France will also remain weaker than in the
other major advanced economies, reflecting a slow recovery from the
very weak productivity developments exhibited since 2007.

Figure B3 delves more deeply into the factors underlying labour
input developments in Germany, Italy and Japan. All three economies
are expecting declines in the population of working age over the
forecast horizon, with the most significant declines anticipated in
Japan, reflecting an acceleration in a process that has been
ongoing since 1997.

Labour input can be decomposed into contributions from demographic
developments in the population of working age, labour force
participation, unemployment and average hours of work per employee.
According to this decomposition, the fall in total number of hours
worked in Germany can be attributed almost entirely to the large
reduction in the number of individuals potentially employable. The
modest increment in labour input expected for Japan in the next few
years relies on a significant recovery in average hours worked,
reversing the downward trend that has been ongoing since the mid-1990s.
Italy is expected to compensate for a predicted decline in
its working age population of around 0.2 per cent per annum by,
first, increasing labour force participation, from a relatively low
level by European standards and, second, by fostering job creation
for the unemployed, while maintaining average hours worked roughly
constant.

[FIGURE B2 OMITTED]

[FIGURE B3 OMITTED]

NOTE

(1) Calculated in purchasing power parity terms.

Prospects for individual economies.

Euro Area

The Euro Area remains in recession, with the effects of continuing, though diminishing, fiscal austerity being exacerbated, in the countries of the periphery, by difficult financial conditions. Fiscal drag is expected to be significantly reduced in 2013, with increased attention appropriately being paid by policymakers to progress in reducing structural rather than nominal deficits, and the European Commission accordingly relaxing deficit targets in a number of cases. Output is again projected to fall slightly this year, by 0.4 per cent, before growing in 2014 for the first time in three years, albeit by only 0.9 per cent.

Growth divergences persist among member countries of the Euro Area. Further significant contractions in 2013 are projected for Greece, Italy, Portugal and Spain, while modest positive growth rates are projected for Austria, Belgium, Ireland and Germany. There are also large divergences in unemployment, which have widened significantly since the onset of the crisis. This is illustrated in figure 1; between 2008 and 2012 not only did average unemployment in the Euro Area increase, from 6.9 per cent to 11.7 per cent, but also the difference between the lowest and highest unemployment rates widened considerably, from about 8 percentage points to as much as 20 percentage points.

[FIGURE 1 OMITTED]

Spreads among government bond yields, having narrowed in late 2012 following the ECB's announcement in September of Outright Monetary Transactions, have generally remained compressed. It is particularly notable that yields in Italy have declined further in face of the political uncertainties resulting from the inconclusive elections in late February. The financial crisis in Cyprus, in March, had little immediate impact beyond the country itself. However, the resolution of the crisis involves, for the first time in the crises that have afflicted the Euro Area, the imposition of capital losses on uninsured bank depositors, and it remains to be seen whether this, or even reports of the initial proposal, later abandoned, to impose levies on insured as well as uninsured depositors, will have destabilising effects on the behaviour of bank depositors in the Euro Area.

Despite the narrowing of spreads among government bond yields, financial markets in the Euro Area remain fragmented, with the private sector in the periphery, where there is a considerable overhang of corporate debt, facing inordinately high borrowing costs despite the ECB's accommodative monetary policy. This reflects continuing weaknesses in the financial system and points to the need for further action to clean up banking systems through recapitalisation and restructuring, without weakening the financial positions of the respective sovereigns. Direct recapitalisation of weak banks by the European Stability Mechanism would help the process. Timely progress towards a banking union for the Euro Area, meanwhile, remains essential, to promote the reintegration of financial markets, the delinking of sovereigns from banks, the removal of suspicions of national bias in supervision, and the effective transmission of monetary policy. In March, preliminary agreement was reached among the European Parliament, the Commission, and the Council on the establishment of a single supervisory mechanism (SSM) at the ECB, and draft legislation to this effect is being considered by the Parliament, with the aim of making the SSM operational by mid-2014. Not only may this legislative process be subject to delays, but also the SSM needs to be complemented by a single resolution mechanism for failed institutions, together with a common deposit guarantee scheme, and agreement has yet to be reached on these. Agreement on common rules for bank resolution seems likely to be a particularly difficult challenge, given the role of systemically important banks and the apparent reluctance of economically strong countries to provide the contingent fiscal support that will be needed to underpin the resolution mechanism, even if its primary source of funding will be levies on the banks. In fact, recently reported statements by German officials seem to have rejected a common deposit guarantee scheme 'for the foreseeable future', (4) and to envisage only the harmonisation of national deposit guarantee schemes.

[FIGURE 2 OMITTED]

Important among the root causes of the crisis in the Euro Area have been the divergences of international competitiveness and associated payments imbalances that developed in the decade following the establishment of the monetary union. Since the crisis erupted, there has been some slow and painful correction of these divergences, notably through absolute reductions in unit labour costs in the countries that have suffered the most severe recessions (see figure 2). It is unclear, however, to what extent the corrections seen thus far are merely cyclical rather than sustainable, and significant divergences and imbalances remain, notably including Germany's current account surplus, projected to widen further to 7.8 per cent of GDP in 2014. With Euro Area inflation, and inflation expectations, comfortably within or below the ECB's target of 'below but close to 2 per cent', there is scope for official interest rates (in particular, the ECB's refinancing rate of 0.75 per cent) to be reduced further; given downward nominal wage rigidities, the moderately higher inflation that this would allow would promote further adjustment of relative costs. Demand and activity in the Euro Area would also be boosted if Germany and other surplus countries with fiscal space would contribute to adjustment through expansionary fiscal measures.

Germany

Our growth projections for Germany in 2013 and 2014 have been revised down slightly, to 0.5 per cent and 1.3 per cent respectively. As in our last forecast, the projection for average growth this year is weighed down by the 0.6 per cent drop in GDP in the last quarter of 2012. We expect activity to pick up moderately in the course of this year, though recent leading indicators have been mixed. The April purchasing managers' index points to the first decline in private sector business activity since last November, and business confidence has also weakened.

As in 2012, fiscal policy is expected to be broadly neutral this year and next, with the budget close to balance. Given Germany's strong international competitiveness, net trade is expected to continue to make a positive contribution to growth, and this seems likely to increase as the global economy strengthens. A component of domestic demand that is especially buoyant is housing investment. The strong rise in house prices has continued. According to the BulwienGesa AG data for 125 towns and cities house prices rose in 2012 by about 51, 1/4 per cent, and although this index is likely to have exceeded the overall index for Germany (413 towns and municipalities) which will be available at a later date, the picture is consistent with the trend acceleration that can be seen in other price indicators (see Bundesbank, 2013). Housing supply has also been expanding; the construction of apartment blocks has increased significantly. Favourable financing conditions have been stimulating housing demand, which may also have been boosted by capital inflows from the Euro Area's periphery. The increase in borrowing for house purchase, and the pace of increase in prices, have raised questions about the sustainability of the rise in household debt and the possible need for stricter prudential controls, such as loan-to-value ratios.

Unemployment has remained low, at about 5.4 per cent in recent months. In fact, while GDP contracted in the last quarter of 2012, employment rose by 0.1 per cent. The unemployment rate may understate the slack in the economy, however, as the weak growth of labour productivity in recent years, common to much of Europe, may indicate significant potential for greater utilisation of hoarded labour.

France

The French economy has continued to weaken, with unemployment in recent months rising to levels that have not been seen for 16 years (3.2 million, close to 11 per cent of the labour force). After zero growth of GDP in 2012 as a whole and a 0.3 per cent drop in the fourth quarter, INSEE's business climate index points to further deterioration, particularly in the building and services sectors. We forecast a small decline in GDP of 0.2 per cent this year, and only weak growth of 0.5 per cent in 2014.

Significant fiscal consolidation will again weigh on the economy in 2013, for a third successive year. The public sector deficit stood at 4.8 per cent of GDP in 2012, down from 5.2 per cent in 2011 but 0.3 percentage points above the official target. The government revised this year's deficit target from 3.0 to 3.7 per cent of GDP, but reiterated its commitment to structural balance by 2017.

Fiscal adjustment is compressing domestic demand, which is expected to fall by 0.8 per cent this year. Rising taxes, as well as rising unemployment and declining real wages, all point to a continuing decline in households' real disposable income in 2013, depressing both private consumption and housing investment. Business investment is also set to continue to decline in the short term in the light of poor demand prospects and low margins.

After this year, the pace of fiscal consolidation is set to ease. Public debt is expected to peak in 2014 at about 94 per cent of GDR The government's target of fiscal balance by 2017 is expected to be revised to a planned deficit of 0.7 per cent of GDR

Exports have remained sluggish and industrial production has been in decline reflecting France's weak international competitiveness as well as the economic stagnation of its Euro Area trading partners. A revival of growth in France will depend not only on further progress towards sustainable public finances and economic recovery in the Euro Area but also on reforms to tackle the country's competitiveness challenge, including reforms in the labour market.

Italy

After six consecutive quarters of GDP decline, and a 2.4 per cent drop in 2012 as a whole, Italy's economic outlook for 2013-14 remains weak and uncertain. The inconclusive outcome of the February general election and the ensuing two-month political deadlock added to policy uncertainties, although government bond yields have fallen further, to about 4 per cent at the 10-year maturity, along with those of other sovereigns.

Short-term indicators point to a further decline in economic activity this year, though milder than in 2012. Our forecast suggests a fall in output of 1.3 per cent in 2013--larger than the 0.9 per cent drop we projected last time--with a slow recovery from 2014, assuming that the new government makes further progress in tackling the country's fiscal and structural challenges. Markets welcomed the news in late April of the formation of a new government, driving government borrowing rates down to historical lows, and also boosting the stock market.

Yet, continuing fiscal consolidation this year, rising unemployment (11.6 per cent in the first quarter this year) and falling real disposable income are weighing heavily on consumer spending, while both business and housing investment continue to weaken, partly as a result of high borrowing costs. As a result, domestic demand is expected to fall by a further 2.4 per cent this year and inflation (as measured by the private consumption deflator) to soften to 2.1 per cent. Net exports will continue to be the only component of aggregate demand to make a possible contribution to growth.

The Italian government's Economy and Finance Document for 2013, issued in April 2013, called for pro-growth policies, starting with a one-off package of measures aimed at injecting liquidity (40 billion [euro] over 2013-14) into the economy by speeding up payments in arrears owed by general government bodies to the private sector. The planned net borrowing target for this year is set at 2.4 per cent of GDP, down from 2.9 per cent last year. A reduced pace of fiscal adjustment next year should assist a slow recovery, and the new Prime Minister has urged for a further easing of austerity.

Spain

Spain's recession is expected to continue this year as a result of further fiscal adjustment, downward pressure on wages in the very weak labour market, and further deleveraging by what remains one of the most indebted private sectors in the EU. We are projecting a larger GDP fall in 2013 (1.8 per cent) than in 2012 (1.4 per cent) but the pace of contraction is expected to moderate over the course of this year. Output is expected to stabilise in 2014, which should see modest average growth of about 0.2 per cent.

In the first quarter of 2013, unemployment rose above 6 million (27 per cent) for the first time. Moreover, it seems unlikely to have reached its upper limit. About half of those who have become unemployed since the start of the crisis worked in the construction sector, where employment declined from over 2.7 million at the end of 2007 to about 1.0 million at the end of 2012. The continuing decline in housing investment and house prices is expected to erode employment in the sector further.

Despite the economic recession, the government broadly implemented its sizeable fiscal consolidation plan in 2012, although it missed the deficit target by a narrow margin. The fiscal deficit, including support for the financial sector (equivalent to 31/2 per cent of GDP), widened to 101 1/4 per cent of GDP from 81/2 per cent in 2011, but the cyclically adjusted deficit was reduced by close to 3 per cent of GDP. Furthermore, as in other countries of the Euro Area, financial market stress indicators in Spain have improved since late 2012, and Spain's 10year government bond yield has declined to below 5 per cent recently. This helped the Spanish government raise nearly 35 per cent of its medium-and long-term funding needs for 2013 in the first three months, January to March.

Since the start of the crisis unit labour costs in Spain have declined by more than in any other Euro Area country except Ireland. Reflecting the resulting improvement in competitiveness, Spain's exports to destinations outside the Euro Area have been growing, and increasing net exports are expected to contribute positively to growth this year and next. The external current account, which was in deficit to the tune of 5 per cent of GDP in 2009, is expected to be roughly in balance in 2014.

Central and Eastern Europe (EU8+2)

The countries of Central and Eastern Europe have continued to be affected by spillovers from the financial crises and recession in the Euro Area, not only through trade but also through tighter external financing conditions and reduced funding by western European banks for their subsidiaries in the region. Domestic policy tightening has also weighed on demand and activity in several cases. As a result we maintain the view that growth in the EU8+2 block will decelerate this year. A moderate recovery may materialise throughout the region next year. Figure 3 shows the expected distribution of growth rates across the region in 2013 against the background of the EU15 countries' expected growth rates in 2013, and forecasts for the EU8+2 region for 2014.

[FIGURE 3 OMITTED]

The Czech Republic, Hungary, and Slovenia fell back into recession in 2012, and a further decline in output is projected this year for Slovenia, which has been experiencing financial pressures (discussed below). The economic situation in Hungary reflects high levels of debt in both the public and private sectors, and also the damaging effects on confidence of political developments. These countries seem unlikely to see significant positive growth until 2014. Among the other countries in the group, Latvia is the only country that did not experience an economic slowdown last year, although the other Baltic countries managed to maintain growth in the 3-3 1/2 per cent range. Growth in the Baltics is projected to continue at a relatively high rate, although output is projected to remain significantly below potential. In Bulgaria, Poland, Romania, and Slovakia, growth seems likely to remain below par this year before recovering in 2014. In Poland, the largest country in the region, growth is being held back this year by low external demand and further declines in EU-funded public investment.

One of the factors behind diverging growth in the region remains the situation of the banking sectors. Recently Slovenia has faced particular difficulties, which have been compared to those of Cyprus. However, there are important differences. In particular, Slovenia is not a tax haven, and financial services represent a much smaller part of its economy; banking sector assets amount to less than 1.5 times Slovenia's annual GDP, compared with 8 times in Cyprus before its crisis. The Slovenian authorities have acknowledged that reforms are needed, in the banking sector and in the economy more broadly, but intend to address these issues without external assistance.

United States

In the United States, the economic recovery, though still tepid overall, has become noticeably stronger than in most other advanced economies, thanks partly to substantial progress in repairing the financial system and in improving households' balance sheets. Thus, for example, the ratio of households' debt service payments to personal disposable income, in the fourth quarter of 2012, was about 40 per cent below its pre-crisis peak, and lower than at any time since the early 1980s.

This progress, spurred by the Federal Reserve's expansionary monetary policies, including its purchases of mortgage backed securities, has been reflected in a pick-up in credit growth, a significant strengthening of the housing market, and a recovery in construction activity, with housing starts rising sharply to levels, in March, that were the highest since mid-2008. There has also been some broader strengthening in private sector demand, and in output and employment, but these developments have been considerably more hesitant and less clear, and, as in our last forecast, GDP growth is projected to be about 2 1/4 per cent per annum in both 2013 and 2014.

This tepid pace of economic recovery is accounted for in large part by contractionary fiscal policy. The structural fiscal deficit was reduced by 1 1/4 per cent of GDP in 2012, and a larger adjustment, of 1 3/4 per cent of GDP, is projected for this year. The fiscal cliff was avoided at the beginning of the year, but the measures taken to resolve that dispute--especially the expiration of a reduction in payroll taxes--are restraining demand. In addition, the sequester, which began in March in the absence of a budget agreement, and which imposes significant spending cuts on a wide range of programmes, is expected alone to reduce GDP growth in 2013 by about 1/2 a percentage point if maintained until the end of the fiscal year. (5)

[FIGURE 4 OMITTED]

The current pace of fiscal tightening is clearly excessive given the weakness of the recovery, but major budget uncertainties remain. In the short term, agreement on the debt ceiling will need to be reached by mid-year. And to establish control over the debt path in the medium term, agreement will need to be reached on entitlement reforms and other much-needed measures, including reform of the tax system. Our projections assume further fiscal tightening measures, amounting to about 1 per cent of GDP, in 2014, in line with current policy plans, with more moderate consolidation of about 1/2 per cent of GDP per annum over the medium-term horizon.

Current and prospective fiscal headwinds point to a continuing need for easy monetary policy for some time. The projections suggest that although strengthening growth may provide some scope for reducing the pace of quantitative easing later this year, unemployment is unlikely to fall below the Federal Reserve's 6.5 per cent intermediate threshold for an increase in official interest rates to take place early in 2015.

There are downside risks to the forecast of the unemployment rate, given the large pool of inactive working-age individuals. Since 2007, the labour force participation rate has declined by more than 2 percentage points, equivalent to a withdrawal of 4 1/2 million workers from the labour force. While the observed unemployment rate has declined by 2.4 percentage points since its peak in 2009, the inactivity rate has declined by just 0.8 percentage points (see figure 4).

If the rebound in the housing market encourages some inactive participants to re-engage with the labour force, the unemployment rate may recede more gradually than currently forecast. However, this would be a welcome development in the US labour market, as the recovery in labour force participation would have a long-run positive impact on the productive capacity of the US economy.

Canada

Growth in the Canadian economy, which weakened in 2012 to 1.8 per cent even as the US economy gathered some steam, is projected to slow further this year to 1.6 per cent. Fiscal consolidation, high household debt, and a cooling housing sector are restraining domestic demand. Consumer price inflation, 1.2 per cent in the year ended February, is well below the Bank of Canada's 2 per cent target.

As mentioned in the Overview, a debate has recently emerged about the potential effects of protracted QE by the US Federal Reserve on competitiveness in the rest of the world, including Canada. Figure 5 illustrates the expected effects of a monetary loosening by the Federal Reserve on the main Canadian macroeconomic indicators, according to a simulation study using NIESR's model, NiGEM. The analysis suggests that a monetary easing associated with a 5 1/2 per cent effective depreciation of the US dollar would lead to an effective appreciation of the Canadian dollar in nominal terms by about 7 per cent. The effects on competiveness would be short-lived, however, and the real effective exchange rates in both the US and Canada would be expected to return to base within four years.

The expected boost from dampened inflationary pressures and interest rate cuts is projected to outweigh a negative effect from the drop in exports and have a positive impact on GDP in the first year.

[FIGURE 5 OMITTED]

Japan

Shifts in recent months by the government elected last December towards more expansionary fiscal and monetary policies have raised short-term prospects for growth and the end of deflation. A supplementary budget worth about 2 per cent of GDP is expected to stimulate the economy over 2013-14 together with the recently announced 'new phase of monetary easing' by the Bank of Japan (BoJ), which aims to raise inflation from negative levels to 2 per cent per annum in two years. The BoJ intends to double the monetary base over the next two years by purchasing long-term bonds, thereby both expanding its asset holdings ('quantitative easing') and lengthening their average maturity ('qualitative easing'). These measures have in recent months contributed to a depreciation of the yen of about 17 per cent in effective terms and to a rise in the Japanese stock market to levels not seen since 2008.

Our current forecast takes these policy measures into account and as a result we have revised up our projections for GDP growth in 2013 and 2014 to about 2 per cent per annum, from projections of 0.6 and 1.4 per cent, respectively, three months ago. We allow for fiscal stimulus of around 1 per cent of GDP in both 2013 and 2014. Japan's fiscal multipliers are relatively high (see Barrell et al., 2013), and this raises growth by about 1 percentage point this year and about 1A percentage point in 2014. The remaining improvement in the growth outlook for this year (about 1/2 percentage point) is related to the aggressive monetary easing, which has driven a depreciation of the exchange rate, a fall in long-term interest rates and a rise in equity prices.

Longer-term prospects for growth and financial stability in Japan will depend both on the formulation of a concrete plan for medium-term fiscal consolidation and on the implementation of structural reforms to raise trend growth. Without a credible medium-term consolidation plan, the government's stimulus measures may put upward pressure on long-term interest rates, which would threaten debt sustainability. The government's plans for structural reforms are due to be announced in the coming months. An important element of these reforms is expected to be measures designed to encourage greater female participation in the labour force.

China

In China, fears of a 'hard landing' have waned. After slowing in 2012, growth seems to have stabilised at an annual pace somewhat above the official target of 7 1/2 per cent, with inflation moderating. But concerns remain about excessive credit growth and financial sector fragilities.

The 7.7 per cent growth of GDP in the year to the first quarter of 2013 was lower than generally expected on the basis of such leading indicators as strong PMI readings and liquidity expansion. The slight slowdown from 7.9 per cent growth in the year to the fourth quarter is accounted for by weaker growth of domestic demand, mainly government-related consumption; external demand contributed positively to growth. We still project GDP growth in 2013 as a whole, at 7.8 per cent, to exceed the official target of 7.5 per cent, on the basis of accommodative monetary policy and strong infrastructure investment.

In the medium term much will depend on success with a range of reforms aimed at restructuring the economy and weaning it off its recent dependence on investment and exports. The growth model that has served the country well over the past decade, resulting in an annual average growth rate above 9 per cent, needs to be changed as it has produced domestic as well as external imbalances and risks to financial stability.

A recent downgrade to China's long-term sovereign credit rating to A-plus from AA-minus by Fitch Ratings was based on concerns about the risks that excessive local government borrowing poses to the economy. Local governments have significantly increased their borrowing since 2008, as part of the stimulus package. In order to avoid balanced budget constraints, they financed investment through creation of financing vehicles, which were mostly land-collaterised bank loans. The worry is over the quality of the majority of these types of loans, as well as the weak state of local government finances. If the central government takes on all the liabilities, including those of local governments, then it is estimated that the government debt to GDP ratio could reach 73 per cent,6 three times larger than in 2011.

We simulated the effect of tightening bank lending conditions on the Chinese economy using the National Institute's model, NiGEM, by raising the effective cost of private sector borrowing by 1 percentage point permanently. The results of the simulation show that a 1 percentage point increase in borrowing costs (or an equivalent tightening in lending conditions --a qualification that is important given that China's financial system is still heavily regulated) would result in a reduction of potential output in China by about 0.6 per cent in the medium term. For comparison, the magnitude of the impact on GDP in the medium term is about three times as large as that of a similar shock in the US, which is largely explained by China's much higher investment to GDP ratio as compared to the US. There is a limited effect from the shock on inflation, which is not surprising given the regulated financial and monetary system.

Financial sector and social reforms will be necessary to ensure healthy output growth in the medium to long term. In considering medium-term prospects for growth in China, the rate of GDP growth may be decomposed into the growth rates of the working-age population and GDP per head of the working-age population, a close proxy for labour productivity. In recent decades rapid GDP growth in China has reflected rapid growth of productivity- the most rapid among the BRIC economies. This is not surprising given the distance from the global technology frontier of the Chinese economy in the early 1990s. However, if productivity continued to increase at this rate China would be expected to become the new global technology frontier by 2021. This would seem unlikely, and therefore we have assumed a moderation of productivity growth, from an average of 8.3 per cent a year during 1995-2010 to just below 7 per cent a year during 2015-20. By taking into account also a projected decline in the working-age population from 2017, we forecast about 6 1/2 per cent annual trend growth in the medium term.

[FIGURE 6 OMITTED]

Brazil

Brazil has recently been suffering from both weakened growth and increased inflation. Growth fell sharply to 0.9 per cent in 2012 from 7.5 per cent two years earlier, but is projected to pick up to 3.2 per cent this year and 3.4 per cent in 2014, partly in response to the Central Bank's lowering of official interest rates by more than 5 percentage points between late 2011 and late 2012. Private investment is also being boosted by targeted policy measures.

Monetary easing, however, has contributed to a renewed increase in inflation, which in March rose to 6.6 per cent on a twelve-month basis, marginally above the target range of 4.5-6.5 per cent. This, in turn, led the Central Bank to raise its key (SELIC) interest rate in April to 7.5 from 7.25 per cent. Especially given supply constraints -unemployment, at about 5.7 per cent recently, is historically low--it seems likely that further increases in the official rate will be needed to restrain inflation. Fiscal policy is also being tightened in 2013, with the primary budget surplus expected to increase from about 2 per cent to above 3 per cent of GDP. Thus the projections show only a moderate strengthening of growth.

Brazil's external current account balance has moved from modest surplus to modest deficit in recent years as commodity markets have become less favourable. Some further increase in the deficit seems likely in 2013-14 as domestic demand rises relative to export markets.

[FIGURE 7 OMITTED]

India

The economic slowdown in India has been more pronounced than forecast, with GDP growth in 2012, at 4.1 per cent, the lowest level in eleven years. Growth is projected to strengthen moderately to 5.3 per cent in 2013 and 6.5 per cent next year, as a result of improving export demand and recent pro-growth policy measures. Significant structural challenges remain to be addressed, however, if the objective of strengthening growth over the medium term is to be achieved.

The recently announced budget for 2013-14 underlined the government's aim of reducing the budget deficit from its recent level of around 81A per cent of GDP.7 However, the planned improvements in the budget rely heavily on a boost to revenues, which is subject to downside risks.

There has recently been an interesting divergence between two of the main inflation indicators, with inflation as measured by the Wholesale Price Index (WPI) easing, while inflation in terms of the Consumer Price Index (CPI) has continued to rise (figure 8). While the explanation for the divergence is not entirely clear, it seems likely that prices in the WPI tend to be flexible prices that are relatively sensitive to market forces, while the retail prices in the CPI tend to be administered and more sticky. The WPI may in some respects provide a better guide to inflationary pressures in the economy, suggesting that the Reserve Bank of India may have more room for monetary easing than CPI inflation suggests.

[FIGURE 8 OMITTED]

Russia

Russia's short-term economic outlook has worsened significantly. GDP growth slowed to 3.6 per cent in 2012 from 4.3 per cent in 2011, and in the first quarter of 2013 GDP was only 1.1 per cent higher than a year earlier--the weakest four-quarter growth since 2009. The slowdown is attributable partly to subdued demand in Russia's export markets, especially in Europe, although the slowdown in China has also had an impact, especially on exports of primary commodities. In addition, the weakening of oil prices not only reduces export revenues but also dampens domestic demand and narrows the scope for fiscal stimulus as over half of all government revenue is directly related to oil. We project a further slowing of annual average growth, to 2.4 per cent this year and 1.6 per cent in 2014.

To support growth, Russia may resort to monetary stimulus, but the room for interest rate cuts is limited, given inflationary pressure. Our forecast puts inflation at about 5 per cent for both the current year and 2014. With regard to the effects on the Russian economy of the financial crisis in Cyprus and its resolution, it is impossible to estimate the exact loss to Russian depositors but we expect the macroeconomic effect to be negligible.

According to Moody's' estimates, Russian deposits in Cypriot banks amount to 30-40 billion [euro] of an estimated total of about 70 billion. [euro] The Russian official gross foreign asset position stood at 1,100 billion [euro] in the second quarter of 2012 so an assumed write-off of 10-20 billion [euro] would be equivalent to a modest 1-2 per cent reduction of official foreign assets. While Cyprus continues to maintain capital controls, only limited amounts can be legally withdrawn from Cypriot bank accounts. Once the capital controls are removed, Russian capital is expected to leave the island. It may be repatriated, in which case it could boost investment in Russia, or depositors might prefer to relocate funds to a different off-shore location, which might be considered more likely.

Appendix A: Summary of key forecast assumptions

By Dawn Holland

The forecasts for the world and the UK economy reported in this Review are produced using NIESR's model, NiGEM. The NiGEM model has been in use at the National Institute for forecasting and policy analysis since 1987, and is also used by a group of about 40 model subscribers, mainly in the policy community. Most countries in the OECD are modelled separately, and there are also separate models of China, India, Russia, 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.

Interest rates in the major advanced economies are expected to remain at their extremely low levels at least until the end of 2014. Interest rate rises in Canada are expected to preempt those in the US by 1 quarter, which in turn are expected to preempt rises in Europe and Japan by 1-2 quarters. While the ECB, Bank of England, Bank of Canada and Federal Reserve have left interest rates and unconventional measures largely unchanged in recent months, the Bank of Japan introduced radical loosening measures in the form of 'quantitative and qualitative monetary easing' at the beginning of April. The slant, if not the specifics, of the measures have been widely anticipated since Prime Minister Shinzo Abe was elected in December 2012, and can largely explain the sharp depreciation of the yen since December. The quantitative and qualitative easing measures aim to achieve 2 per cent inflation in Japan in two years' time. This is to be effected through an expansion of the money base of 60-70 trillion yen per annum. The Federal Reserve eased monetary policy aggressively in the final quarter of 2012. In addition to announcing its intention to maintain interest rates at an exceptionally low level until 2015, it continues 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. 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, following a similar action by the Bank of Korea in October 2012. Interest rates in both countries have since remained unchanged.

After a modest softening of the monetary stance in several emerging economies in the first half of last year, there has been a slight reversal in the stance in Brazil. After ten consecutive interest rate cuts since August 2011, bringing the target for the Brazilian main policy rate to a record low of 7.25 per cent towards the end of 2012, the central bank raised its target rate by 25 basis points in April. Monetary policy in the other BRIC economies has remained more or less stable, with a slight bias towards loosening targets on longer-term maturities in Russia and India.

[FIGURE A1 OMITTED]

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 2015. 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 the Outright Money Transactions (OMT) introduced by the ECB in August 2012 brought some relief to bond yields in the vulnerable economies last year. There was surprisingly little reaction to the Cyprus crisis or even the delay to the Troika disbursement to Greece scheduled from March, although some upward pressure was observed in Italy related to policy uncertainty in the wake of inconclusive elections in March. In our forecast, we have assumed spreads remain at current levels until the end of 2014, and start to recede in 2015.

[FIGURE A2 OMITTED]

[FIGURE A3 OMITTED]

Nominal exchange rates against the US dollar are assumed to remain constant at the rate prevailing on 19 April 2013 until the end of December 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 Japanese effective exchange rate has slumped by 20 per cent since mid-2012, reflecting the significant easing of the policy stance following elections last December. While sterling and the Canadian dollar have also weakened less dramatically over this period, the euro and US$ have strengthened in effective terms.

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. The price of Brent crude dropped below $100 per barrel in June 2012 for the first time in over a year, but has since recovered to a level averaging about $112 per barrel in the first quarter of 2013. A modest decline in this level is expected over the near term. Over the medium term, oil price growth will be restrained in part by the rise in new extraction methods for oil and gas, especially in the US.

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 sharp rebound in global share prices in recent months. The most significant gains have been in Japan. At the end of 2012, Japanese equity markets had still recovered none of the losses suffered at the height of the financial crisis, and stood about 45 per cent below their average level in 2007. Since then share prices in Japan have jumped by more than 30 per cent, with more modest rises of 5-10 per cent observed in Europe and the US.

[FIGURE A4 OMITTED]

[FIGURE A5 OMITTED]

Fiscal policy assumptions for 2013-14 follow announced policies as of 1 April 2013. 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, Italy and Japan. Government spending in 2013 is expected to decline as a share of GDP in eight out of eighteen countries reported in the table. 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. Recent policy announcements in Portugal, Spain, Italy and elsewhere, suggest that the commitment to fiscal austerity in Europe may be waning. This is supported by comments by international organisations such as the IMF, which have supported the move to a looser fiscal stance in some countries. A policy loosening relative to our current assumptions poses an upside risk to the short-term outlook in Europe.

Table A1. 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 0.25 1.06 0.10 0.75 0.50
2015 0.98 1.69 0.14 0.89 0.65
2016-2020 2.79 3.18 0.73 2.06 1.91
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 1.00 0.10 0.75 0.50
2014 Q4 0.25 1.25 0.10 0.75 0.50
2015 Q1 0.54 1.50 0.10 0.75 0.50
2015 Q2 0.83 1.63 0.10 0.85 0.60
2015 Q3 1.12 1.75 0.15 0.94 0.71
2015 Q4 1.41 1.88 0.20 1.04 0.81

 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 1.9 2.0 0.6 2.7 1.9
2014 2.5 2.6 0.8 3.2 2.2
2015 3.0 3.1 1.0 3.5 2.6
2016-2020 3.9 3.9 1.7 3.9 3.5
2012 Q1 2.0 2.0 1.0 3.5 2.1
2012 Q2 1.8 1.9 0.9 3.4 1.8
2012 Q3 1.6 1.8 0.8 3.2 1.7
2012 Q4 1.7 1.8 0.7 2.8 1.8
2013 Q1 1.9 1.9 0.7 2.7 2.0
2013 Q2 1.8 1.8 0.6 2.5 1.7
2013 Q3 1.9 2.0 0.6 2.6 1.8
2013 Q4 2.1 2.2 0.7 2.8 1.9
2014 Q1 2.3 2.3 0.7 3.0 2.0
2014 Q2 2.4 2.5 0.8 3.1 2.1
2014 Q3 2.5 2.6 0.8 3.2 2.2
2014 Q4 2.7 2.8 0.9 3.4 2.3
2015 Q1 2.8 2.9 0.9 3.4 2.4
2015 Q2 3.0 3.0 1.0 3.5 2.5
2015 Q3 3.1 3.2 1.1 3.5 2.6
2015 Q4 3.2 3.3 1.1 3.5 2.7

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 2.4 -3.5
2013 1.3 -1.4 -16.9 2.6
2014 0.6 -0.5 -1.8 0.0
2015 0.7 -0.6 -0.4 0.4
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 -0.8 -1.5 -4.3 2.4
2013 Q1 1.0 -1.5 -12.1 2.3
2013 Q2 0.9 -0.7 -4.6 -0.4
2013 Q3 -0.1 0.0 -0.1 -0.1
2013 Q4 -0.1 0.0 -0.1 -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 -0.1 -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 0.1
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 1.3 1.3 1.4 -3.5
2014 0.0 0.0 0.1 0.1
2015 0.2 0.2 0.4 0.5
2012 Q1 -1.5 -1.2 -1.4 1.3
2012 Q2 -0.5 -0.6 -0.5 2.5
2012 Q3 -1.0 -0.9 -0.7 1.2
2012 Q4 1.2 1.2 1.3 -0.5
2013 Q1 1.2 1.2 1.2 -4.0
2013 Q2 -0.2 -0.2 -0.2 -0.4
2013 Q3 0.0 0.0 0.0 0.0
2013 Q4 0.0 0.0 0.0 0.0
2014 Q1 0.0 0.0 0.1 0.1
2014 Q2 0.0 0.0 0.1 0.1
2014 Q3 0.0 0.0 0.1 0.1
2014 Q4 0.0 0.0 0.1 0.1
2015 Q1 0.0 0.1 0.1 0.1
2015 Q2 0.1 0.1 0.1 0.1
2015 Q3 0.1 0.1 0.1 0.2
2015 Q4 0.1 0.1 0.1 0.2

 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 0.997 79.8 0.778 0.631
2013 1.016 96.0 0.766 0.652
2014 1.023 97.9 0.771 0.656
2015 1.032 98.7 0.774 0.656
2012 Q1 0.994 79.3 0.763 0.636
2012 Q2 1.027 80.1 0.780 0.632
2012 Q3 0.979 78.6 0.799 0.633
2012 Q4 0.990 81.2 0.771 0.623
2013 Q1 1.008 92.3 0.758 0.645
2013 Q2 1.018 97.2 0.769 0.655
2013 Q3 1.018 97.2 0.769 0.655
2013 Q4 1.018 97.2 0.769 0.655
2014 Q1 1.020 97.5 0.770 0.655
2014 Q2 1.022 97.8 0.771 0.656
2014 Q3 1.024 98.0 0.771 0.656
2014 Q4 1.026 98.3 0.772 0.656
2015 Q1 1.028 98.5 0.773 0.657
2015 Q2 1.031 98.7 0.774 0.657
2015 Q3 1.033 98.8 0.774 0.656
2015 Q4 1.034 98.9 0.774 0.656

Table A3. Government revenue assumptions

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

 2012 2013 2014 2012 2013 2014

Australia 14.5 14.4 14.4 25.7 25.7 25.7
Austria 31.5 31.5 31.5 19.9 19.9 19.9
Belgium 33.9 34.3 34.5 16.7 16.7 16.7
Canada 21.6 21.8 21.5 19.6 19.5 20.3
Denmark 38.0 38.0 37.8 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 17.4 16.7 13.5 13.5 13.5
Ireland 25.1 25.7 24.8 9.8 9.8 9.8
Italy 28.4 28.4 28.4 26.4 26.4 26.4
Japan 22.8 23.0 23.8 29.2 29.4 29.6
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 25.7 26.7 25.2 25.2 25.2
Sweden 29.9 29.9 29.6 30.4 30.4 30.4
UK 23.0 23.2 23.5 17.6 16.3 14.6
US 17.3 18.2 18.3 28.4 28.6 28.8

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

 2012 2013 2014

Australia 31.8 33.9 34.5
Austria 38.9 38.4 37.6
Belgium 43.6 44.3 44.4
Canada 35.1 35.0 34.9
Denmark 46.6 48.4 48.8
Finland 45.0 44.8 44.4
France 45.7 46.6 46.8
Germany 45.6 46.5 46.9
Greece 47.6 50.4 49.9
Ireland 29.9 29.2 30.2
Italy 45.2 45.7 45.7
Japan 31.7 31.2 32.3
Netherlands 42.0 42.8 42.9
Portugal 38.0 38.8 38.6
Spain 32.6 35.6 35.5
Sweden 44.9 44.8 44.2
UK 37.2 38.7 38.3
US 27.5 28.5 28.9

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

Table A4. Government spending assumptions (a)

 Gov't spending excluding
 interest payments

 2012 2013 2014

Australia 33.2 33.6 33.6
Austria 38.9 38.2 37.1
Belgium 43.8 44.0 44.0
Canada 34.9 34.5 33.9
Denmark 48.7 49.6 49.2
Finland 45.4 45.3 44.4
France 47.8 47.9 47.6
Germany 43.8 44.4 44.6
Greece 47.1 48.2 47.0
Ireland 33.2 31.6 30.2
Italy 42.7 42.8 42.1
Japan 39.5 40.0 39.4
Netherlands 44.0 44.4 43.9
Portugal 38.5 38.1 37.3
Spain 39.8 38.9 38.0
Sweden 44.7 45.1 44.2
UK 39.9 39.7 38.9
US 33.4 32.7 32.3

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

Australia 1.7 1.7 1.6 2013
Austria 2.5 2.4 2.2 2011
Belgium 3.5 3.3 3.0 2013
Canada 3.4 3.2 2.9 2013
Denmark 1.8 1.7 1.6 2013
Finland 1.4 1.2 I.0 -
France 2.7 2.7 2.5 2016
Germany 2.0 1.7 1.5 2011
Greece 7.4 7.8 8.0 2017
Ireland 4.1 4.6 4.7 2019
Italy 5.3 5.7 5.7 2012
Japan 2.0 1.8 1.6 -
Netherlands 2.0 1.9 1.8 2014
Portugal 4.4 4.8 4.8 2015
Spain 3.1 3.8 4.2 2018
Sweden I.I I.0 0.9 -
UK 3.0 3.2 3.2 2017
US 2.8 2.7 2.6 -

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 per cent of GDP within our forecast horizon.

Appendix B: Forecast detail

[FIGURE B1 OMITTED]

[FIGURE B2 OMITTED]

[FIGURE B3 OMITTED]

[FIGURE B4 OMITTED]

Table B1. Real GDP growth and inflation

 Real GDP growth (percent)

 2010 2011 2012 2013 2014 2015-19

Australia 2.6 2.4 3.6 2.7 2.9 3.7
Austria (a) 2.2 2.7 0.8 1 1.6 2.5
Belgium (a) 2.4 1.8 -0.2 0.5 1 2.7
Bulgaria (a) 0.5 1.9 0.7 1.3 3.0 3.1
Brazil 7.5 2.7 0.9 3.2 3.4 4.5
China 10.4 9.3 7.7 7.8 7.4 7.0
Canada 3.2 2.6 1.8 1.6 2.4 2.9
Czech Rep. 2.3 1.9 -1.2 -0.1 1.9 3.6
Denmark (a) 1.6 1.1 -0.5 1 1.5 2.6
Estonia (a) 3.3 8.3 3.2 3.4 4.3 2.2
Finland (a) 3.3 2.8 -0.2 0.1 2.5 2.5
France (a) 1.6 1.7 0.0 -0.2 0.5 1.7
Germany (a) 4.0 3.1 0.9 0.5 1.3 1.3
Greece (a) -4.9 -7.1 -6.4 -5.5 0.1 1.8
Hong Kong 6.8 4.9 1.4 3.8 4.2 3.4
Hungary (a) 1.3 1.6 -1.8 0.0 1.5 4.3
India 11.4 7.5 4.1 5.3 6.5 7.0
Ireland (a) -0.8 1.4 0.9 0.7 2.2 3.2
Italy (a) 1.7 0.5 -2.4 -1.3 0.3 2.3
Japan 4.7 -0.5 2.0 2.0 2.0 1.3
Lithuania (a 1.5 5.9 3.5 2.4 4.0 3.4
Latvia (a) -1.4 5.2 5.4 3.9 5.3 3.4
Mexico 5.3 3.9 3.9 2.9 3.2 3.5
Netherlands (a) 1.6 1.1 -1 -0.4 0.9 2.2
New Zealand 0.9 1.3 3.0 2.7 2.7 2.6
Norway 0.2 1.3 3.0 2.1 2.8 2.4
Poland (a) 3.9 4.3 2.2 1.4 2.9 4.0
Portugal (a) 1.9 -1.6 -3.2 -2.7 0.7 2.5
Romania (a) -1.2 2.2 0.7 1.7 2.8 3.4
Russia 4.4 4.3 3.6 2.9 2.9 3.9
South Africa 3.1 3.5 2.5 3.0 3.2 3.5
S. Korea 6.3 3.7 2.0 2.6 3.5 3.9
Slovakia (a) 4.4 3.2 2.0 1.3 3.2 2.9
Slovenia (a) 1.1 1 -2.2 -1 1.3 1.6
Spain (a) -0.3 0.4 -1.4 -1.8 0.2 2.6
Sweden (a) 6.3 3.8 1.2 1.3 2.0 2.3
Switzerland 3.0 1.9 1 1.5 2.2 2.2
Taiwan 10.8 4.1 1.3 3.5 3.9 3.4
UK (a) 1.8 1 0.3 0.9 1.5 2.3
US 2.4 1.8 2.2 2.2 2.3 2.9
Euro Area (a) 1.9 1.5 -0.5 -0.4 0.9 1.9
EU-27 (a) 2.0 1.6 -0.3 0.1 1.1 2.1
OECD 3.0 1.9 1.4 1.4 2.0 2.6
World 5.1 3.8 3.1 3.3 3.7 4.2

 Annual inflation(a) (per cent)

 2010 2011 2012 2013 2014 2015-19

Australia 2.5 2.4 2.2 2.2 2.2 2.8
Austria (a) 1.7 3.6 2.6 2.4 1.7 2.1
Belgium (a) 2.3 3.4 2.6 1.6 1.6 2.0
Bulgaria (a 3.0 3.4 2.4 2.9 2.2 3.0
Brazil 5.1 6.6 5.4 5.6 4.8 4.7
China 3.3 5.4 2.7 2.3 2.9 2.2
Canada 1.4 2.1 1.3 1.6 2.4 1.9
Czech Rep. 1.2 2.1 3.5 2.1 1.8 1.8
Denmark (a 2.2 2.7 2.4 1.3 1.7 1.7
Estonia (a) 2.7 5.1 4.2 3.4 2.7 4.9
Finland (a) 1.7 3.3 3.2 2.5 2.0 2.4
France (a) 1.7 2.3 2.2 1.7 1.9 1.5
Germany (a 1.2 2.5 2.1 1.9 1.6 1.5
Greece (a) 4.7 3.1 1.0 -0.1 0.2 1.6
Hong Kong 1.4 3.7 2.8 3.0 2.7 2.7
Hungary (a) 4.7 3.9 5.7 3.4 3.1 2.5
India 12.0 8.8 9.4 8.9 5.4 4.5
Ireland (a) -1.6 1.2 1.9 1.2 1.4 1.8
Italy (a) 1.6 2.9 3.3 2.1 1.7 2.5
Japan -1.7 -0.8 -0.6 -0.1 1.3 0.9
Lithuania (a) 1.2 4.1 3.2 1.9 2.6 4.7
Latvia (a) -1.2 4.2 2.3 0.4 3.0 4.9
Mexico 4.2 3.4 4.1 4.2 4.1 3.1
Netherlands (a) 0.9 2.5 2.8 2.8 1.6 2.6
New Zealand 1.6 3.0 1.1 1.2 2.7 3.0
Norway 2.3 1.3 0.9 2.0 2.4 2.8
Poland (a) 2.7 3.9 3.7 2.0 2.2 2.3
Portugal (a) 1.4 3.6 2.8 1.3 1.5 1.9
Romania (a) 6.1 5.8 3.4 4.1 2.5 3.4
Russia 6.9 8.4 5.1 5.1 5.1 5.3
South Africa 3.9 5.0 5.7 4.9 3.9 4.4
S. Korea 2.9 4.0 2.2 2.4 2.7 2.9
Slovakia (a) 0.7 4.1 3.7 2.6 2.9 3.5
Slovenia (a) 2.1 2.1 2.8 2.5 2.8 3.0
Spain (a) 2.0 3.1 2.4 1.8 1.4 1.5
Sweden (a) 1.9 1.4 0.9 0.9 1.3 2.0
Switzerland 0.9 0.1 -0.5 0.5 1.3 2.5
Taiwan 0.7 0.8 1.3 1.8 1.7 2.4
UK (a) 3.3 4.5 2.8 2.9 2.3 2.0
US 1.9 2.4 1.8 1.4 1.7 2.5
Euro Area (a) 1.6 2.7 2.5 1.9 1.6 1.9
EU-27 (a) 2.1 3.1 2.6 2.1 1.8 2.0
OECD 1.7 2.3 1.8 1.7 1.8 2.2
World 4.1 5.2 4.2 3.6 3.1 3.0

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 -3.1 -1.4 -0.7 -0.9
Austria (a) -4.5 -2.5 -2.5 -2.2 -1.7 -1.4
Belgium (a) -3.9 -3.9 -3.7 -2.9 -2.7 -1.6
Bulgaria -3.1 -2.0 -1.5 -0.5 -0.4 -1.0
Canada -5.2 -4.0 -3.2 -2.7 -1.9 -1.6
Czech Rep. -4.8 -3.3 -4.7 -3.3 -3.2 -2.6
Denmark (a) -2.5 -1.8 -3.9 -2.9 -2.0 -1.3
Estonia 0.2 1.1 -1.0 -0.8 -0.2 -1.2
Finland (a) -2.8 -0.9 -1.8 -1.7 -1.0 -1.4
France (a) -7.1 -5.2 -4.8 -4.0 -3.4 -2.0
Germany (a) -4.1 -0.8 -0.3 0.3 0.9 0.5
Greece (a) -10.8 -9.5 -6.8 -5.7 -5.2 -1.9
Hungary -4.5 4.2 -2.6 -2.3 -1.6 -0.8
Ireland (a, c) -30.9 -13.3 -7.5 -6.9 -4.7 -2.6
Italy (a) -4.5 -3.9 -2.9 -2.7 -2.1 -0.7
Japan -8.4 -9.2 -9.9 -10.6 -8.7 -5.5
Lithuania -7.2 -5.5 -3.5 -2.8 -2.3 -1.5
Latvia -8.1 -3.4 -1.8 -1.5 -1.7 -1.1
Netherlands (a) -5.0 -4.4 -4.0 -3.5 -2.8 -1.9
Poland -7.9 -5.0 -3.5 -3.6 -2.6 -1.2
Portugal (a) -9.8 -4.4 -4.9 -4.1 -3.5 -1.0
Romania -6.8 -5.5 -3.2 -2.1 -2.0 -1.7
Slovakia -7.7 -4.9 -4.4 -3.2 -1.9 0.0
Slovenia -5.7 -6.4 -5.6 -4.6 -3.7 -0.7
Spain (a) -9.4 -8.6 -10.3 -7.0 -6.8 -2.1
Sweden (a) 0.3 0.4 -0.8 -1.3 -0.9 -1.0
UK (a) -10.2 -7.8 -6.3 -6.8 -6.2 -0.9
US -11.4 -10.2 -8.7 -6.9 -5.9 -3.4

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

 2010 2011 2012 2013 2014 2019

Australia 22.8 26.2 28.7 28.7 28.1 23.6
Austria (a) 71.7 72.2 73.5 73.0 71.1 60.7
Belgium (a) 95.5 97.8 102.1 102.1 102.2 88.9
Bulgaria - - - - - -
Canada 81.3 81.7 84.6 83.4 81.5 71.7
Czech Rep. 37.8 40.8 46.3 49.6 51.7 50.9
Denmark (a) 42.7 46.4 48.4 50.9 52.3 50.5
Estonia - - - - - -
Finland (a) 48.7 49.1 51.5 51.6 49.8 43.3
France (a) 82.4 86.0 90.8 93.1 94.1 91.6
Germany (a) 82.5 80.5 81.4 79.6 76.2 60.0
Greece (a) 148.3 170.5 157.6 170.7 174.9 161.7
Hungary 81.8 81.4 79.1 72.3 69.6 52.2
Ireland (a, c) 92.1 106.4 118.3 123.3 122.0 113.0
Italy(a) 119.3 120.6 128.1 130.1 129.6 104.0
Japan 192.9 203.1 214.9 213.2 214.4 216.5
Lithuania - - - - - -
Latvia - - - - - -
Netherlands (a) 63.2 65.4 71.0 73.6 74.5 67.8
Poland 54.8 56.4 56.2 56.5 56.9 46.8
Portugal (a) 93.5 108.1 122.6 127.2 127.2 109.6
Romania - - - - - -
Slovakia - - - - - -
Slovenia - - - - - -
Spain (a) 61.5 69.3 80.7 90.6 98.3 97.1
Sweden (a) 39.5 38.4 37.6 38.1 37.3 34.4
UK (a) 79.4 85.5 90.0 93.3 96.3 88.6
US 96.2 100.5 108.6 110.6 111.9 102.3

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 5.1 5.5 4.8
Austria 4.4 4.2 4.4 4.7 4.5 4.0
Belgium 8.2 7.2 7.6 7.8 7.8 6.9
Bulgaria 10.3 11.3 12.3 11.3 10.2 9.8
Canada 8.0 7.5 7.3 7.2 7.2 6.5
China - - - - - -
Czech Rep. 7.3 6.7 7.0 7.2 7.6 7.3
Denmark 7.4 7.6 7.5 7.2 7.1 6.3
Estonia 16.9 12.5 10.1 9.7 9.4 9.4
Finland 8.4 7.8 7.7 8.1 7.7 7.1
France 9.7 9.6 10.3 10.9 10.7 9.6
Germany 7.1 5.9 5.5 5.2 5.0 5.1
Greece 12.6 17.7 24.4 27.2 28.2 26.0
Hungary 11.2 II.0 10.9 10.4 9.2 7.7
Ireland 13.9 14.7 14.7 14.3 12.5 10.8
Italy 8.4 8.4 10.6 11.8 11.6 9.9
Japan 5.1 4.6 4.3 4.3 4.4 4.6
Lithuania 18.0 15.3 13.3 12.9 12.3 12.2
Latvia 19.8 16.4 14.8 13.9 13.1 12.0
Netherlands 4.5 4.4 5.3 6.2 5.5 4.6
Poland 9.6 9.7 10.1 10.6 10.5 7.5
Portugal 12.0 12.9 15.9 17.7 18.2 15.6
Romania 7.3 7.4 7.0 6.2 6.3 6.0
Slovakia 14.5 13.6 14.0 13.7 12.3 11.8
Slovenia 7.3 8.2 8.9 8.5 7.9 7.8
Spain 20.1 21.7 25.0 26.9 26.0 18.4
Sweden 8.6 7.8 8.0 7.8 6.7 7.6
UK 7.9 8.1 7.9 8.1 8.2 7.0
US 9.6 8.9 8.1 7.3 6.7 6.0

 Current account balance (percent of GDP)

 2010 2011 2012 2013 2014 2015-19

Australia -2.9 -2.3 -3.4 -4.7 -3.7 -2.3
Austria 3.5 0.5 1.8 0.6 1.4 1.9
Belgium 1.9 -1.4 -1.2 -1.3 -2.0 -1.2
Bulgaria -1.6 0.4 -4.2 -1.3 -2.5 -3.7
Canada -3.6 -3.0 -3.7 -3.1 -3.1 -2.4
China 4.5 3.1 3.7 5.0 6.0 4.4
Czech Rep. -3.8 -2.8 -2.8 -5.5 -6.7 -8.3
Denmark 5.9 5.6 5.2 6.5 5.5 5.4
Estonia 3.0 2.2 -1.3 -1.8 -3.6 -8.1
Finland 2.4 -0.7 -1.6 -0.2 -1.0 -2.5
France -1.6 -2.0 -2.2 -1.4 -0.9 -0.9
Germany 6.1 6.2 7.1 7.4 7.8 5.6
Greece -10.1 -9.9 -3.3 -2.1 -1.7 -1.8
Hungary 1.1 0.9 0.3 1.6 3.3 4.8
Ireland 1.2 1.1 4.0 3.7 0.6 -4.4
Italy -3.5 -3.1 -0.8 -0.4 -0.8 0.3
Japan 3.7 2.0 I.0 1.6 2.0 3.6
Lithuania 0.1 -1.5 -0.1 5.1 4.9 -1.2
Latvia 3.3 -2.4 -1.9 -1.9 -2.8 -4.7
Netherlands 7.7 9.7 9.5 7.9 6.8 3.6
Poland -4.7 -4.3 -3.1 1.8 2.9 0.3
Portugal -10.6 -7.0 -1.8 -0.8 0.1 1.6
Romania -6.2 -6.3 -4.5 -3.4 -5.6 -11.2
Slovakia -3.1 0.0 3.0 2.6 2.5 -1.9
Slovenia -0.6 0.0 2.3 3.2 1.5 2.1
Spain -4.5 -3.5 -1.7 -0.4 0.2 1.3
Sweden 7.1 7.7 8.0 7.4 7.4 6.6
UK -2.5 -1.3 -3.7 -2.6 -2.3 -2.5
US -3.0 -3.1 -3.0 -2.6 -2.6 -3.1

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 12.1
business -18.1 0.7 8.6 8.0
Government: consumption 4.3 0.9 -2.3 -1.3
investment 0.6 -0.6 -7.2 -4.0
Stockbuilding (a) -0.8 1.5 -0.2 0.1
Total domestic demand -4.2 2.8 1.8 2.1

Export volumes -9.1 11.1 6.7 3.4
Import volumes -13.5 12.5 4.8 2.4

Average earnings 2.6 2.0 2.2 1.2
Private consumption deflator 0.1 1.9 2.4 1.8
RPDI -2.6 2.2 1.6 1.5
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 96.2 100.5 108.6

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

 Average
 2013 2014 2015-19

GDP 2.2 2.3 2.9

Consumption 2.2 2.0 2.3
Investment : housing 7.9 5.4 7.6
business 6.5 5.8 6.6
Government: consumption -0.9 0.9 1.9
investment 0.7 1.7 2.3
Stockbuilding (a) -0.2 0.1 0.0
Total domestic demand 2.1 2.5 2.9

Export volumes 3.6 4.8 6.1
Import volumes 2.4 5.7 5.9

Average earnings 2.1 2.7 3.9
Private consumption deflator 1.4 1.7 2.5
RPDI 1.7 2.6 2.4
Unemployment, % 7.3 6.7 6.0

General Govt. balance as % of GDP -6.9 -5.9 -4.2
General Govt. debt as % of GDP (b) 110.6 111.9 107.4

Current account as % of GDP -2.6 -2.6 -3.1

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 1.8

Consumption 0.2 3.4 2.4 1.9
Investment :housing -6.4 7.9 1.9 5.8
 :business -19.5 14.4 10.4 6.0
Government: consumption 3.4 3.0 1.0 0.4
 :investment 8.7 9.3 -3.3 -5.6
Stockbuilding (a) -0.9 0.4 0.1 0.2
Total domestic demand -2.3 5.2 2.8 2.2

Export volumes -12.8 6.5 4.6 1.6
Import volumes -12.4 13.6 5.8 2.9

Average earnings 2.1 1.6 2.9 2.7
Private consumption deflator 0.4 1.4 2.1 1.3
RPDI 0.7 2.1 1.5 2.1
Unemployment, % 8.3 8.0 7.5 7.3

General Govt. balance -4.8 -5.2 -4.0 -3.2
 as % of GDP
General Govt. debt as 79.5 81.3 81.7 84.6
 % of GDP (b)
Current account as % of GDP -3.0 -3.6 -3.0 -3.7

 Average
 2013 2014 2015-19

GDP 1.6 2.4 2.9

Consumption 2.3 2.2 2.2
Investment :housing 3.6 5.8 5.3
 :business 3.3 4.0 3.3
Government: consumption 0.0 0.0 2.5
 :investment -0.1 0.0 2.0
Stockbuilding (a) -0.2 0.0 0.0
Total domestic demand 1.8 2.1 2.6

Export volumes 1.7 5.5 6.1
Import volumes 2.1 4.1 4.9

Average earnings 2.2 3.6 3.8
Private consumption deflator 1.6 2.4 1.9
RPDI 1.7 2.1 2.6
Unemployment, % 7.2 7.2 6.5

General Govt. balance -2.7 -1.9 -1.7
 as % of GDP
General Govt. debt as 83.4 81.5 75.2
 % of GDP (b)
Current account as % of GDP -3.1 -3.1 -2.4

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 2.0

Consumption -0.7 2.8 0.5 2.4
Investment :housing -16.3 -4.8 5.5 2.9
 :business -14.2 0.7 3.3 2.0
Government :consumption 2.3 1.9 1.4 2.7
 :investment 7.8 0.1 -6.9 12.5
Stockbuilding (a) -1.5 0.9 -0.4 0.0
Total domestic demand -3.8 2.9 0.4 2.8

Export volumes -24.4 24.5 -0.4 -0.2
Import volumes -15.8 11.1 5.9 5.3

Average earnings -0.4 -1.3 0.8 -1.6
Private consumption deflator -2.4 -1.7 -0.8 -0.6
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 -9.9
Govt. debt as % of GDP9BO 187.5 192.9 203.1 214.9

Current account as % of GDP 2.9 3.7 2.0 1.0

 Average
 2013 2014 2015-19

GDP 2.0 2.0 1.3

Consumption 1.3 1.1 0.3
Investment :housing 3.9 3.6 3.2
 :business 1.8 5.6 4.1
Government :consumption 3.3 0.5 0.1
 :investment 10.1 1.2 0.1
Stockbuilding (a) 0.2 0.2 0.0
Total domestic demand 2.5 1.8 0.9

Export volumes 1.2 6.7 6.8
Import volumes 5.0 5.8 4.7

Average earnings -0.5 0.5 1.1
Private consumption deflator -0.1 1.3 0.9
RPDI 0.9 -0.7 0.3
Unemployment, % 4.3 4.4 4.6

Govt. balance as % of GDP -10.6 -8.7 -6.2
Govt. debt as % of GDP9BO 213.2 214.4 218.2

Current account as % of GDP 1.6 2.0 3.6

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 1.9 1.5 -0.5

Consumption -0.9 1.0 0.1 -1.3
Private investment -14.5 0.3 2.1 -4.3
Government :consumption 2.6 0.8 -0.2 -0.3
 :investment 0.9 -3.7 -2.3 -4.1
Stockbuilding (a) -0.9 0.7 0.2 -0.4
Total domestic demand -3.7 1.4 0.5 -2.1

Export volumes -12.4 11.0 6.4 2.9
Import volumes -11.0 9.5 4.3 -0.8

Average earnings 3.1 1.0 1.8 1.3
Harmonised consumer prices 0.3 1.6 2.7 2.5
RPDI 0.0 -0.6 -0.7 -1.0
Unemployment, % 9.6 10.1 10.1 11.4

Govt. balance as % of GDP -6.3 -6.2 -4.1 -3.7
Govt. debt as % of GDP (b) 80.0 85.4 87.3 93.1

Current account as % of GDP -0.2 0.0 0.1 1.2

 Average
 2013 2014 2015-19

GDP -0.4 0.9 1.9

Consumption -1.0 0.1 1.0
Private investment -2.3 1.6 5.6
Government :consumption -0.4 -0.2 1.1
 :investment -2.1 0.2 1.7
Stockbuilding (a) -0.2 0.1 0.1
Total domestic demand -1.3 0.4 2.0

Export volumes 2.9 4.1 6.1
Import volumes 1.0 3.6 6.6

Average earnings 0.8 0.6 2.2
Harmonised consumer prices 1.9 1.6 1.9
RPDI -1.4 -0.2 1.6
Unemployment, % 12.1 11.8 10.0

Govt. balance as % of GDP -2.8 -2.2 -1.2
Govt. debt as % of GDP (b) 94.3 94.0 87.8

Current account as % of GDP 2.3 2.4 1.6

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 1.5
 : business -17.2 6.9 7.3 -2.4
Government : consumption 3.0 1.7 1.0 1.4
 : investment 5.7 0.3 -0.2 -9.5
Stockbuilding (a) -0.9 0.7 0.3 -0.6
Total domestic demand -2.4 2.6 2.7 -0.4

Export volumes -12.8 13.4 7.9 4.3
Import volumes -8.0 10.9 7.5 2.2

Average earnings 2.9 0.8 3.0 3.0
Harmonised consumer prices 0.2 1.2 2.5 2.1
RPDI -0.5 0.9 1.2 1.3
Unemployment, % 7.8 7.1 5.9 5.5

Govt. balance as % of GDP -3.1 -4.1 -0.8 -0.3
Govt. debt as % of GDP (b) 74.4 82.5 80.5 81.4

Current account as % of GDP 5.9 6.1 6.2 7.1

 Average
 2013 2014 2015-19

GDP 0.5 1.3 1.3

Consumption 0.6 0.8 2.0
Investment : housing 1.0 5.0 7.8
 : business -2.1 2.8 2.8
Government : consumption 1.5 1.1 0.9
 : investment 1.0 1.2 1.2
Stockbuilding (a) 0.0 0.0 0.1
Total domestic demand 0.5 1.3 2.3

Export volumes 3.0 3.7 5.9
Import volumes 3.2 4.0 8.2

Average earnings 2.5 1.3 2.6
Harmonised consumer prices 1.9 1.6 1.5
RPDI 0.4 0.4 2.2
Unemployment, % 5.2 5.0 5.1

Govt. balance as % of GDP 0.3 0.9 1.2
Govt. debt as % of GDP (b) 79.6 76.2 65.7

Current account as % of GDP 7.4 7.8 5.6

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 0.0

Consumption 0.2 1.4 0.2 -0.1
Investment : housing -12.1 -0.3 3.2 0.4
 : business -12.9 4.4 5.1 -0.2
Government : consumption 2.6 1.7 0.2 1.4
 : investment 2.5 -8.2 -1.8 0.2
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 2.5
Import volumes -9.5 8.4 5.2 -0.3

Average earnings 3.1 1.9 3.0 1.6
Harmonised consumer prices 0.1 1.7 2.3 2.2
RPDI 1.5 0.9 0.2 0.2
Unemployment, % 9.5 9.7 9.6 10.3

Govt. balance as % of GDP -7.5 -7.1 -5.2 -4.8
Govt. debt as % of GDP (b) 79.2 82.4 86.0 90.8

Current account as % of GDP -1.3 -1.6 -2.0 -2.2

 Average
 2013 2014 2015-19

GDP -0.2 0.5 1.7

Consumption -0.1 0.3 1.1
Investment : housing -0.4 1.0 5.3
 : business -0.4 1.4 2.2
Government : consumption -1.2 -1.0 1.3
 : investment -2.8 0.7 2.1
Stockbuilding (a) -0.3 0.0 0.0
Total domestic demand -0.8 0.1 1.5

Export volumes 2.5 3.9 6.2
Import volumes -0.5 2.7 5.7

Average earnings 1.4 1.7 2.5
Harmonised consumer prices 1.7 1.9 1.5
RPDI -0.5 0.5 1.7
Unemployment, % 10.9 10.7 9.6

Govt. balance as % of GDP -4.0 -3.4 -2.5
Govt. debt as % of GDP (b) 93.1 94.1 93.7

Current account as % of GDP -1.4 -0.9 -0.9

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 1.7 0.5 -2.4

Consumption -1.6 1.5 0.1 -4.3
Investment : housing -8.4 -0.4 -3.3 -6.3
 : business -15.3 4.5 -0.6 -10.1
Government : consumption 0.8 -0.4 -1.2 -2.9
 : investment -3.3 -5.9 -4.4 -8.3
Stockbuilding (a) -1.3 1.2 -0.5 -0.7
Total domestic demand -4.4 2.2 -0.9 -5.4

Export volumes -17.7 11.2 6.6 2.2
Import volumes -13.6 12.3 1.1 -7.8

Average earnings 1.7 2.0 1.2 0.0
Harmonised consumer prices 0.8 1.6 2.9 3.3
RPDI -3.0 -0.6 -1.0 -2.2
Unemployment, % 7.8 8.4 8.4 10.6

Govt. balance as % of GDP -5.4 -4.5 -3.9 -2.9
Govt. debt as % of GDP (b) 116.5 119.3 120.6 128.1

Current account as % of GDP -2.0 -3.5 -3.1 -0.8

 Average
 2013 2014 2015-19

GDP -1.3 0.3 2.3

Consumption -1.8 0.0 0.6
Investment : housing -2.3 -1.1 6.9
 : business -2.6 0.4 7.5
Government : consumption -1.1 0.0 1.1
 : investment -3.6 1.3 1.4
Stockbuilding (a) -0.5 0.2 0.1
Total domestic demand -2.4 0.3 2.0

Export volumes 2.3 3.2 6.0
Import volumes -1.5 3.4 5.7

Average earnings -0.9 -1.5 1.8
Harmonised consumer prices 2.1 1.7 2.5
RPDI -2.1 -1.5 1.3
Unemployment, % 11.8 11.6 9.9

Govt. balance as % of GDP -2.7 -2.1 -1.1
Govt. debt as % of GDP (b) 130.1 129.6 116.7

Current account as % of GDP -0.4 -0.8 0.3

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 -1.4

Consumption -3.8 0.7 -1.0 -2.1
Investment : housing -23.1 -10.1 -6.7 -8.0
 : business -16.7 -3.7 -5.7 -14.2
Government : consumption 3.7 1.5 -0.5 -3.7
 : 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 -3.9

Export volumes -10.0 11.3 7.6 3.1
Import volumes -17.2 9.2 -0.9 -5.0

Average earnings 4.0 -0.1 -0.5 -0.9
Harmonised consumer prices -0.2 2.0 3.1 2.4
RPDI 1.0 -4.8 -3.3 -6.6
Unemployment, % 18.0 20.1 21.7 25.0

Govt. balance as % of GDP -11.2 -9.4 -8.6 -10.3
Govt. debt as % of GDP (b) 53.9 61.5 69.3 80.7

Current account as % of GDP -4.8 -4.5 -3.5 -1.7

 Average
 2013 2014 2015-19

GDP -1.8 0.2 2.6

Consumption -3.7 -3.1 -1.5
Investment : housing -8.1 -2.4 10.0
 : business -11.5 -0.2 12.3
Government : consumption -3.1 -2.7 1.7
 : investment -1.4 -1.2 2.8
Stockbuilding (a) -0.2 0.0 0.0
Total domestic demand -4.7 -2.7 1.8

Export volumes 4.5 9.4 6.8
Import volumes -4.6 1.3 5.7

Average earnings -3.0 -1.8 0.2
Harmonised consumer prices 1.8 1.4 1.5
RPDI -7.0 -3.5 0.1
Unemployment, % 26.9 26.0 18.4

Govt. balance as % of GDP -7.0 -6.8 -3.6
Govt. debt as % of GDP (b) 90.6 98.3 101.7

Current account as % of GDP -0.4 0.2 1.3

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

ACKNOWLEDGEMENTS

All questions and comments related to the forecast and its underlying assumptions should be addressed to Dawn Holland (dholland@niesr.ac.uk). We would like to thank Angus Armstrong, Simon Kirby and Jonathan Portes for helpful comments and discussion and Jean MacRae for years of support.

This forecast was completed on 2.5 April, 2013.

Exchange rate, interest rates and equity price assumptions are based on information available to 19 April 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, Vol. 2012, pp. 71-102.

Bundesbank (2013), Monthly Report--February 2013, 65(2).

Crafts, N. (2013), 'Long-term growth in Europe: what difference does the crisis make?', National Institute Economic Review, 224, May, pp. R 14-28.

NOTES

(1) International Labour Organization, Global Employment Trends, 2013. The ILO estimates that in the five years to the end of 2012, unemployment globally rose by 28 million (shared equally between advanced and developing economies) and that a further 39 million people dropped out of the labour market.

(2) International Monetary Fund, Global Financial Stability Report, April 2013.

(3) Ben S. Bernanke, 'Monetary Policy and the Global Economy', Speech delivered at the London School of Economics, March 25, 2013, Board of Governors of the Federal Reserve System.

(4) The Dow-Jones news service reported on April 25, 2013 as follows: 'There will be no common European deposit insurance scheme for the "foreseeable future", Chancellor Angela Merkel said today at German banking conference. Her remarks are the most explicit yet from a German government official that one of the desired pillars for the EU's proposed banking union won't be in place any time soon. "The German government rejects a unified European deposit insurance--at least for the foreseeable future," said Ms. Merkel. "We prioritise, however, very clearly and vehemently," a harmonisation of the European deposit system, she added. Her comments come one day after the head of Germany's central bank told the same conference that at the current time a common insurance scheme was inappropriate. Such a plan is "not sensible" because Europe's financial system isn't sufficiently integrated, said Jens Weidmann, head of the Bundesbank, yesterday.'

(5) See the discussion in the National Institute Economic Review, February 2013, p. F 17.

(6) Ettore Dorrucci, Gabor Pula and Daniel Santabarbara (2013), 'Chinas' economic growth and rebalancing', Occasional paper series, No 142, European Central Bank.

(7) World Economic Outlook Database, April 2013, IMF.

Table 1. Forecast summary
Percentage change

 Real GDP (a)

 World OECD China EU-27 Euro
 Area

2009 -0.6 -3.6 9.0 -4.3 -4.3
2010 5.1 3.0 10.4 2.0 1.9
2011 3.8 1.9 9.3 1.6 1.5
2012 3.1 1.4 7.7 -0.3 -0.5
2013 3.3 1.4 7.8 0.1 -0.4
2014 3.7 2.0 7.4 I.I 0.9
2003-2008 4.4 2.3 11.0 2.1 1.9
2015-2019 4.2 2.6 7.0 2.1 1.9

 Private consumption deflator

 OECD Euro USA Japan Germany
 Area

2009 0.2 -0.5 0.1 -2.4 0.0
2010 1.7 1.7 1.9 -1.7 2.0
2011 2.3 2.5 2.4 -0.8 2.0
2012 1.8 2.1 1.8 -0.6 1.7
2013 1.7 2.0 1.4 -0.1 2.0
2014 1.8 I.6 1.7 1.3 1.6
2003-2008 2.2 2.2 2.7 -0.5 1.4
2015-2019 2.2 1.8 2.5 0.9 1.5

 Real GDP (a)

 USA Japan Germany France

2009 -3.1 -5.5 -5.1 -3.1
2010 2.4 4.7 4.0 1.6
2011 1.8 -0.5 3.1 1.7
2012 2.2 2.0 0.9 0.0
2013 2.2 2.0 0.5 -0.2
2014 2.3 2.0 1.3 0.5
2003-2008 2.2 1.4 1.5 1.6
2015-2019 2.9 1.3 1.3 1.7

 Private consumption deflator

 France Italy UK Canada

2009 -0.7 -0.1 1.4 0.4
2010 1.1 1.5 3.7 1.4
2011 2.1 2.9 4.5 2.1
2012 1.7 2.8 2.7 1.3
2013 1.9 2.1 2.6 1.6
2014 1.9 1.5 1.9 2.4
2003-2008 2.1 2.6 2.5 1.5
2015-2019 1.5 2.3 2.0 1.9

 World
 Real GDP (a) trade (b)

 Italy UK Canada

2009 -5.5 -4.0 -2.8 -10.4
2010 1.7 1.8 3.2 12.5
2011 0.5 I.0 2.6 5.8
2012 -2.4 0.3 1.8 2.8
2013 -1.3 0.9 1.6 4.2
2014 0.3 1.5 2.4 5.8
2003-2008 0.9 2.5 2.4 7.7
2015-2019 2.3 2.3 2.9 6.9

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

2009 0.3 0.1 1.3 61.8
2010 0.3 0.1 1.0 78.8
2011 0.3 0.1 1.2 108.5
2012 0.3 0.1 0.9 110.4
2013 0.3 0.1 0.8 106.1
2014 0.3 0.1 0.8 98.8
2003-2008 3.0 0.2 2.8 57.5
2015-2019 2.2 0.5 1.7 102.3

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