World overview.

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

Global growth prospects for this year and next have weakened slightly further since early May. This is partly due to further signs of a significant slowing in a number of key emerging market economies, particularly China. But activity has also been somewhat weaker than assumed in some advanced economies, including the United States. In addition, although some central banks, including the European Central Bank (ECB), have eased monetary conditions in recent months, the significant rise in global long-term interest rates since early May, in anticipation of steps towards a normalisation of monetary policy by the US Federal Reserve, entails a tightening of financial conditions that will tend to weaken demand and slow the recovery. Thus our forecast of global GDP growth in 2013 is now 3.1 per cent, revised down from 3.3 per cent in May. World growth is projected to pick up to 3.6 per cent in 2014, a downward revision of 0.1 percentage point.

Box A. The macroeconomic implications of rising government bond
yields by Dawn Holland

Global government bond yields have followed a rising trajectory
since early May 2013. This movement has been widely attributed to
signals from the Federal Reserve that it will begin to taper (i.e.
reduce) QE later this year. Since January 2012, monetary policy
statements from the Federal Reserve have been accompanied by a
transparent summary of the projections made by members of the
Federal Open Market Committee (FOMC) for the appropriate path of
the federal funds rate over the next several years. This currently
points to interest rate rises commencing in 2015. Given that the
further asset purchases related to quantitative easing measures all
should terminate before any interest rate rises begin, this gives a
fairly clear timetable for the tapering process.

Bond yields in the US have reacted to the Fed's signals--the
expected tapering of QE has pushed yields up by 90 basis points
since the recent trough reached in early May 2013. This can be seen
as a narrowing of the negative term premium on US bond yields that
emerged in early 2012. Figure A I illustrates the difference
between 10-year government bond yields in the US, UK, Japan and the
Euro Area and the geometric mean of expected policy rates over a I
0-year forward horizon in the same country. In theory, if investors
have perfect foresight, this difference should reflect a term
premium--the extra return demanded to cover the risk of holding
longer-term maturities. In practice, the difference is at least as
likely to reflect investor forecasting errors. Clearly in 2009-10,
the historically low interest rates in the major economies were not
expected to persist into 2014. The margins declined significantly
in 2011, as the sovereign debt crisis in the Euro Area erupted and
the US pursued its second round of quantitative easing. From early
2012, figure AI suggests that a negative term premium had opened on
long-term US government bonds, indicating that investors were
willing to accept a lower expected rate of return on these safe
assets than on shorter term bonds. Since May 2013, the negative
premium in the US has effectively dissipated, suggesting that
current market rates are essentially neutral, and in line with
market expectations for the federal funds rate. It is not at all
clear that this neutrality holds for other countries, and the term
premium in the UK appears to have widened significantly. This
suggests that investors in the UK are less willing to take on
longer-term investments, and may adversely affect, for example,
investment in major infrastructure projects and other projects that
entail a long time lag before seeing a financial return.

[FIGURE A1 OMITTED]

Global bond markets are highly correlated and, as the US dollar
accounts for more than 60 per cent of global foreign currency
reserves, US markets are a key influence on global interest rates.
Bond markets in the US and the UK move together particularly
closely, with about 60 per cent of the weekly shift in US long
rates tending to pass through to UK yields. Many countries,
including the UK and Germany, have benefited from the low global
interest rates, which can, at least in part, be attributed to the
loose US monetary stance in recent years. The tightening in the US
since May has effectively tightened financial conditions in the
other major economies as well, and this may prove challenging for
many of the struggling European economies.

Figure A2 illustrates the projections for 10-year government bond
yields for the US, UK and Japan underlying our May 2013 forecast
and our current forecast. We have excluded the Euro Area from the
analysis, as average bond yields for the Area as a whole are
broadly unchanged. The recent rise in yields in Germany is largely
offset by a narrowing of spreads over Germany in Greece, Portugal,
Spain, Ireland and Italy (see Appendix A). Bond yields in the UK
and the US are expected to be about 50 basis points higher in 2014
than anticipated three months ago, while in Japan the expected
level of bond yields next year has risen by about 15 basis points.
Yields are expected to converge gradually back towards the long-run
path anticipated in May by about 2016, so the shock to the expected
level of bond yields is a temporary, but protracted, one.

In order to assess the macroeconomic impact of the observed rise in
bond yields since May 2013, we run a scenario using the National
Institute's model, NiGEM,1 that shifts the term premium on
government bonds. A similar scenario is described in OECD (2013).
(2) Within the modeling framework we adopt, bond yields feed into
the macroeconomy through four channels.

* Public sector interest rates are assumed to act as a floor for
private sector rates, so a rise in government bond yields pushes up
private sector borrowing costs, and restrains GDP growth through
the investment channel.

* The housing market is also linked to interest rates. Rising bond
yields push up mortgage rates in many countries, putting downward
pressure on house prices and thereby restraining GDP growth through
the consumption channel.

* Rising public sector borrowing costs push up government interest
payments on newly issued debt, worsening the fiscal deficit. In
order to maintain a targeted fiscal position, a tightening of the
fiscal stance would be required, slowing demand.

* Bond yields are inversely related to the market value of bond
holdings, so a rise in bond yields implies a loss of financial
wealth and a deterioration in the balance sheet position of banks
and other private sector bond holders. These effects have direct
negative consequences for consumption, which is modelled as partly
determined by the financial wealth holdings of the personal sector,
and may also lead to a tightening of bank lending conditions,
further restraining both investment and consumer spending.

Figure A3 illustrates the expected impact on GDP growth of the
recent rise in global bond yields, based on the NiGEM model
simulation described above. The simulation suggests that recent
movements in bond yields may reduce GDP growth by about 0.3
percentage points this year in the US, UK and Japan. The effects
feed through more rapidly in Japan, so while the shock is somewhat
smaller, the impact on GDP in the first year is in line with what
is expected in the other economies. In 2014, the model simulation
suggests that GDP growth in Japan would be unaffected, whereas we
continue to see negative effects in both the UK and the US. The
decline in GDP growth is driven by a steep drop in investment,
which is more sensitive than consumer spending to borrowing costs.
Private sector investment growth is reduced by 2-3 percentage
points in 2013 as a result of the shock. Consumer spending growth,
on the other hand, is only expected to fall by about 0.1 percentage
point this year in response to the rise in government bond yields.
The fiscal impacts of the shock feed through gradually, as new debt
is issued at the higher rate of return. The simulation suggests
that government interest payments in the UK would rise by 0.8 per
cent this year, while in Japan they would rise by 2.2 per cent and
in the US by 2.6 per cent. By 2016, the level of government
interest payments in the UK would be 2 1/2 per cent above baseline,
with a rise of 5 per cent in Japan and 7 1/4 per cent in the US.

[FIGURE A2 OMITTED]

[FIGURE A3 OMITTED]

NOTES

(1) Further details on the NiGEM model are available at
http://nimodel.niesr.ac.ukl.

(2) The main differences between the OECD and NIESR scenarios are
that the OECD scenario applies a larger (2 percentage point) and
shorter-term (I year) shock to bond yields, whereas in this box we
raise bond yields by 50 basis points in the US and UK and 15 basis
points in Japan, with a gradual tapering, so that interest rates
more closely resemble the paths illustrated in figure A2.

REFERENCE

OECD (2013), Economic Outlook, no. 93, May, pp. 46-7.

Inflation remains generally subdued worldwide, with commodity prices weak. Monetary policy has become more supportive of recovery, through cuts in official interest rates since early May, not only in the Euro Area but also in Australia, Hungary, Israel, Korea, Poland, and Thailand. Key official rates have been raised, however, in Brazil, Indonesia, and Turkey in response to inflationary and currency pressures.

The broad slowing of growth among major emerging market economies stems partly from various idiosyncratic national factors, but a common feature in some important cases is central bank actions to restrain credit growth or tighten monetary conditions. In China the central bank has recently taken action to restrain excessive credit growth and in Brazil the central bank has raised its benchmark rate by a further 1 percentage point in recent months to reduce inflation. In Russia also, the central bank is seeking to lower inflation with the economy operating close to full capacity. And in India, after more than a year of waning inflation and declining interest rates, the Reserve Bank tightened liquidity in mid-July to stem the depreciation of the rupee at a time when inflation seemed to be rising again. In each case, it seems that the slowing of growth has been in response to financial and inflationary pressures, or capacity constraints, which suggests that it may persist for some time.

Since early May there has been a significant increase in volatility in global financial markets arising mainly from speculation about the timing of the normalisation of monetary policy in the United States, from uncertainties about how the new Japanese government's policies will work and from the action by the Chinese authorities to restrict credit growth. Over the period as a whole, 10year government bond yields have risen by about 90 basis points in the United States, 20 basis points in Japan, and 40 basis points in the major Euro Area countries (figure 1). Long-term interest rates have also risen in many emerging markets--by about 50 basis points in China and Russia and 100 basis points in Brazil. Statements by the US Federal Reserve about its plans for the future normalisation of monetary policy seem to have been the main factor behind the general rise in yields. The rise in long rates entails a tightening of financial conditions which may be particularly inconvenient for countries still suffering from weak activity. The synchronicity of world financial markets despite very different national economic conditions may prove even more challenging as the major central banks act to normalise conditions.

In foreign exchange markets, the US dollar has appreciated in the past three months against commodity-based currencies and emerging market currencies; exchange rates among the currencies of the major advanced economies are broadly unchanged (Appendix A). With pressures on emerging market currencies having reversed, talk of competitive 'currency wars' has receded, and some emerging market economies, especially those with significant current account deficits and financing needs, have become concerned instead about how to contain capital outflows and currency depreciation without damaging growth.

The upturn in bond yields was accompanied between mid-May and late June by broad, moderate declines in equity markets. More recently, markets have turned up again, reaching new record highs in the United States. In the period since early May most major markets have risen moderately. The most notable declines, of about 15 per cent and 7 per cent, respectively, in local currency terms, have occurred in Brazil and China.

The modest strengthening of global growth that is projected for the period ahead is expected to be supported by the maintenance of highly accommodative monetary policies in key advanced economies, by the fiscal stimulus being implemented in Japan, and by the waning of fiscal drag in the United States and the Euro Area. The decision by the ECOFIN Council to allow more time for some European countries to reduce their fiscal deficits shows some welcome pragmatism.

There are a number of important downside risks to this outlook. First, it seems likely that financial markets will remain volatile in the period ahead as they respond to the economic data that will provide the input to the Fed's decision on the reduction or 'tapering' of its quantitative easing (QE) programme and the subsequent raising of short-term interest rates. Recent market reactions, which have sometimes seemed erratic and difficult to relate to successive, similar official policy statements indicate the possibility of further yield increases and continued volatility. This may damage the recovery in advanced economies and lead to capital flow reversals and lower growth in emerging markets.

Second, the recent slowdown in some key emerging market economies and the indications of supply-side constraints suggest that there are risks of a more prolonged growth slowdown in these economies than we are projecting. While many of these economies are in strong financial positions with significant degrees of policy freedom (including exchange rate flexibility), slower growth after a period of rapid credit expansion may uncover financial vulnerabilities. In addition, if potential output is lower than assumed this would imply less fiscal room for manoeuvre than expected.

Third, in the United States, there is the political risk of further failure in budget negotiations, notably over a timely increase in the debt ceiling when needed later this year.

Fourth, progress towards banking reform remains piecemeal at best, leaving significant financial sector risks in place. In the US, the Federal Reserve restated in early July that banks will be expected to meet the (fairly weak) Basel III capital requirements. Also, together with other regulators, the Fed proposed a rule to strengthen leverage ratio standards for the largest, most systemically significant US banking organisations. In the UK and Europe some large banks have warned that, rather than increase capital to satisfy the new requirements they will significantly shrink their balance sheets which, all else equal, implies less credit availability. This is clearly not the intention of the regulators and is an indication of the deeper challenges still to be addressed in the industry.

Finally, the Euro Area continues to face substantial risks associated with: first, the concentration of the burden of adjustment on the Area's deficit countries and, second, the incompleteness of the institutional framework for the monetary union. Actions to mitigate and reverse financial fragmentation, to strengthen banks' balance sheets, and to establish a banking union are high on the policy agenda. Some progress has been made with the agreement that the ECB will be responsible for supervision of the larger banks in the Euro Area. But as we have previously warned, the politics of the authority to resolve banks and share the losses is proving difficult to resolve. The German government has warned that such proposals would be beyond the powers permitted under EU treaties. Since the fiscal back-stop is the core element of a banking union, the Euro Area remains vulnerable to further set-backs.

[FIGURE 1 OMITTED]

Prospects for individual economies

Euro Area

While the Euro Area overall seems to be stabilising, conditions differ widely between member states. Activity in some core countries remains robust, but the most fiscally challenged members continue to face depression-like conditions. For the Area as a whole, GDP fell by 0.2 per cent in the first quarter, and in May unemployment reached a new high of 12.2 per cent. But industrial production has risen since late last year, business sentiment and consumer confidence have improved, and preliminary PMI data for July indicate a pick-up in private sector activity. The second quarter seems likely to have seen the seventh consecutive quarterly decline in GDP, but recovery, albeit weak and fragile, seems likely to begin later this year. Our projection for growth this year has been revised down slightly, to -0.6 from -0.4 per cent. For 2014, we again forecast modest positive growth, of 0.8 per cent.

In late June, the ECOFIN Council, under the excessive deficit procedure, extended the deadlines for meeting the fiscal deficit target of 3 per cent of GDP for six countries (by two years for France, Poland, Slovenia, and Spain, and one year for the Netherlands and Portugal) 'on account of a worse than expected deterioration in their economies'. Diminishing fiscal drag in 2013-14--partly reflecting the progress made by the countries implementing IMF/ EU/ECB programmes, as well as the extension of the Commission's deadlines--will promote the stabilisation of demand and activity. Recovery would also be helped by more expansionary budgetary policies in the fiscally stronger economies.

Consumer price inflation, at 1.6 per cent in the year to June, is below the ECB's target. In recent months the ECB has taken steps to ease monetary policy further. In early May it cut its refinancing rate to 0.5 from 0.75 per cent, and the rate on its marginal lending facility to 1.0 from 1.5 per cent--the first reductions in ECB rates since July 2012. Furthermore, in early July, the ECB for the first time provided forward guidance on interest rates, indicating downward bias by saying that it expected 'key ECB interest rates to remain at present or lower levels for an extended period of time'. The decision by the ECB to provide this guidance was unanimous and followed 'an extensive discussion' about an immediate further interest rate cut. Taking this into account, our projections assume that the ECB will take the appropriate step of cutting rates further, by 25 basis points, before end- September.

Financial market conditions have remained relatively subdued, with yields well below the distressed levels seen before the introduction last September of the ECB's programme of Outright Monetary Transactions.

The Area still faces considerable challenges and risks. First, significant divergences in economic performance persist between the stronger and weaker members. Although there have been some encouraging signs in the economies of the periphery--including improvements in international competitiveness and, in some cases (notably, Spain), export performance- vigorous recoveries in output and employment remain a distant prospect. Second, there have been growing signs, in a number of countries, of political and social resistance to further austerity and fiscal and labour market reforms. Third, bank lending has continued to decline, and severe weaknesses in banking systems are still contributing to continuing divergences in lending rates among countries. Borrowing costs remain particularly high for small and medium-sized firms in the periphery. Repair of banks' balance sheets continues to be needed for a revival of credit.

Finally, progress towards strengthening the institutional framework of EMU has been disappointing. In particular, early establishment of a banking union, essential to promote the reintegration of financial markets and the delinking of sovereigns from banks, seems unlikely, despite recent progress towards installing some of its components. Enabling legislation for a Single Supervisory Mechanism (SSM) to be operated by the ECB is expected to be passed by the European Parliament in Septembel; which would enable the ECB to take over this function for the region's larger banks late next year. In June, the ECOFIN Council agreed on a draft Bank Recovery and Resolution Directive, helpfully setting out 'bail-in' rules and a pecking order of creditors and depositors in the event of a bank intervention. Another 'crucial pillar' of the banking union and an 'indispensable complement' to the SSM (in President Draghi's words) is a Single Resolution Mechanism (SRM). In July, the European Commission presented its proposals for an SRM. However, Germany has made it clear that it objects to the establishment of an SRM both on legal grounds and because of potential fiscal costs to Germany, arguing that amendments to EU treaties are necessary. The establishment of a true banking union therefore still seems some way off.

Box B. The impact of Euro Area interest rate cuts
by Dawn Holland

In July 2012, the European Central Bank (ECB) cut its key interest
rate by 25 basis points to 0.75 per cent, in response to the
deteriorating economic outlook. This was followed by a second 25
basis point cut in May 2013, and our forecast assumptions allow for
an additional 25 basis point cut before the end of the year. This
will bring policy rates in the Euro Area down to 0.25 per cent, in
line with the rates that have been prevailing in the US since 2009.

In order to explore the expected impact of enacted and anticipated
interest rate moves by the ECB, we simulate the effect of a 1/4
point decrease in Euro Area interest rares using NIESR's global
econometric model (NiGEM). (1) Our model simulations suggest that
this would provide a modest stimulus to the economy, raising GDP
growth by 0. 1-0.15 percentage points for two years. The stimulus
is largely delivered through the expected reaction of financial
markers to the policy announcement. Figure 131 illustrates the
simulated impact on the effective euro exchange rate and on
long-term government bond yields in the Euro Area of a 1/4 point
interest rate cut by the ECB. The euro is expected to depreciate by
about I per cent, permanently, and we would expect a small
temporary decline in long rates of about 7 basis points.

In Box A above, we discuss the strong correlation between global
bond yields. Movements in Euro Area financial markets are sensitive
to policy actions in other major economies as well as chose of the
ECB. In table BI we look at the immediate reaction of the Euro Area
exchange rate and bond yields to the interest rate announcements in
July 2012 and in May 2013, to see how closely they correspond to
our model-based predictions. We also look one quarter ahead to see
if the immediate effects are sustained.

The initial financial market reaction to the ECB interest rate cut
in July 2012 was almost exactly in line with model projections.
However, before we congratulate ourselves on a model that perfectly
captures volatile financial market behaviour, it is important to
recall that real world experiments are never conducted in
isolation. The July 2012 ECB rate cut occurred in close proximity
to other major policy actions within the Euro Area--such as the
announcement of the Outright Monetary Transactions (OMT)
policy--not to mention policy actions outside the Euro Area. It
would be difficult, therefore, to fully attribute the immediate
response of financial markets in 2012Q3 exclusively to the ECB
interest rate cut. Nonetheless, the ECB would certainly have
considered the policy action a success. The impact on the exchange
rate, however, was short-lived, and by the end of 2012 the euro had
reverted to previous levels.

Following the interest rate cut of May 2013, the euro appreciated
rather than depreciated, and the direction of the movement would no
doubt have been disappointing for the ECB. Of course exchange rates
should be viewed in a global context. The May 2013 rate cut closely
followed the formalisation of a radical monetary and fiscal
loosening in Japan, which was putting upward pressure on the euro.
So perhaps the euro would have appreciated by closer to 1 1/2 per
cent in 2013Q2 in the absence of an ECB interest rate cut, as our
model simulations suggest. Bond yields initially declined in
2013Q2, but have subsequently risen sharply. As discussed in Box A,
this can largely be attributed to monetary policy in the US rather
than policy actions in the Euro Area. However, given the implicit
tightening of financial conditions, an additional interest rate cut
in the Euro Area by the end of this year is now more likely and
forms part of our central forecast assumptions.

[FIGURE B1 OMITTED]

NOTE

(1) Further details of the NiGEM model are available on
http://nimodel.niesr.ac.uk/.

Table B1. Financial market reactions following ECB rate
cuts in July 2012 and May 2013

 Percentage change Basis point change
 in effective in long rate
 exchange rate (Germany)

2012q3/2012q2 -0.9 -8.2
2012q4/2012q2 0.3 -6.9
2013q2/2013q1 0.5 -11
2013q3/2013q1 0.6 16

Source:NiGEM database and NIESR forecast.

Germany

Economic growth is expected to pick up moderately in the course of this year after being negative in late 2012 and only barely positive in the first quarter. Weak external demand has been putting a drag on exports, and business investment has been declining since late 2011, reflecting weak demand and uncertainties relating to the Euro Area and forthcoming federal elections. Relative to other advanced economies, Germany has a sound budgetary position, and the fiscal stance is expected to be modestly expansionary in 2013 and broadly neutral next year. Modest GDP growth of 0.5 per cent (unchanged from our previous forecast) is forecast for 2013 as a whole, with a pick-up to 1.4 per cent next year, which would be close to the potential growth rate.

There has been little sign of recovery in export growth, which is suffering particularly from the slowdown in China. In the first quarter of 2013 total exports declined further, although exports to some Euro Area countries rose. More recently, in May, exports suffered their steepest monthly drop since late 2011. The current account surplus, which reached 7 per cent of GDP in 2012, seems to be narrowing. Import growth should increase more strongly than export growth once domestic demand, and in particular equipment investment, picks up.

Private consumption has been more robust than other GDP components, underpinned by the strength of the labour market. Unemployment, at 5.3 per cent in May, has remained close to post-unification lows, partly reflecting the success of past labour market reforms. A marked recovery in consumer confidence since 2012 has also contributed to the recent buoyancy of spending.

The increasing demand for housing and rising number of public building projects will contribute to a recovery in investment. Business investment should also pick up, assuming that financial conditions and growth in the Euro Area continue to improve, reducing uncertainty and boosting business sentiment.

The soundness of the banking sector has improved, with strengthened capitalisation and relatively favourable funding conditions. There are vulnerabilities related to exposures to particular sectors, including certain foreign assets, but overall asset quality has been broadly stable. Lending to the private sector has shown positive but moderate growth, driven largely by lending to households, notably for house purchase. Loans to enterprises have grown only marginally, reflecting the subdued pace of investment and the common ability of enterprises to finance themselves internally.

In the context of an ageing population, the government's efforts to increase the labour force, including through training programmes and the encouragement of immigration of skilled workers, should, if sustained, be important in helping to raise Germany's growth potential.

Germany's current account surplus is projected to decrease somewhat over the forecast horizon, contributing to internal rebalancing in the Euro Area. Adjustment of the deficits of the southern European economies has been quite dramatic in recent years, reflecting not only the compression of domestic demand and imports but also improvements in cost competitiveness. The countries with the largest current account deficits in 2008--Greece, with a deficit of about 15 per cent of GDP, and Portugal, with a deficit of about 13 per cent of GDP--had reduced them to 3.4 per cent and 1.5 per cent of GDP, respectively, by 2012. The slower pace of adjustment on the German side can partially be explained by the ageing structure of the German population. As a result, the current account balance of the Euro Area as a whole may improve somewhat in the near future. The international counterparts of the improvement are likely to be found largely in a narrowing of the surpluses of Asian countries such as China and Japan, which would contribute to a narrowing of global imbalances. Figure 2 shows recent current account balance developments across the Euro Area.

[FIGURE 2 OMITTED]

France

The economy returned to recession in late 2012 and early 2013, with both decreasing domestic demand and falling exports. Recent indicators have been more balanced, giving some hope that the economy may stabilise later this year. Unemployment has continued to rise, reaching a 14-year high of 10.9 per cent in May, and in June consumer confidence was at its lowest in more than 40 years. Yet, improvements in business confidence suggest less gloomy prospects. Also, industrial production in April and May was 1.9 per cent higher than in the first quarter, and the PMI for manufacturing rose to a 17-month high of 49.8 in July, suggesting that output is close to stabilising. In the second half of the year, exports are expected to pick up as activity in the Euro Area, notably Germany, strengthens, and this will help the stabilisation of overall activity. Our growth forecast is broadly unchanged from May, at -0.2 and 0.6 per cent this year and next. Consumer price inflation, recently below 1 per cent on a 12-month basis, should remain subdued, notwithstanding the rise in VAT expected in January 2014.

In late June, the ECOFIN Council extended by two years, to 2015, France's deadline for correcting its 'excessive deficit' to 3 per cent of GDP. Yet, the fiscal drag on the economy will remain significant; the French Court of Auditors has estimated that an additional 13 [euro] and 15 [euro] billion of savings, in 2014 and 2015 respectively, will be needed to achieve the new target. This represents a significant further effort to cut public spending, given the limited scope for raising tax receipts. In line with this view, the government plans to reduce the structural deficit by 20 billion [euro] in 2014, 14 [euro] of which is to come from spending cuts, and 9 billion [euro] of which is already planned.

[FIGURE 3 OMITTED]

In line with other advanced economies, government bond yields increased from late April to late July, by about 50 basis points. Yet, financing conditions remain favourable, with annual borrowing costs even for new businesses reported to be as low as 2 per cent. Investment is nonetheless likely to remain weak in the context of depressed demand and low profitability. Further increases in unemployment seem likely this year, although the effect could be mitigated by the new tax credit for encouraging competitiveness and employment (CICE). The impact of this policy in the long run is uncertain; the government expects 300,000 new jobs, net, to be created in the next five years, but a study carried out by the OFCE, a French research centre, argues that the impact could be half this.

In the medium to long term, stronger growth in France will largely depend on the government's ability to tackle the competitiveness challenge and implement reforms to boost productivity growth and profitability. The European Commission has pointed to the importance of further labour market and pension reforms. Similarly to Italy, unit labour costs have risen steadily since 2005 (figure 3), at a much faster pace than in the other European countries. The government has already taken significant steps (CICE, and also ANI, a new agreement to improve enterprise dialogue) on labour market reforms, aimed at increasing flexibility for companies and reducing labour costs. Pension reform started in 2010, with the pension age rising from 60 to 62, but this will not be enough to rebalance the system. Whilst the government has ruled out a rise in the retirement age, alternatives have been suggested, such as raising employers' pension contributions, reducing income tax benefits for pensioners, and diluting the indexation of pension payments. Raising employers' pension contributions, however, would conflict with policies aimed at increasing competitiveness, and could have a serious negative impact on growth.

Italy

Output declined further in the first quarter of 2013, with all major components of demand falling. Domestic demand fell by 0.6 per cent, whilst exports fell by 1.9 per cent, the first decline since mid-2009. More recent indicators suggest that activity has remained weak; unemployment rose to 12.2 per cent in May. Consumer confidence increased sharply in June, but this may well prove temporary, as it followed the cancellation of a scheduled property tax instalment, now postponed until September, and the delay from July to October in the VAT increase from 21 to 22 per cent.

Activity seems likely to stabilise later this year. Altogether, our growth forecast for this year has been reduced by 0.6 percentage points to -1.9 per cent, whilst the economy is again expected to begin recovery next year, growing by a slight 0.2 per cent.

The stabilisation of the economy projected for 2013-14 will be helped by an easing of fiscal adjustment. The sizeable adjustment last year lowered the general government deficit to 3 per cent of GDP and thus removed Italy from the EU's excessive deficit procedure. In mid-June the government announced a new round of public spending cuts to enable the financing of new measures to boost the economy, which include tax breaks for labour and companies, infrastructure investments, and increased funding for small and medium-sized firms via an existing state-backed fund. Efforts to accelerate the clearing of public sector arrears should ease firms' credit constraints and support investment.

Sovereign borrowing costs remain much lower than a year ago. However, the rise of about 50 basis points in government bond yields since late April has not been helpful to domestic financial conditions. It further weakens banks' asset positions, which will tighten already restrictive credit supply. Bank credit has continued to contract, and lending rates remain high, especially for small and medium-sized firms. Banks' bad loans, which have risen sharply since 2007, were in April the highest since records began in June 1998. Policies to help banks clean up their balance sheets are essential to provide support for the economy.

The badly needed strengthening of medium-term growth performance will require further reform efforts to strengthen competitive forces in the economy.

Spain

The economy remains in deep depression but its contraction has slowed. In the first quarter, GDP suffered its sixth consecutive fall, of 0.5 per cent. More recently, unemployment has risen to a record 26.9 per cent in May. However, industrial production and PMI data indicate a stabilisation of manufacturing activity in the second quarter. There are also clear signs of improving external competitiveness as a result of moderating costs. Partly owing to labour market reforms implemented in 2012, unit labour costs fell by 1.4 per cent in the year ended in the first quarter of 2013. The external sector has recently been contributing positively to growth not just because of a contraction in imports but also because of strong growth in exports. After more than fifteen years of deficits, the current account has this year swung into surplus, but perhaps more significantly Spain has increased its share of exports to non-European countries by nearly 30 per cent since 2007. With fiscal consolidation easing, output seems likely to stabilise later this year and in 2014. GDP is forecast to contract by 1.6 per cent this year, and to begin recovery next year, with modest growth of 0.2 per cent.

Government bond yields and banks' funding costs have declined since last year as financial tensions in the Euro Area have eased. Yet credit conditions remain tight and lending has continued to decline. There has, however, been substantial progress in the restructuring of the banking sector under the programme of reforms supported by the European Stability Mechanism. The banking sector recapitalisation so far has used 43 billion out of the available 100 billion euros. This implies there is still room for absorbing losses from the construction sector. House prices have fallen by 25-30 per cent from their peak, with the largest annual drop so far, of nearly 9 per cent, in 2012. We expect this decline to continue somewhat further. This, coupled with the continuing weakness of the broader economy, indicates the likelihood of further increases in nonperforming loans on banks' balance sheets.

The fiscal deficit is still large and needs to be reduced further over the medium term to ensure debt sustainability. Government debt as a share of GDP is forecast to reach 100 per cent of GDP next year. The prospect of sluggish growth, at best, for the next several years points to the continuing urgency of action both in Spain and at the level of the Euro Area to promote growth and jobs.

Other EU countries in Central and Eastern Europe

The first quarter of 2013 saw listless economic activity in these economies outside the Euro Area. While GDP in Hungary picked up, the Polish economy remained stagnant and the recession in the Czech Republic intensified. In each case, official interest rates have been lowered over the past year to support demand: in the Czech Republic the benchmark rate has been reduced virtually to zero.

The Polish economy has slowed markedly since 2011. GDP grew by 2 per cent in 2012, with both the slowdown in the country's main export markets and sluggish domestic demand leaving their mark on economic activity. Household consumption was affected by the weakness of the labour market, with high unemployment and declining real wages. Business investment was hampered by a bleak demand outlook, uncertain prospects for Euro Area growth, and worsening financial conditions. As a result of the weakness of domestic demand, exports grew more strongly than imports last year, which provided some respite for economic activity. GDP growth is expected to weaken further this year, to 1.2 per cent. Some improvement should materialise next year, although the currently forecast growth rate of 2.9 per cent does not exceed the growth of potential. Reflecting the slowdown, inflation has fallen close to zero: the 12-month change in consumer prices was 0.2 per cent in June. Since last November, the central bank has lowered its benchmark interest rate from 4.75 per cent to 2.5 per cent, most recently with cuts of 25 basis points in early June and early July. The growth and inflation outlook indicates scope for further easing.

[FIGURE 4 OMITTED]

In 2012 the Hungarian economy entered recession, with GDP declining by 1.8 per cent in the year as a whole. Buoyant exports were insufficient to offset weak domestic demand, which partly reflected significant fiscal consolidation. While GDP recovered by 0.7 per cent in the first quarter of this year, prospects remain subdued. Household indebtedness remains high and continuing deleveraging is likely to limit consumer spending. Private investment is expected to decline further, in view of the continuing fall in lending by stressed banks and high surtaxes on certain capital-intensive sectors. Thus GDP is forecast to be virtually flat this year and to pick up by 1.6 per cent in 2014. With 12-month consumer price inflation below its 3 per cent target--it was 1.9 per cent in June--the central bank lowered its benchmark interest rate in several steps over the past year to 4 per cent from 7 per cent, and it has indicated that further reductions are in train.

The Czech Republic may be beginning to emerge from the recession that it entered in late 2011. GDP declined by 1.2 per cent in 2012, and in the first quarter of this year it fell by a further 1.3 per cent--the largest of six consecutive quarterly falls. Underlying the recession have been both the slump in the Euro Area and weak domestic demand, with consumer spending depressed by lower disposable incomes and reduced consumer confidence, and also a drop in public investment. Inflation below the central bank's 2 per cent target enabled it to lower its benchmark interest rate to 0.05 per cent in November 2012. Recent signs of the beginning of recovery include a notable improvement in PMI data for the manufacturing sector in June. In addition, unemployment has fallen in recent months--from 8 per cent in the first quarter to 7.3 per cent in June. Nevertheless, GDP is expected to decline by 0.7 per cent this year, while only a mild recovery is expected to materialise in 2014.

United States

After four years of recovery from the December 2007-June 2009 recession, growth remains tepid. GDP growth in the second quarter of this year seems likely to have been below the 1.8 per cent annual rate seen in the first quarter.

The labour market in recent months has been somewhat stronger than output data might have suggested: non-farm jobs increased by 202,000 a month, on average, in the six months to June, significantly more than in the preceding half-year and enough to reduce unemployment to 7.6 from 7.8 per cent. However, there has been little rise in the proportion of the labour force in employment, which remains well below pre-crisis levels (figure 5).

In recent months manufacturing activity has grown slightly, but construction and energy production have been stronger and the services sector has been buoyant.

Consumer spending has shown steady, modest growth since late last year, thanks partly to a reduced saving rate; buoyant housing and stock market prices are likely to have contributed through wealth and confidence effects. Consumer confidence has recently been close to five-year highs; but the low saving rate seems likely to limit the growth of consumer spending in the near term.

Taking into account recent data, including GDP revisions, we have lowered our growth forecast for 2013 to 1.7 percent from 2.2 per cent. Growth is expected to strengthen to 2.4 per cent in 2014 as fiscal drag eases.

[FIGURE 5 OMITTED]

An important factor slowing growth in 2013 is the fiscal contraction resulting from the tax increases introduced in January, as part of the 'fiscal cliff' agreement, and the spending sequester begun on March 1. In May the Congressional Budget Office published revised fiscal projections, with the federal budget deficit for the current fiscal year lowered to 4 per cent of GDP, 3 percentage points smaller than the deficit in FY 2012. The CBO estimates that the consolidation measures introduced this year will reduce GDP growth by about 1 1/2 percentage points. Because of the reduced deficit projections, agreement on raising the debt ceiling, which it had seemed would be needed by mid-year, now seems unlikely to be necessary until the fourth quarter. Political pressure to reach a broad budget agreement has also been reduced by the relative resilience of the economy in the face of the fiscal contraction. (Figure 6 shows NIESR's projections for the general government debt and deficit position, which include state and local governments.)

Inflation remains subdued. In May, the 12-month increase in the personal consumption deflator was I per cent, well below the Federal Reserve's 2 per cent target.

Short-term interest rates are unchanged at very low levels, but statements by the Fed since early May about the future normalisation of monetary policy, including the tapering of the 'QE3' asset purchases it began last September, have led to a sharp upturn in longer-term rates. The rise began in early May following a statement by the FOMC that it was 'prepared to increase or reduce the pace of its asset purchases', and apparently in anticipation of a subsequent, more specific announcement. It continued after Chairman Bernanke's statement to Congress on 22 May that the Fed could slow asset purchases 'in the next few meetings' as long as the labour market showed sustained improvement. The rise steepened after a press conference by the Chairman on 19 June, when he laid out a more specific provisional timetable: assuming economic growth in line with the Fed's projections, he expected that it would be appropriate to moderate the pace of asset purchases 'later this year' and end them around mid-2014, when unemployment could be expected to have fallen to about 7 per cent. About six months later, unemployment could be expected to have reached 6.5 per cent, the threshold (announced last December) where the Fed would expect to consider beginning to raise short-term rates, assuming inflation was close to target. Bernanke emphasised that this timetable was contingent on economic and financial developments, and he also referred, for example, to the possibility that the 6.5 per cent unemployment threshold could be lowered, and that the withdrawal of stimulus could be delayed by excessively low inflation. By early July, the yield on 10-year Treasury securities had risen by a full percentage point since early May, to about 2.6 per cent.

[FIGURE 6 OMITTED]

The Fed's revised growth forecasts for 2013 and 2014 are 2.45 and 3.25 per cent, respectively. These are more optimistic than our projections and the consensus, and do not to take into account the tightening of financial conditions associated with the recent rise of long-term interest rates. It seems not too unlikely that growth may turn out slower than the Fed's projections, or that labour market performance may weaken in the coming months, so that the tapering of QE and subsequent rise in short rates may come later than recently envisaged by the Fed.

Canada

After losing momentum in 2012, economic growth in Canada has begun to pick up this year. In the first quarter, GDP grew by 2.5 per cent at an annual rate, the fastest pace in six quarters. The largest contributor to growth was exports, which expanded at an annual rate of more than 6 per cent; domestic demand rose only slightly. Production growth was concentrated in the mining sector. More recent data indicate a strengthening of domestic demand. With export prospects improving as the US recovery continues, we forecast GDP growth of 2 per cent in 2013 (revised up from 1.6 per cent in May) and 2.4 per cent (unchanged) in 2014. Unemployment in June was 7.1 per cent, unchanged since the end of 2012 but 1.5 percentage points lower than the peaks of 2009. With the moderate economic growth in prospect, unemployment should decline further in the coming months, to pre-crisis levels of below 7 per cent.

The largest domestic risk to growth remains the possibility of a disorderly unwinding of household sector financial imbalances, as the housing market continues to cool off. Despite a slowing of credit growth, the ratio of household debt to disposable income was 161.8 per cent in the second quarter, only slightly lower than the record 162.8 per cent seen in the third quarter of last year. Borrowing rates remain low and there have been some signs of renewed buoyancy in housing: sales increased by 3.6 per cent and average prices by 3.7 per cent from April to May. This is despite four rounds of tightening of mortgage rules by the Canadian government to avert a potential housing bubble. In our forecast, we predict a continuing gradual correction of household imbalances, which will limit private consumption growth in the period ahead.

Inflation is low, at 1.2 per cent in June in terms of the 12-month increase in the CPI, and inflation expectations remain subdued. As slack in the economy is gradually reduced, inflation may be expected to rise towards the 2 per cent target. We thus forecast average annual inflation at 1.2 per cent in 2013 and 2 per cent in 2014. The Bank of Canada's key policy rate has been unchanged at 1 per cent for almost three years. As the Bank has signalled, a gradual withdrawal of stimulus is likely as slack is reduced.

Russia

GDP growth and short-term growth prospects have declined further, mainly reflecting lower global demand for Russian energy exports, curbs in public spending, and weak investment. After 3.7 per cent growth in 2012, GDP in the first quarter was 1.6 per cent higher than a year earlier, and more recent data suggest that the expansion is unlikely to have picked up. With unemployment close to historic lows--at 5.2 per cent in May--and inflation high--at 7.4 per cent a year--the economy also seems close to full capacity. We project that the Russian economy will grow by 2.3 per cent in 2013 and 3.6 per cent in 2014.

Fiscal policy is constrained by the recent lack of buoyancy in oil prices. In order to balance, the Russian budget relies on a certain oil price target to be met. Following increases in government spending of 17.8 per cent in 2012, this target has now increased to $115 per barrel, more than $10 above the current and projected price in the medium run. The budget proposal for 2013 therefore envisages spending growth of only 3.8 per cent. Moreover, in the medium run, it seems likely that the country will have to adjust further to a lower oil price target.

Monetary policy, meanwhile, is constrained by inflation. Consumer price inflation in the year to May was 7.4 per cent, above the Central Bank's informal target range of 5-6 per cent. The Central Bank, which plans to adopt a formal target for inflation from 2015, has affirmed its commitment to lowering inflation from its current rate. At its May meeting, its key interest rate was left unchanged at 8.25 per cent, where it has stood since last September. A lowering of rates seems unlikely in the near term. We project inflation of 5.4 per cent in 2013 and 5.0 per cent in 2014.

With the economy seemingly close to full capacity, improved growth performance will require reforms to boost investment and potential output, including improvements in the business climate, a strengthening of property rights, and reforms of the tax regime.

Brazil

Brazil's recovery from its sharp slowdown in 2011-12 has been meeting increasing difficulties. Growth fell sharply to 0.9 per cent in 2012, despite significant fiscal and monetary policy stimulus. A number of idiosyncratic and structural factors have weighed on business confidence and private investment; the ratio of domestic investment to GDP last year was 18.5 per cent, the lowest among the four BRICs. Persistent inflation, limited fiscal space and currency pressures are some of the reasons behind the downward revision to our projection of GDP growth in 2013 to 2.6 per cent. Our growth forecast for 2014 is revised up slightly, to 3.5 per cent, due to the likely boost to domestic demand triggered by the preparations for the World Cup/Olympic Games.

Unemployment has risen to 6 per cent in June from its record low of 4.6 per cent at the end of 2012, but it is still lower than at any time in the decade up to 2010. Inflation has been on an upward trend over the past year. In June, it reached 6.7 per cent in terms of the 12-month change in consumer prices, slightly above the central bank's target range of 2.5-6.5 per cent. The factors behind this rise have been strong wage growth, capacity constraints and currency depreciation. The central bank stepped up the pace of tightening in May when it moved from 25 to 50 basis points increases. It raised its benchmark rate to 8.5 per cent in July, after raising it to 8 per cent from 7.5 per cent in May. Although we expect this tightening to bring inflation down within its target range, the persistence of sources of concern for the Central Bank make us revise inflation figures upwards to 5.8 per cent in 2013 and 5.7 per cent in 2014.

Since our last forecast, the Real has depreciated by 12 per cent against the US dollar as US and other international bond yields have risen. This will complicate the reduction of inflation, but it will boost international competitiveness if domestic costs are contained, and help to strengthen the external current account, which over the past decade has swung from surplus to a deficit.

With its inflationary pressures, low unemployment as well as weakened government and household finances, it is now difficult for Brazil to promote growth through demand management policies. Supply-side reforms that promote private initiative and investment, improve human capital, and tackle infrastructure bottlenecks are needed to boost productivity and potential output. In a context of social unrest, such measures are also likely to require improvements in governance.

Japan

The fiscal and monetary stimulus polices introduced earlier in the year appear to have strengthened economic growth. GDP rose by 1.0 per cent in the first quarter, with private consumption and exports rising strongly. Business investment continued to decline, but the Tankan survey for June indicated that firms plan to increase capital expenditure by 5.5 per cent in the current fiscal year started in April, compared with the 2 per cent drop they had predicted in March. The survey also showed a significant improvement in business sentiment, with the highest reading in more than two years. Recent data for retail sales, bank lending, and exports also suggest that growth has been sustained. Our May projection of about 2 per cent GDP growth this year has thus looked increasingly solid and is unchanged, although we are now projecting a slight deceleration, to 1.8 per cent growth, in 2014. There are also signs of waning deflation: the 12-month change in the CPI excluding seasonal food, which the government aims to raise to 2 per cent within two years, rose to 0.4 per cent in June from -0.5 per cent in March.

Recent developments in financial markets have been mixed. Government benchmark bond yields bottomed out in May, and have since risen by about 20 basis points, to about 0.8 per cent at the 10-year maturity. The Yen stabilised in late May, after a major depreciation since late last year, and has since risen somewhat against the US dollar, although it is still about 30 per cent lower than last October. The stock market has retreated from peaks reached in late May, but it is about 70 per cent higher than last October. The reversals since May, partly related to the global rise in long-term interest rates, still leave changes from late 2012 that reflect the 'new phase of monetary easing' and that suggest expectations of stronger growth (figure 7).

[FIGURE 7 OMITTED]

The Bank of Japan's large-scale purchases of government bonds may be expected to heighten the sensitivity of financial markets to the government's fiscal position, especially given that gross public debt exceeds 200 per cent of annual GDP--the largest among the advanced economies. To illustrate the risks that a rise in market yields resulting from increased fiscal concerns might entail, we used the National Institute's model to simulate the effects of a permanent 1 percentage point rise in long-term interest rates. The results show a reduction of potential output in Japan by around 1.8 per cent in the medium term, with an increase of about 3 percentage points in the ratio of government debt to GDP (figure 8). This points to the importance of the early announcement of a concrete, credible plan for medium-term fiscal consolidation.

Increases in the consumption tax are planned for April 2014 (to 8 from 5 per cent) and April 2015 (to 10 per cent) but remain to be confirmed. If implemented they will constrain growth in the next two years, so there is a case for tax rises to be phased in more gradually. An outline of structural reforms to raise potential growth, announced by the Prime Minister in early June, was mainly a statement of objectives. A more specific plan of reforms is expected to be put forward in September.

[FIGURE 8 OMITTED]

India

There is little sign of a turnaround in India's economic slowdown. GDP rose by 3 per cent in the year to the first quarter of this year, close to the slowest growth in a decade. This contrasts with annual growth rates of 8-10 per cent in 2005-7 and 2010 (figure 9). Nor do more recent data point to an upturn: thus industrial production fell by 1.6 per cent in the year ended in May. Taking into account recent data and other developments, we have revised down our GDP forecasts for this year and next to just under 5 and 6 per cent, respectively, from 5.3 and 6.5 per cent in May.

The slowdown since 2011 may be attributed partly to government action to reduce the fiscal deficit, and partly to a tightening of monetary policy in 2010-11 to reduce inflation. But more important factors seem to have been a slowing of exports, a decline in corporate investment, and supply constraints that need to be addressed through structural reforms. In recent months the situation has been complicated by a marked weakening of the rupee, seemingly stemming from financial outflows related to the global rise in bond yields.

The tightening of monetary policy in 2010-11 helped to lower inflation over the past two years, from about 10 per cent in 2010-11 to below 5 per cent in recent months, in terms of the 12-month change in the wholesale prices index (WPI). (Consumer price inflation, meanwhile, has recently remained close to 10 per cent at an annual rate.) This led the Reserve Bank, in turn, to lower official rates gradually. Its latest step was a reduction of its benchmark rate in early May to 7.25 per cent from 7.5 per cent.

[FIGURE 9 OMITTED]

Since late May the rupee has depreciated by about 7 per cent in terms of the US dollar, in spite of reported official intervention in the foreign exchange market in support of the currency. Partly reflecting currency pressures, government bond yields have risen since late April by about 70 basis points. Moreover, the yield on credit default swaps on the State Bank of India, a proxy for the riskiness of the government's debt, has increased to levels last seen a year ago (figure 10). Although the Reserve Bank has so far avoided any increase in its benchmark rate for monetary policy, in mid-July it raised two other official rates by 2 percentage points to stem currency pressures, following indications that inflation was again picking up.

With inflation apparently not securely subdued, and with an external current account deficit that has widened significantly in recent years, it seems clear that a revival of growth in India will require supply side improvements, structural reforms, and an associated boost to investment. The implementation of reforms introduced by the government nine months ago has been disappointingly slow. Reforms needed to revive growth include a simplification and speeding up of approvals for investment projects and land acquisition, labour market reforms, and streamlining of the tax system.

[FIGURE 10 OMITTED]

China

The slowing of economic growth has continued. In the second quarter of this year GDP was 7.5 per cent higher than a year earlier--a further decline from the 7.7 per cent growth in the year to the first quarter. The recent slowing, which has reflected a weakening of both external and domestic demand, is broadly consistent with the authorities' growth target of 7.5 per cent for 2013, set in March, and with the objective of 7 per cent average annual growth for 2011-15 in the 5-year plan. The slowing is recognised as being unavoidable in the economy's transition to a more balanced growth path that is less dependent on exports and increasingly unproductive investment, less prone to the accumulation of excess capacity and external financial imbalances, more consumption-based, and more environment-friendly, and that will in the longer term deliver higher per capita incomes. In recent months it has become clearer that the new leadership, which came to office in March, is willing to prioritise economic reforms over short-term growth. This, in addition to recent data, has led us to lower projections for GDP growth by 0.4 percentage points for both 2013 and 2014.

The government has identified several key areas for reform, with the financial sector a high priority. The authorities have been concerned about the recent rapid growth of M2, significantly above the growth of nominal GDP, and also about the longer-term rise of total credit, including non-traditional lending by 'shadow banks', to about 200 per cent of GDP from about 120 per cent five years ago (figure 11).

[FIGURE 11 OMITTED]

The People's Bank of China referred in its June Financial Stability Report to the increasing risks of shadow banking activity, and in mid-June it took action to restrain the growth of credit, non-traditional and traditional, by reducing money-market liquidity. This led to an increase in short-term money market rates to record highs above 10 per cent, from about 3 per cent in May (figure 12). Subsequent injections of liquidity by the central bank returned interbank rates to more normal levels, but the action sent a message about the authorities' aims. The main source of the problem of the growth of non-traditional financing is financial repression. The authorities impose an upper limit on interest rates paid on bank deposits, which makes the cost of funding for banks low; and loan-to-deposit ratios and reserve requirements have been used to curb excessive bank lending. But to avoid lending caps banks have increasingly provided services off-balance sheet; non-traditional credit, funded by high-yielding wealth-management products, has risen to the equivalent of about 50 per cent of GDP. Shadow banking, being largely beyond the purview of regulators, carries relatively high risks; indeed, it is partly a result of regulatory arbitrage. It will need to be tackled not only through money market operations and prudential measures of the kind seen in recent months, but also by reforms that liberalise the traditional financial sector and remove the incentives for shadow financing. A step in this direction was taken in mid-July, when the central bank announced the removal of the floor under lending rates, but this is expected to have limited effects because the floor has generally not been binding.

[FIGURE 12 OMITTED]

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, Brazil, Hong Kong, Taiwan, Indonesia, Singapore, Vietnam, South Africa, Turkey, Estonia, Latvia, Lithuania, Slovenia, Romania and Bulgaria. (1) The rest of the world is modelled through regional blocks so that the model is global in scope. All models contain the determinants of domestic demand, export and import volumes, prices, current accounts and net assets. Output is tied down in the long run by factor inputs and technical progress interacting through production functions, but is driven by demand in the short to medium term. Economies are linked through trade, competitiveness and financial markets and are fully simultaneous. Further details on the NiGEM model are available on http://nimodel.niesr.ac.uk/.

The key interest rate and exchange rate assumptions underlying our current forecast are shown in tables A1-A2. Our short-term interest rate assumptions are generally based on current financial market expectations, as implied by the rates of return on treasury bills of different maturities. Long-term interest rate assumptions are consistent with forward estimates of short-term interest rates, allowing for a country-specific term premium in the Euro Area. Policy rates in the major advanced economies are expected to remain at extremely low levels at least until the end of 2014. The ECB cut interest rates in the Euro Area by 25 basis points in May 2013. We are currently projecting a further 25 basis point cut by the end of September, partly as a reaction to rising global bond yields, which have effectively tightened financial conditions in the depressed economies of the Euro Area. The Reserve Bank of Australia and Bank of Korea have also introduced a 25 basis point interest rate cut since May, while the central bank of Hungary has reduced rates by 50 basis points and the National Bank of Poland has reduced rates by 75 basis points in three steps. By contrast, tightening measures have been introduced in several emerging market economies in response to inflationary and financial market pressures, including China, Brazil, Indonesia, Turkey and India.

Interest rates in the US and Canada are expected to begin to rise in early 2015, preempting rate rises in Europe and Japan by 2-3 quarters. This is broadly consistent with the interest rate path signalled for the US by the Federal Open Market Committee (FOMC), which has stated that it plans to keep the target range for the federal funds rate unchanged at least as long as the unemployment rate remains above 6 1/2 per cent. At its most recent meeting in June 2013, the FOMC announced that it would continue quantitative easing measures, but has signalled a move towards a gradual tapering of QE, subject to continued improvements in the labour market. Global financial markets reacted strongly to the change in stance, putting upward pressure on global bond yields and triggering a temporary drop in global share prices. The move is in contrast to the looser stance adopted by the ECB and especially the radical loosening measures introduced by the Bank of Japan at the beginning of April 2013. The slant, if not the specifics, of the Japanese measures was widely anticipated following the election of Prime Minister Shinzo Abe in December 2012, and can largely explain the sharp depreciation of the yen since December.

[FIGURE A1 OMITTED]

Figure A1 illustrates the recent movement in, and our projections for, 10-year government bond yields in the US, Euro Area, Japan and Canada. The rise in government bond yields started in early May 2013, well in advance of the June statement by the FOMC. While yields have drifted down marginally since their recent peak in early July, the level of bond yields in the UK and the US is expected to be about 50 basis points higher in 2014 than anticipated three months ago, and up by about 15 basis points in Japan. In the Euro Area, average bond yields are broadly unchanged, as the recent rise in yields in Germany is offset by a narrowing of spreads over Germany in the vulnerable economies of Greece, Portugal, Spain, Ireland and Italy. Box A in the World Overview section quantifies the macroeconomic impact of the recent movement in long rates using NiGEM simulations.

Figure A2 depicts the spread between 10-year government bond yields of Spain, Italy, Portugal, Ireland and Greece over Germany. Sovereign risks in the Euro Area have been a major macroeconomic issue for the global economy and financial markets over the past two years. The final agreement on the Private Sector Involvement in the Greek default in February 2012 and the 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 in Spring 2013, although there has been some recent upward pressure on yields in Portugal in particular, related to uncertainty over the fiscal austerity programme, parts of which were declared unconstitutional. In our forecast, we have assumed spreads remain at current levels until the end of 2014, and start to recede in 2015 in all Euro Area countries. The implicit assumption underlying this is that the Euro Area continues to hold together in its current form and progress is made towards establishing a banking union.

[FIGURE A2 OMITTED]

Figure A3 reports the spread of corporate bond yields over government bond yields in the US, UK and Euro Area. This acts as a proxy for the margin between private sector and 'risk free' borrowing costs. Private sector borrowing costs have risen more or less in line with or less than the observed rise in government bond yields since May, illustrated by the stability of these spreads in the US and Euro Area and a marginal decline in the UK. Our forecast assumption is for corporate spreads to remain at current levels until the end of 2014, and then recede gradually by 30-40 basis points from 2015. Nominal exchange rates against the US dollar are generally assumed to remain constant at the rate prevailing on 11 July 2013 until the end of March 2014. After that, they follow a backward-looking uncovered-interest parity condition, based on interest rate differentials relative to the US. We have modified this assumption for the Euro Area and China. For the euro, we have assumed that the anticipated interest rate cut in the second half of this year will lead to a modest depreciation of the currency of about 0.7 per cent in effective terms. For China we have assumed that the exchange rate target continues to follow a gradual appreciation against the US$, of about 3 1/2 per cent in 2014, 3 per cent in 2015 and 2 3/4 per cent in 2016.

Our oil price assumptions for the short term are based on those of the US Energy Information Administration, who use information from forward markets as well as an evaluation of supply conditions, and are reported in table 1 at the beginning of this chapter. The price of oil has come down marginally since the start of the year, although the most recent movements in July have been upward. Our forecast assumption is for a modest decline in oil prices in 2014 of about $5-6 per barrel. Over the medium term, oil price growth will be restrained in part by the rise in new extraction methods for oil and gas, especially in the US (see the discussion in February 2013 National Institute Economic Review).

[FIGURE A3 OMITTED]

[FIGURE A4 OMITTED]

Our equity price assumptions for the US reflect the expected return on capital. Other equity markets are assumed to move in line with the US market, but are adjusted for different exchange rate movements and shifts in country-specific equity risk premia. Figure A5 illustrates the key equity price assumptions underlying our current forecast. Global share prices dropped in reaction to the signals from the Federal Reserve that it may begin to taper QE, but these declines were short-lived and major equity markets have more or less recovered. Share prices in some of the more vulnerable economies of the Euro Area, however, remain depressed relative to their position in the first quarter of 2013 (Greece, Portugal, Spain, Slovenia). The most significant gains have been in Japan. Since the end of 2012, share prices in Japan have jumped by more than 50 per cent, mirroring the exchange rate movements over the same period.

Fiscal policy assumptions for 2013-14 follow announced policies as of 1 July 2013. Average personal sector tax rates and effective corporate tax rate assumptions underlying the projections are reported in table A3. Our forecast also incorporates planned/enacted VAT rate rises in 2013-14 for Canada, Finland, France, Italy and Japan, and a decline in Ireland. Government spending is expected to decline as a share of GDP between 2012 and 2014 in most countries reported in the table, with the exceptions of Germany and Greece. 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. A policy loosening relative to our current assumptions poses an upside risk to the short-term outlook in Europe. For a discussion of fiscal multipliers and the impact of fiscal policy on the macroeconomy based on NiGEM simulations, see Barrell, Holland and Hurst (2013).

[FIGURE A5 OMITTED]

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 0.50 0.50
2014 0.25 1.00 0.10 0.25 0.50
2015 0.93 1.53 0.11 0.43 0.58
2016-2020 2.74 3.07 0.68 1.80 1.80
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 0.60 0.50
2013 Q3 0.25 1.00 0.10 0.40 0.50
2013 Q4 0.25 1.00 0.10 0.25 0.50
2014 Q1 0.25 1.00 0.10 0.25 0.50
2014 Q2 0.25 1.00 0.10 0.25 0.50
2014 Q3 0.25 1.00 0.10 0.25 0.50
2014 Q4 0.25 1.00 0.10 0.25 0.50
2015 Q1 0.52 1.25 0.10 0.25 0.50
2015 Q2 0.80 1.50 0.10 0.25 0.50
2015 Q3 1.07 1.63 0.10 0.50 0.60
2015 Q4 1.34 1.75 0.15 0.71 0.71

 10-year government bond yields

 US Canada Japan Euro Area UK

2010 3.2 3.2 1.2 3.3 3.6
2011 2.8 2.8 1.1 3.9 3.1
2012 1.8 1.9 0.8 3.2 1.8
2013 2.3 2.2 0.8 2.7 2.3
2014 2.9 2.9 1.0 3.2 2.7
2015 3.3 3.3 1.1 3.5 2.9
2016-2020 4.0 4.0 1.7 3.9 3.6
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 2.0 2.0 0.7 2.5 1.9
2013 Q3 2.6 2.5 0.9 2.8 2.6
2013 Q4 2.7 2.6 0.9 2.9 2.6
2014 Q1 2.8 2.7 0.9 3.0 2.6
2014 Q2 2.9 2.8 0.9 3.1 2.7
2014 Q3 3.0 2.9 I.0 3.2 2.7
2014 Q4 3.1 3.0 I.0 3.4 2.8
2015 Q1 3.2 3.2 1.0 3.4 2.8
2015 Q2 3.3 3.3 1.1 3.4 2.9
2015 Q3 3.3 3.3 1.1 3.5 2.9
2015 Q4 3.4 3.4 1.2 3.5 3.0

Table A2. Nominal exchange rates

 Percentage change in effective rate

 Euro
 US Canada Japan Area Germany France

2010 -3.1 9.4 4.0 -3.2 -3.8 -3.1
2011 -3.0 2.0 6.8 0.9 0.5 1.0
2012 3.4 1.0 2.2 -1.9 -2.0 -2.0
2013 2.8 -3.1 -17.6 1.7 1.8 1.7
2014 1.5 -1.2 -2.1 -0.1 -0.2 -0.2
2015 0.5 -0.6 -0.5 0.4 0.3 0.5
2012 Q1 -0.5 3.1 -2.5 -1.4 -1.6 -1.3
2012 Q2 1.9 -2.8 -0.1 -0.5 -0.5 -0.5
2012 Q3 -0.4 5.1 2.4 -0.9 -1.0 -0.9
2012 Q4 -0.8 -1.5 -4.2 1.2 1.2 1.2
2013 Q1 1.2 -3.1 -12.0 1.2 1.3 1.2
2013 Q2 1.1 0.6 -5.8 0.1 0.2 0.1
2013 Q3 2.1 -2.1 -0.2 0.5 0.5 0.4
2013 Q4 0.1 0.0 -0.1 -0.7 -0.8 -0.7
2014 Q1 -0.1 0.0 -0.2 0.0 0.0 0.0
2014 Q2 0.1 -0.2 -0.2 0.1 0.1 0.1
2014 Q3 0.1 -0.2 -0.2 0.1 0.1 0.1
2014 Q4 0.1 -0.2 -0.2 0.1 0.1 0.1
2015 Q1 0.1 -0.2 -0.2 0.1 0.1 0.1
2015 Q2 0.1 -0.2 -0.1 0.1 0.1 0.1
2015 Q3 0.1 -0.2 0.0 0.1 0.1 0.2
2015 Q4 0.1 -0.1 0.0 0.1 0.1 0.1

 Percentage
 change in
 effective rate Bilateral rate per US $

 Italy UK Canadian $ Yen Euro Sterling

2010 -3.4 -0.5 1.026 87.8 0.755 0.647
2011 1.3 -0.2 0.995 79.8 0.719 0.624
2012 -1.6 4.2 0.997 79.8 0.778 0.631
2013 1.9 -3.1 1.038 97.9 0.770 0.656
2014 -0.1 0.2 1.055 100.7 0.783 0.665
2015 0.6 0.3 1.062 101.6 0.782 0.666
2012 Q1 -1.4 1.1 0.994 79.3 0.763 0.636
2012 Q2 -0.5 2.5 1.027 80.1 0.780 0.632
2012 Q3 -0.8 1.1 0.979 78.6 0.799 0.633
2012 Q4 1.4 -0.5 0.990 81.2 0.771 0.623
2013 Q1 1.3 -3.9 1.025 92.3 0.757 0.645
2013 Q2 0.1 0.3 1.023 98.8 0.766 0.651
2013 Q3 0.5 -0.5 1.052 100.3 0.773 0.665
2013 Q4 -0.8 0.5 1.052 100.3 0.783 0.665
2014 Q1 0.0 0.0 1.052 100.3 0.783 0.665
2014 Q2 0.1 0.0 1.054 100.6 0.783 0.665
2014 Q3 0.1 0.0 1.056 100.9 0.783 0.665
2014 Q4 0.1 0.0 1.058 101.1 0.783 0.666
2015 Q1 0.1 0.0 1.059 101.4 0.783 0.666
2015 Q2 0.2 0.1 1.061 101.6 0.782 0.666
2015 Q3 0.2 0.1 1.063 101.7 0.781 0.666
2015 Q4 0.2 0.1 1.065 101.8 0.780 0.665

Table A3. Government revenue assumptions

 Average income tax rate
 (per cent) (a)

 2012 2013 2014

Australia 14.5 14.2 14.1
Austria 31.6 31.8 31.7
Belgium 33.9 33.9 33.9
Canada 21.5 21.6 21.5
Denmark 37.4 37.6 37.0
Finland 32.0 32.2 32.4
France 30.1 30.4 30.4
Germany 28.2 28.0 27.9
Greece 17.6 17.5 17.5
Ireland 25.1 25.7 24.9
Italy 29.6 30.3 30.3
Japan 22.9 23.0 23.4
Netherlands 34.9 35.7 35.7
Portugal 19.5 21.3 22.1
Spain 24.2 24.9 25.1
Sweden 29.8 30.0 30.0
UK 23.0 23.2 23.5
US 17.3 19.1 19.1

 Effective corporate tax rate
 (per cent)

 2012 2013 2014

Australia 25.7 25.7 25.7
Austria 19.9 19.9 19.9
Belgium 16.7 16.7 16.7
Canada 19.6 19.5 20.3
Denmark 18.1 18.1 18.1
Finland 22.5 22.4 22.6
France 17.6 23.6 23.6
Germany 16.8 16.8 16.8
Greece 13.5 13.5 13.5
Ireland 9.8 9.8 9.8
Italy 26.4 26.4 26.4
Japan 29.2 29.4 29.6
Netherlands 8.1 8.3 8.4
Portugal 18.6 18.6 18.6
Spain 25.2 25.2 25.2
Sweden 30.4 30.4 30.4
UK 17.6 16.3 14.6
US 28.4 28.6 28.8

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

 2012 2013 2014

Australia 31.6 32.8 32.3
Austria 39.0 38.9 38.3
Belgium 43.8 44.0 43.7
Canada 35.2 35.6 35.7
Denmark 46.1 46.5 46.7
Finland 44.8 45.6 45.2
France 45.2 46.0 46.3
Germany 45.7 45.5 45.2
Greece 40.0 44.7 45.6
Ireland 28.5 28.4 30.0
Italy 44.9 45.8 45.5
Japan 31.9 31.1 31.4
Netherlands 41.8 41.9 41.6
Portugal 36.2 37.4 37.5
Spain 32.0 36.2 36.6
Sweden 45.0 44.5 43.7
UK 37.2 37.4 37.4
US 27.6 29.6 30.0

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 32.2 31.4
Austria 38.8 38.7 37.6
Belgium 44.2 43.8 43.0
Canada 35.2 35.3 34.9
Denmark 48.3 46.9 46.8
Finland 45.6 45.8 44.6
France 47.4 47.7 47.3
Germany 43.4 43.6 44.0
Greece 45.0 46.9 46.4
Ireland 32.3 32.0 30.7
Italy 42.5 43.1 42.2
Japan 39.3 39.0 37.8
Netherlands 43.9 43.8 43.8
Portugal 38.2 37.8 36.9
Spain 39.7 39.8 39.2
Sweden 44.5 44.3 43.4
UK 39.7 38.9 37.9
US 33.4 32.8 32.1

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

 2012 2013 2014 of GDP(b)

Australia 1.7 1.8 1.6 2013
Austria 2.6 2.5 2.3 2011
Belgium 3.5 3.3 3.1 2013
Canada 3.4 3.2 3.1 2013
Denmark 1.8 1.7 1.6 2013
Finland 1.4 1.4 1.2 --
France 2.6 2.6 2.5 2016
Germany 2.0 1.8 1.5 2011
Greece 5.0 5.7 6.0 --
Ireland 3.6 3.9 3.9 2019
Italy 5.4 5.7 5.8 2012
Japan 2.1 1.8 1.7 --
Netherlands 1.9 1.8 1.7 2017
Portugal 4.4 5.2 5.3 2016
Spain 3.0 3.8 4.2 2018
Sweden 1.0 1.0 0.9 --
UK 3.0 3.0 3.1 2017
US 2.8 2.5 2.4 2016

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

 2010 2011 2012 2013 2014 2015-19

Australia 2.6 2.4 3.6 2.4 2.6 3.3
Austria (a) 2.2 2.7 0.8 0.3 1.2 2.5
Belgium (a) 2.4 1.9 -0.3 0.2 1.1 2.1
Bulgaria (a) 0.2 2.0 0.8 0.5 1.3 3.0
Brazil 7.5 2.7 0.9 2.6 3.5 4.2
China 10.4 9.3 7.9 7.4 7.0 6.7
Canada 3.4 2.5 1.7 2.0 2.4 2.6
Czech Rep. 2.3 1.8 -1.2 -0.7 1.9 2.9
Denmark (a) 1.6 1.1 -0.4 0.1 1.5 2.1
Estonia (a) 3.3 8.3 3.2 2.0 3.7 2.1
Finland (a) 3.3 2.8 -0.2 0.2 2.5 1.9
France (a) 1.6 2.0 0.0 -0.2 0.6 1.4
Germany (a) 4.0 3.1 0.9 0.5 1.4 1.2
Greece (a) -4.9 -7.1 -6.4 -5.9 -0.1 1.9
Hong Kong 6.8 4.9 1.5 3.1 3.2 3.2
Hungary (a) 1.3 1.6 -1.8 0.1 1.6 3.8
India 11.4 7.5 4.1 4.9 5.9 6.9
Indonesia 6.2 6.5 6.2 6.0 6.4 7.4
Ireland (a) -1.1 2.2 0.1 -0.4 2.7 2.9
Italy (a) 1.7 0.5 -2.4 -1.9 0.2 2.2
Japan 4.7 -0.5 1.9 2.1 1.8 1.5
Lithuania (a) 1.5 6.0 3.6 3.5 3.9 3.3
Latvia (a) -1.4 5.2 5.5 3.6 4.4 4.3
Mexico 5.3 3.9 3.9 2.2 3.2 3.4
Netherlands (a) 1.5 1.0 -1.3 -0.7 0.9 1.9
New Zealand 0.9 1.3 3.2 2.7 2.8 3.0
Norway 0.2 1.3 3.0 1.0 3.6 2.6
Poland (a) 3.9 4.5 2.0 1.2 2.9 2.7
Portugal (a) 1.9 -1.6 -3.2 -2.3 0.2 2.2
Romania (a) -0.9 2.3 0.4 2.3 2.7 2.5
Russia 4.4 4.3 3.7 2.3 3.6 3.5
Singapore 14.8 5.2 1.3 1.5 3.9 5.8
South Africa 3.1 3.5 2.5 2.5 3.9 3.4
S. Korea 6.3 3.7 2.0 2.4 3.0 4.4
Slovakia (a) 4.4 3.2 2.0 0.8 2.5 2.7
Slovenia (a) 1.1 1.0 -2.2 -2.0 0.2 2.1
Spain (a) -0.3 0.4 -1.4 -1.6 0.2 2.6
Sweden (a) 6.3 3.8 I.1 1.9 2.3 2.6
Switzerland 3.0 1.8 1.0 1.9 2.7 2.1
Taiwan 10.8 4.1 1.3 2.5 3.1 3.3
Turkey 9.5 8.5 2.2 3.5 3.2 6.5
UK (a) 1.7 1.1 0.2 1.2 1.8 2.1
US 2.4 1.8 2.2 1.7 2.4 3.0
Vietnam 6.8 6.2 5.2 5.3 5.1 4.2
Euro Area (a) 1.9 1.5 -0.5 -0.6 0.8 1.8
EU-27 (a) 2.0 1.6 -0.3 -0.1 1.2 1.9
OECD 3.0 1.9 1.4 1.3 2.0 2.7
World 5.2 4.0 3.2 3.1 3.6 4.1

 Annual inflation (a) (per cent)

 2010 2011 2012 2013 2014 2015-19

Australia 2.5 2.4 2.2 3.1 3.2 3.0
Austria (a) 1.7 3.6 2.6 2.4 1.9 1.9
Belgium (a) 2.3 3.4 2.6 1.3 1.2 2.3
Bulgaria (a) 3.0 3.4 2.4 2.0 2.6 3.3
Brazil 5.1 6.6 5.4 5.8 5.7 4.4
China 3.3 5.4 2.7 2.6 3.0 3.1
Canada 1.4 2.1 1.4 1.2 2.0 2.1
Czech Rep. 1.2 2.1 3.5 1.9 1.5 1.7
Denmark (a) 2.2 2.7 2.4 0.7 1.1 1.7
Estonia (a) 2.7 5.1 4.2 3.9 2.5 4.3
Finland (a) 1.7 3.3 3.2 2.4 1.2 2.2
France (a) 1.7 2.3 2.2 1.2 1.3 1.7
Germany (a) 1.2 2.5 2.1 1.6 1.7 2.4
Greece (a) 4.7 3.1 1.0 -0.4 0.3 2.1
Hong Kong 1.3 3.6 3.1 3.0 2.8 2.9
Hungary (a) 4.7 3.9 5.7 2.5 3.0 3.1
India 12.0 8.8 9.4 10.0 6.8 5.4
Indonesia 5.1 5.4 4.3 5.9 5.3 5.2
Ireland (a) -1.6 1.2 1.9 0.9 1.5 2.0
Italy (a) 1.6 2.9 3.3 1.9 1.6 2.5
Japan -1.7 -0.9 -0.6 -0.4 1.3 1.2
Lithuania (a) 1.2 4.1 3.2 2.3 2.6 5.2
Latvia (a) -1.2 4.2 2.3 1.1 2.3 3.7
Mexico 4.2 3.4 4.1 4.4 5.4 3.8
Netherlands (a) 0.9 2.5 2.8 3.0 1.4 2.1
New Zealand 1.6 3.0 0.8 0.7 1.9 3.0
Norway 2.3 1.3 0.8 1.8 2.6 3.2
Poland (a) 2.7 3.9 3.7 1.2 2.1 1.8
Portugal (a) 1.4 3.6 2.8 0.6 0.5 2.2
Romania (a) 6.1 5.8 3.4 4.1 2.6 2.3
Russia 6.9 8.4 5.1 5.4 5.0 5.5
Singapore 2.9 5.3 4.5 4.4 5.0 5.7
South Africa 3.9 5.0 5.7 6.9 6.5 5.2
S. Korea 2.9 4.0 2.2 1.9 2.8 3.3
Slovakia (a) 0.7 4.1 3.7 2.2 2.5 2.6
Slovenia (a) 2.1 2.1 2.8 1.7 1.1 3.0
Spain (a) 2.0 3.1 2.4 1.7 1.0 2.1
Sweden (a) 1.9 1.4 0.9 0.6 1.1 2.6
Switzerland 0.9 0.1 -0.5 0.2 1.0 2.9
Taiwan 0.7 0.8 1.3 1.3 1.2 1.8
Turkey 8.6 6.5 8.9 6.9 5.2 6.4
UK (a) 3.3 4.5 2.8 2.7 2.3 2.0
US 1.9 2.4 1.8 1.0 1.7 2.6
Vietnam 8.9 18.7 9.1 7.0 6.0 6.9
Euro Area (a) 1.6 2.7 2.5 1.6 1.4 2.2
EU-27 (a) 2.1 3.1 2.6 1.8 1.6 2.2
OECD 2.0 2.5 2.1 1.6 2.0 2.6
World 4.1 5.3 4.8 4.2 3.8 3.8

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

Table B2. Fiscal balance and government debt

 Fiscal balance (percent of GDP) (a)

 2010 2011 2012 2013 2014 2019

Australia -5.2 -3.6 -3.3 -1.2 -0.8 -1.1
Austria (a) -4.5 -2.4 -2.5 -2.3 -1.7 -1.5
Belgium (a) -3.9 -3.9 -4.0 -3.0 -2.4 -1.8
Bulgaria -3.1 -2.0 -0.8 0.3 0.5 -0.6
Canada -4.9 -3.7 -3.4 -2.9 -2.3 -1.6
Czech Rep. -4.8 -3.3 -4.4 -2.9 -3.2 -2.9
Denmark (a) -2.5 -1.8 -4.0 -2.1 -1.7 -1.5
Estonia 0.2 1.2 -0.3 0.8 0.7 -1.1
Finland (a) -2.8 -1.1 -2.3 -1.6 -0.7 -1.3
France (a) -7.1 -5.3 -4.8 -4.3 -3.5 -2.1
Germany (a) -4.1 -0.8 0.2 0.1 -0.3 -1.6
Greece (a) -10.8 -9.6 -10.0 -7.9 -6.8 -3.1
Hungary -4.4 4.2 -2.0 -2.8 -2.7 -1.1
Ireland (a,c) -30.8 -13.3 -7.5 -7.5 -4.7 -2.9
Italy (a) -4.5 -3.8 -3.0 -3.0 -2.4 -0.8
Japan -8.3 -8.9 -9.5 -9.7 -8.1 -5.4
Lithuania -7.2 -5.5 -3.2 -2.5 -2.1 -1.5
Latvia -8.1 -3.6 -1.2 0.0 -0.9 -1.0
Netherlands (a) -5.0 -4.4 -4.0 -3.7 -3.9 -2.6
Poland -7.9 -5.0 -3.9 -3.1 -2.4 -1.7
Portugal (a) -9.9 -4.4 -6.4 -5.6 -4.7 -1.5
Romania -6.8 -5.6 -2.9 -2.7 -2.5 -1.8
Slovakia -7.7 -5.1 -4.3 -2.4 -1.5 0.1
Slovenia -5.9 -6.4 -4.0 -3.8 -3.3 -0.7
Spain (a) -9.4 -8.6 -10.7 -7.3 -6.8 -2.4
Sweden (a) 0.3 0.2 -0.5 -0.7 -0.6 -0.8
UK (a) -10.0 -7.7 -6.1 -6.5 -5.5 -0.8
US -11.4 -10.2 -8.6 -5.7 -4.5 -2.3

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

 2010 2011 2012 2013 2014 2019

Australia 23.0 26.7 32.1 31.2 30.3 25.9
Austria (a) 71.9 72.5 73.5 72.9 71.1 62.3
Belgium (a) 95.6 97.7 99.8 100.0 98.8 86.5
Bulgaria -- -- -- -- -- --
Canada 81.5 81.7 83.4 83.3 82.4 73.1
Czech Rep. 37.8 40.8 45.8 49.3 51.8 54.7
Denmark (a) 42.7 46.4 45.7 47.3 48.1 48.2
Estonia -- -- -- -- -- --
Finland (a) 48.7 49.0 53.1 53.1 51.1 44.5
France (a) 82.4 86.0 90.7 93.3 94.4 91.7
Germany (a) 82.5 80.4 81.9 79.4 76.7 65.1
Greece (a) 148.3 170.3 157.0 176.1 179.2 165.1
Hungary 81.8 81.4 79.2 77.1 72.7 53.6
Ireland (a,c) 92.1 106.4 117.6 127.1 124.3 114.1
Italy (a) 119.4 120.8 127.0 130.6 130.6 103.8
Japan 192.7 202.8 213.1 213.1 213.9 209.1
Lithuania -- -- -- -- -- --
Latvia -- -- -- -- -- --
Netherlands (a) 63.2 65.4 71.1 73.7 75.9 76.0
Poland 54.8 56.2 55.6 57.6 58.1 56.4
Portugal (a) 94.0 108.3 123.6 129.2 132.3 114.8
Romania -- -- -- -- -- --
Slovakia -- -- -- -- -- --
Slovenia -- -- -- -- -- --
Spain (a) 61.5 69.3 84.1 93.0 100.1 94.8
Sweden (a) 39.4 38.4 38.2 37.5 36.4 30.6
UK (a) 78.4 84.3 88.8 91.4 93.7 88.2
US 96.4 100.7 105.1 107.5 107.0 92.0

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 5.4 4.9 4.7
Austria 4.4 4.2 4.4 4.6 4.0 3.8
Belgium 8.2 7.2 7.6 8.5 7.8 7.2
Bulgaria 10.3 11.3 12.3 12.3 10.3 9.8
Canada 8.0 7.5 7.3 6.9 7.1 6.6
China -- -- -- -- -- --
Czech Republic 7.3 6.7 7.0 7.3 7.7 7.2
Denmark 7.4 7.6 7.5 6.7 6.2 6.2
Estonia 16.9 12.5 10.1 8.6 9.2 9.3
Finland 8.4 7.8 7.7 8.3 7.4 6.7
France 9.7 9.6 10.3 11.0 11.1 9.9
Germany 7.1 5.9 5.4 5.4 5.0 5.4
Greece 12.6 17.7 24.4 27.7 27.4 23.7
Hungary 11.2 11.0 10.9 10.9 11.1 7.7
Ireland 13.9 14.7 14.7 14.2 14.8 13.1
Italy 8.4 8.4 10.7 12.2 12.2 10.7
Japan 5.1 4.6 4.3 3.9 4.1 4.5
Lithuania 18.0 15.3 13.3 12.6 12.4 12.1
Latvia 19.9 16.4 14.8 13.1 13.2 13.3
Netherlands 4.5 4.4 5.3 6.8 7.7 6.3
Poland 9.6 9.7 10.1 10.6 10.6 8.7
Portugal 12.1 13.0 15.9 17.9 17.3 11.8
Romania 7.3 7.4 7.0 7.6 8.1 7.8
Slovakia 14.5 13.7 14.0 13.6 12.5 12.0
Slovenia 7.3 8.2 8.9 9.6 8.5 7.7
Spain 20.1 21.7 25.0 27.0 27.4 22.0
Sweden 8.6 7.8 8.0 8.0 7.2 7.1
UK 7.9 8.1 7.9 8.0 7.9 7.2
US 9.6 8.9 8.1 7.5 7.0 6.0

 Current account balance (per cent of GDP)

 2010 2011 2012 2013 2014 2015-19

Australia -2.9 -2.3 -3.5 -3.6 -3.9 -1.7
Austria 3.5 1.3 1.8 1.7 1.4 -0.7
Belgium 1.9 -1.1 -1.4 -1.8 -1.4 -0.2
Bulgaria -1.6 0.2 -1.5 -4.3 -0.4 3.1
Canada -3.5 -2.8 -3.4 -3.2 -2.9 -2.2
China 4.5 2.1 2.6 3.2 3.4 2.0
Czech Republic -3.8 -2.7 -2.5 -5.9 -10.0 -9.5
Denmark 5.9 5.6 5.7 5.3 5.4 4.7
Estonia 3.0 2.2 -1.3 3.0 4.6 1.3
Finland 2.4 -0.7 -1.5 0.5 1.5 0.2
France -1.6 -1.9 -2.3 -1.6 -0.7 0.5
Germany 6.1 6.2 7.1 6.7 6.8 6.2
Greece -10.1 -9.9 -3.4 1.2 6.0 7.5
Hungary 1.1 0.8 1.6 -0.4 3.6 4.7
Ireland 1.2 1.1 4.9 6.6 7.6 6.9

Italy -3.5 -3.1 -0.7 -0.1 -0.1 1.5
Japan 3.7 2.0 1.1 1.8 2.3 3.6
Lithuania 0.1 -1.5 -0.6 7.2 8.4 1.1
Latvia 3.3 -2.4 -1.9 -1.3 -1.1 -0.6
Netherlands 7.8 10.2 10.0 11.9 12.1 12.4
Poland -4.7 -4.3 -2.9 -1.3 -2.6 -6.5
Portugal -10.6 -7.0 -1.5 1.3 2.9 4.5
Romania -6.2 -6.2 -5.3 -1.7 -2.1 -1.2
Slovakia -3.4 -1.8 1.9 1.5 -1.4 -4.6
Slovenia -0.6 0.0 2.3 5.4 7.3 6.8
Spain -4.5 -3.7 -1.1 0.6 0.9 1.6
Sweden 6.8 7.0 7.1 5.6 5.2 4.1
UK -2.7 -1.5 -3.8 -2.6 -2.2 -2.8
US -3.1 -3.0 -2.8 -2.6 -2.6 -2.3

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 1.6
Private consumption deflator 0.1 1.9 2.4 1.8
RPDI -2.6 2.2 1.6 1.7
Unemployment, % 9.3 9.6 8.9 8.1

General Govt. balance as % of GDP -11.9 -11.4 -10.2 -8.6
General Govt. debt as % of GDP (b) 87.8 96.4 100.7 105.1
Current account as % of GDP -2.7 -3.1 -3.0 -2.8

 Average
 2013 2014 2015-19

GDP 1.7 2.4 3.0

Consumption 2.2 1.9 2.4
Investment : housing 10.1 5.1 6.3
 : business 4.9 6.8 6.9
Government : consumption -2.2 -0.7 1.1
 : investment -4.3 -0.5 1.5
Stockbuilding (a) 0.0 0.2 0.0
Total domestic demand 1.8 2.2 2.9

Export volumes 2.1 6.5 6.5
Import volumes 2.3 5.3 5.2

Average earnings 1.3 2.3 3.9
Private consumption deflator 1.0 1.7 2.6
RPDI 0.2 2.4 2.8
Unemployment, % 7.5 7.0 6.0

General Govt. balance as % of GDP -5.7 -4.5 -2.8
General Govt. debt as % of GDP (b) 107.5 107.0 98.2
Current account as % of GDP -2.6 -2.6 -2.3

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

Table B5. Canada Percentage change

 2009 2010 2011 2012

GDP -2.7 3.4 2.5 1.7
Consumption 0.4 3.4 2.3 1.9
Investment : housing -7.0 8.7 1.6 6.1
 : business -20.3 14.2 10.9 6.1
Government : consumption 3.3 2.7 0.8 1.1
 : investment 9.3 10.5 -7.0 0.5
Stockbuilding (a) -0.8 0.3 0.5 0.0
Total domestic demand -2.3 5.2 2.8 2.3

Export volumes -13.1 6.9 4.7 1.5
Import volumes -12.4 13.6 5.7 3.1

Average earnings 2.1 1.6 3.4 2.9
Private consumption deflator 0.2 1.4 2.1 1.4
RPDI 0.7 2.2 2.2 2.4
Unemployment, % 8.3 8.0 7.5 7.3

General Govt. balance as % of GDP -4.5 -4.9 -3.7 -3.4
General Govt. debt as % of GDP (b) 79.3 81.5 81.7 83.4
Current account as % of GDP -2.9 -3.5 -2.8 -3.4

 Average
 2013 2014 2015-19

GDP 2.0 2.4 2.6
Consumption 1.8 1.9 1.8
Investment : housing -0.6 5.0 5.8
 : business 3.2 4.1 2.2
Government : consumption 0.8 0.1 2.3
 : investment 2.0 3.3 2.9
Stockbuilding (a) -0.1 0.0 0.0
Total domestic demand 1.5 2.0 2.3

Export volumes 5.1 5.6 5.2
Import volumes 2.4 4.4 4.1

Average earnings 2.4 3.2 3.9
Private consumption deflator 1.2 2.0 2.1
RPDI 2.1 1.9 2.2
Unemployment, % 6.9 7.1 6.6

General Govt. balance as % of GDP -2.9 -2.3 -1.8
General Govt. debt as % of GDP (b) 83.3 82.4 77.2
Current account as % of GDP -3.2 -2.9 -2.2

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 1.9

Consumption -0.7 2.8 0.5 2.3
Investment : housing -16.3 -4.8 5.5 3.0
 : business -14.2 0.7 3.3 1.9
Government : consumption 2.3 1.9 1.4 2.4
 : investment 7.8 0.1 -6.9 12.6
Stockbuilding (a) -1.5 0.9 -0.4 0.1
Total domestic demand -3.8 2.9 0.4 2.8

Export volumes -24.4 24.5 -0.4 -0.1
Import volumes -15.8 11.1 5.9 5.5

Average earnings -0.5 -1.4 0.8 -1.0
Private consumption deflator -2.5 -1.7 -0.9 -0.6
RPDI 1.4 2.2 0.6 -0.1
Unemployment, % 5.1 5.1 4.6 4.3

Govt. balance as I of GDP -8.8 -8.3 -8.9 -9.5
Govt. debt as % of GDP (b) 187.5 192.7 202.8 213.1

Current account as % of GDP 2.9 3.7 2.0 1.1

 Average
 2013 2014 2015-19

GDP 2.1 1.8 1.5

Consumption 1.6 0.6 0.5
Investment : housing 7.5 3.3 3.1
business -1.2 5.6 4.6
Government: consumption 3.2 0.4 0.3
investment 10.0 1.2 0.1
Stockbuilding (a) 0.0 0.1 0.1
Total domestic demand 2.1 1.4 1.2

Export volumes 1.9 6.8 6.3
Import volumes 2.6 4.8 4.9

Average earnings 1.1 0.1 1.2
Private consumption deflator -0.4 1.3 1.2
RPDI 1.4 -1.0 0.5
Unemployment, % 3.9 4.1 4.5

Govt. balance as I of GDP -9.7 -8.1 -6.0
Govt. debt as % of GDP (b) 213.1 213.9 212.4

Current account as % of GDP 1.8 2.3 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 0.2 -1.3
Private investment -14.3 0.2 1.9 -4.4
Government : consumption 2.6 0.8 -0.1 -0.4
 : investment 0.3 -3.8 -2.1 -3.6
Stockbuilding (a) -0.9 0.7 0.3 -0.4
Total domestic demand -3.7 1.4 0.6 -2.1

Export volumes -12.4 11.0 6.5 2.9
Import volumes -11.0 9.5 4.3 -0.7

Average earnings 3.0 1.1 1.6 1.7
Harmonised consumer prices 0.3 1.6 2.7 2.5
RPDI 0.0 -0.6 -0.7 -1.8
Unemployment, % 9.6 10.1 10.1 11.4

Govt. balance as % of GDP -6.4 -6.2 -4.2 -3.7
Govt. debt as % of GDP (b) 80.0 85.4 87.3 90.6
Current account as % of GDP -0.2 0.0 0.2 1.2

 Average
 2013 2014 2015-19

GDP -0.6 0.8 1.8

Consumption -0.8 0.0 0.5
Private investment -3.2 1.1 5.3
Government : consumption -0.2 0.3 0.9
 : investment -3.3 0.8 1.3
Stockbuilding (a) 0.0 -0.1 0.0
Total domestic demand -1.1 0.2 1.5

Export volumes 1.2 5.7 5.4
Import volumes 0.0 4.9 5.3

Average earnings 1.1 0.9 2.7
Harmonised consumer prices 1.6 1.4 2.2
RPDI -1.4 0.1 1.1
Unemployment, % 12.3 12.2 10.7

Govt. balance as % of GDP -3.1 -2.7 -2.0
Govt. debt as % of GDP (b) 93.4 93.3 87.7
Current account as % of GDP 2.3 2.9 3.1

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 0.7
Investment : housing -2.5 4.4 6.5 1.5
 : business -17.2 6.9 7.3 -2.9
Government : consumption 3.0 1.7 1.0 1.2
 : investment 5.7 0.3 -0.2 -6.0
Stockbuilding (a) -0.9 0.7 0.3 -0.5
Total domestic demand -2.4 2.6 2.7 -0.3

Export volumes -12.8 13.4 7.9 4.5
Import volumes -8.0 10.9 7.5 2.6

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 0.6
Unemployment, % 7.8 7.1 5.9 5.4

Govt. balance as % of GDP -3.1 -4.1 -0.8 0.2
Govt. debt as % of GDP (b) 74.4 82.5 80.4 81.9

Current account as % of GDP 6.0 6.1 6.2 7.1

 Average
 2013 2014 2015-19

GDP 0.5 1.4 1.2

Consumption 1.1 0.9 0.6
Investment : housing -0.9 2.1 4.7
 : business -0.6 2.3 1.8
Government : consumption 0.7 1.7 0.9
 : investment -3.2 4.7 0.5
Stockbuilding (a) 0.2 -0.4 0.1
Total domestic demand 0.8 0.9 1.1

Export volumes 1.0 7.5 5.7
Import volumes 2.0 7.4 6.2

Average earnings 2.9 2.8 3.6
Harmonised consumer prices 1.6 1.7 2.4
RPDI 0.8 1.1 0.7
Unemployment, % 5.4 5.0 5.4

Govt. balance as % of GDP 0.1 -0.3 -1.1
Govt. debt as % of GDP (b) 79.4 76.7 69.2

Current account as % of GDP 6.7 6.8 6.2

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 2.0 0.0

Consumption 0.2 1.5 0.5 -0.4
Investment : housing -12.1 -0.4 2.3 -0.4
 : business -13.0 4.7 3.9 -1.7
Government : consumption 2.6 1.8 0.4 1.4
 : investment 2.5 -8.2 0.3 -0.6
Stockbuilding (a) -1.2 0.5 0.9 -0.5
Total domestic demand -2.6 2.0 1.8 -0.6

Export volumes -11.9 9.0 5.6 2.5
Import volumes -9.5 8.6 5.3 -0.9

Average earnings 3.1 1.8 2.8 2.3
Harmonised consumer prices 0.1 1.7 2.3 2.2
RPDI 1.5 0.9 0.2 0.0
Unemployment, % 9.5 9.7 9.6 10.3

Govt. balance as % of GDP -7.5 -7.1 -5.3 -4.8
Govt. debt as % of GDP (b) 79.2 82.4 86.0 90.7

Current account as % of GDP -1.3 -1.6 -1.9 -2.3

 Average
 2013 2014 2015-19

GDP -0.2 0.6 1.4

Consumption -0.3 0.0 0.9
Investment : housing -3.6 -2.0 0.7
 : business -1.6 2.3 1.8
Government : consumption 1.2 0.8 1.0
 : investment -1.4 0.4 1.0
Stockbuilding (a) -0.3 0.0 0.0
Total domestic demand -0.5 0.3 1.0

Export volumes 0.6 4.6 5.4
Import volumes 0.0 3.3 4.2

Average earnings 1.1 1.3 2.5
Harmonised consumer prices 1.2 1.3 1.7
RPDI 0.0 0.4 1.4
Unemployment, % 11.0 11.1 9.9

Govt. balance as % of GDP -4.3 -3.5 -2.5
Govt. debt as % of GDP (b) 93.3 94.4 94.1

Current account as % of GDP -1.6 -0.7 0.5

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 2.2 1.1 1.2
Harmonised consumer prices 0.8 1.6 2.9 3.3
RPDI -3.0 -0.9 -0.8 -4.9
Unemployment, % 7.8 8.4 8.4 10.7

Govt. balance as % of GDP -5.5 -4.5 -3.8 -3.0
Govt. debt as % of GDP (b) 116.5 119.4 120.8 127.0

Current account as % of GDP -2.0 -3.5 -3.1 -0.7

 Average
 2013 2014 2015-19

GDP -1.9 0.2 2.2

Consumption -2.1 -0.5 0.3
Investment : housing -4.4 1.2 8.7
 : business -2.9 0.7 8.4
Government : consumption -1.3 -0.9 0.8
 : investment -3.6 1.3 1.1
Stockbuilding (a) 0.0 0.2 0.1
Total domestic demand -2.4 0.0 1.9

Export volumes 0.1 5.0 5.4
Import volumes -1.9 4.9 5.2

Average earnings -0.2 -2.1 1.9
Harmonised consumer prices 1.9 1.6 2.5
RPDI -3.5 -2.0 1.3
Unemployment, % 12.2 12.2 10.7

Govt. balance as % of GDP -3.0 -2.4 -1.1
Govt. debt as % of GDP (b) 130.6 130.6 116.1

Current account as % of GDP -0.1 -0.1 1.5

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 3.9 -0.1 -0.2 -0.6
Harmonised consumer prices -0.2 2.0 3.1 2.4
RPDI 1.0 -4.8 -3.3 -4.6
Unemployment, % 18.0 20.1 21.7 25.0

Govt. balance as % of GDP -11.2 -9.4 -8.6 -10.7
Govt. debt as % of GDP (b) 53.9 61.5 69.3 84.1

Current account as % of GDP -4.8 -4.5 -3.7 -1.1

 Average
 2013 2014 2015-19

GDP -1.6 0.2 2.6

Consumption -3.1 -1.9 -0.9
Investment : housing -8.0 -1.9 11.1
 : business -9.5 -0.7 13.6
Government : consumption -3.3 -1.4 1.3
 : investment -1.3 -1.0 2.4
Stockbuilding (a) 0.0 0.0 0.0
Total domestic demand -4.0 -1.7 2.3

Export volumes 2.4 6.2 5.1
Import volumes -4.8 0.6 4.6

Average earnings -1.5 -1.3 1.3
Harmonised consumer prices 1.7 1.0 2.1
RPDI -4.7 -2.2 0.4
Unemployment, % 27.0 27.4 22.0

Govt. balance as % of GDP -7.3 -6.8 -3.9
Govt. debt as % of GDP (b) 93.0 100.1 101.0

Current account as % of GDP 0.6 0.9 1.6

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

REFERENCE

Barrell, R., Holland, D. and Hurst, I. (2013), 'Fiscal multipliers and prospects for consolidation', OECD Journal: Economic Studies, Vol. 2012, pp. 71-107.

NOTE

(1) Indonesia, Singapore, Vietnam and Turkey were all added as separate country models within NiGEM in July 2013.

Graham Hacche, with Aurelie Delannoy, Tatiana Fic, Iana Liadze, Ali Orazgani, Pawet Paluchowski and Miguel Sanchez-Martinez *

* 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. The forecast was completed on 25 July, 2013. Exchange rate, interest rate and equity price assumptions are based on information available to 19 July 2013. Unless otherwise specified, the source of all data reported in tables and figures is the NiGEM database and NIESR forecast baseline.

Table 1. Forecast summary Percentage change

 Real GDP (a)

 Euro
 World OECD China EU-27 Area

2009 -0.6 -3.6 8.9 -4.4 -4.3
2010 5.2 3.0 10.4 2.0 1.9
2011 4.0 1.9 9.3 1.6 1.5
2012 3.2 1.4 7.9 -0.3 -0.5
2013 3.1 1.3 7.4 -0.1 -0.6
2014 3.6 2.0 7.0 1.2 0.8
2003-2008 4.5 2.3 11.0 2.2 1.9
2015-2019 4.1 2.7 6.7 1.9 1.8

 Private consumption deflator

 Euro
 OECD Area USA Japan Germany

2009 0.4 -0.5 0.1 -2.5 0.0
2010 2.0 1.7 1.9 -1.7 2.0
2011 2.5 2.5 2.4 -0.9 2.0
2012 2.1 2.1 1.8 -0.6 1.7
2013 1.6 1.3 1.0 -0.4 1.3
2014 2.0 1.4 1.7 1.3 1.8
2003-2008 2.4 2.2 2.7 -0.5 1.4
2015-2019 2.6 2.2 2.6 1.2 2.4

 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 2.0
2012 2.2 1.9 0.9 0.0
2013 1.7 2.1 0.5 -0.2
2014 2.4 1.8 1.4 0.6
2003-2008 2.2 1.4 1.5 1.6
2015-2019 3.0 1.5 1.2 1.4

 Private consumption deflator

 France Italy UK Canada

2009 -0.7 -0.1 1.9 0.2
2010 1.1 1.5 4.0 1.4
2011 2.1 2.9 3.9 2.1
2012 1.9 2.8 2.6 1.4
2013 1.1 1.5 2.8 1.2
2014 1.4 1.5 2.4 2.0
2003-2008 2.1 2.6 2.4 1.5
2015-2019 1.7 2.5 2.0 2.1

 World
 Italy UK Canada trade(b)

2009 -5.5 -5.2 -2.7 -10.4
2010 1.7 1.7 3.4 12.5
2011 0.5 1.1 2.5 5.8
2012 -2.4 0.2 1.7 2.4
2013 -1.9 1.2 2.0 3.2
2014 0.2 1.8 2.4 6.5
2003-2008 0.9 2.6 2.3 7.7
2015-2019 2.2 2.1 2.6 6.4

 Interest rates (c)
 Oil
 Euro ($ per
 USA Japan Area barrel)
 (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 0.5 103.9
2014 0.3 0.1 0.3 98.2
2003-2008 3.0 0.2 2.8 57.5
2015-2019 2.2 0.5 1.4 101.5

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.