Appendix A: summary of key forecast assumptions.

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

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 50 model subscribers, mainly in the policy community. Most countries in the OECD1 are modelled separately, and there are also separate models of China, India, Russia, Hong Kong, Taiwan, Brazil, South Africa, Latvia, Lithuania, Romania and Bulgaria. The rest of the world is modelled through regional blocks so that the model is global in scope. All models contain the determinants of domestic demand, export and import volumes, prices, current accounts and net assets. Output is tied down in the long run by factor inputs and technical progress interacting through production functions, but is driven by demand in the short-to-medium term. Economies are linked through trade, competitiveness and financial markets and are fully simultaneous. Further details on the NiGEM model are available on http://nimodel.niesr.ac.uk/.

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

In this context, we note that in response to the deteriorating economic outlook and banks' funding pressure, the ECB recently announced two cuts of its main policy rate by 25 basis points, reversing the increases seen in 2011 and returning it to its record low level of 1 per cent. It has also engaged in a new round of long-term refinancing operations, providing unlimited collateralised funding to banks for an extended period of 36 months, and lowered the required reserve ratio from 2 to 1 per cent to increase the amount banks can lend. The ECB's decision was immediately followed by similar interest rate cuts in Norway (-50 basis points) and Sweden (-25 basis points) in December 2011. In Hungary, however, the central bank engaged in two policy rate hikes in the final months of 2011, raising it from 6 to 7 per cent in order to boost the forint and tackle escalating inflationary pressures. Meanwhile, the Bank of England maintained its interest rate at its record low 0.5 per cent, whilst also continuing with its programme of asset purchase of 275 billion [pounds sterling].

[FIGURE A1 OMITTED]

The Bank of Japan also maintained its current target rate unchanged in the short term in order to support economic growth after the twin disasters of March 2011. The Federal Reserve continues to stress that interest rates in the US will remain low for an extended period, while Canada is also expected to maintain its key interest rate constant. Similarly, after widespread interest rate hikes in the emerging economies, official rates have been kept on hold in recent months as the global inflationary pressure coming from high food and oil prices appears to have eased. Yet, in Brazil, the central bank has just announced its fourth policy rate cut since August 2011. The cumulative 200 basis point cut has brought the key policy rate to 10.5 per cent, reflecting concerns over growth prospects for this year and the rise in the exchange rate in the first half of 2011.

Figure A1 illustrates our projections for real long-term interest rates in the US, Euro Area, Japan and Canada. Long real rates have followed nominal rates in a sharp drop since the second quarter of 2011 and are expected to continue to fall in the first quarter of this year. The monetary stance is expected to remain expansionary until 2015, when real interest rates in North America are expected to stabilise close to historical levels. A somewhat higher level in the Euro Area, where the long real rate is forecast to average 2.1 per cent this year, reflects the risk premium on sovereign debt in Greece, Ireland, Portugal and Italy. We see real interest rates in Japan stabilising around a level rather below international rates of return.

[FIGURE A2 OMITTED]

Long real rates are illustrative measures of the state of the economy, but do not reflect the actual borrowing costs faced by firms, which pay a premium above the risk-free rates to reflect the risk of default. Figure A2 depicts the spread between corporate bond yields and 10-year government bond yields in the US, UK and Euro Area. This acts as a proxy both for the direct cost of borrowing, and the degree of tightness in bank lending conditions. After falling to recent lows in April 2010, spreads rose sharply in the final quarter of 2011 in Europe, with a smaller rise observed in the US. As discussed by Euroframe (2012), this is partly a reflection of the bank recapitalisation requirements imposed by the European Banking Authority in December, following the latest round of stress tests. Bond yields have continued to rise since then in Europe, and uncertainty regarding the exposure of individual banks to the affected assets has made all banks more cautious. The assumption underlying our forecast is that the corporate borrowing premium rises further in the first quarter of 2012, and remains high until June, before a gradual decline starting in the second half of the year. Nominal exchange rates against the US dollar are generally assumed to remain constant at the prevailing rate of 23 January 2012 in the short term. After that, they follow a backward-looking uncovered-interest parity condition, based on interest rate differentials relative to the US. Figure A3 illustrates the effective exchange rate projections for the US, Euro Area, Japan, Canada and the UK. The US dollar has appreciated significantly since October, mainly against the euro, which has depreciated by more than 10 per cent against the US dollar since the second quarter of 2011. Meanwhile, Japanese interventions to bring their currency down against the dollar seem to have brought some relief, as the Yen has stabilised around 35 per cent above its pre-crisis level. Sterling lost nearly 20 per cent of its value between the end of 2007 and the end of 2009, but has been broadly stable in effective terms since then. The Canadian dollar tends to follow the oil price closely, and has followed it upward in the first weeks of 2012.

[FIGURE A3 OMITTED]

Our oil price assumptions for the short term are based on those of the US Energy Information Administration, who use information from forward markets as well as an evaluation of supply conditions. In the longer term, we assume that real oil prices will rise in line with the real interest rate. The oil price assumptions underlying our current forecast are reported in figure A4 and in table 1 at the beginning of this chapter. Annual average oil prices, based on the average of Brent and Dubai spot prices, rose by almost 40 per cent between 2010 and 2011, from $78.8 to $108.6 per barrel. The increase was triggered by tight demand and supply balances and the Libyan crisis. Prices reached well above $100 per barrel, averaging $114 per barrel in the second quarter of 2011, but then fell back in the third quarter. However, oil prices have risen slightly in recent weeks following tensions on Iranian exports. In our forecast, we assumed that oil prices will average $111 per barrel this year. If tensions with Iran intensify, we could see a large temporary spike in the oil price. Barrell et al. (2011) offers insight into how this might affect our forecast of the major economies.

[FIGURE A4 OMITTED]

Our equity price assumptions for the US reflect the 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 equity price assumptions underlying our current forecast. Global share prices dropped sharply in the third quarter of 2011 in response to the deepening of the Euro Area debt crisis and the downgrade of US government debt. However, we have seen a rebound in equity markets in most countries since October. Exceptions included Italy, Greece and Japan. In Japan, share prices have been on a declining trend since 2007, standing about 50 per cent below their pre-crisis levels.

Fiscal policy assumptions for 2012-13 follow announced policies (see Euroframe, 2012 for details of these policies in EU countries). Average personal sector tax rates and effective corporate tax rate assumptions underlying the projections are reported in table A3. Government revenue as a share of GDP reported in the table reflects these tax rate assumptions and our forecast projections for income and profits, as well as our projections for consumption tax revenue. Consumption tax revenue projections also reflect an indirect tax cut in Germany and rises in Portugal and the UK in 2011. Moreover, we expect further increases in indirect tax rates this year in Finland, Ireland and Italy. Following fiscal consolidation plans, the average income tax rate in 2012-13 is expected to rise sharply in Belgium, France, Ireland, Italy, Portugal, as well as in the US where various temporary fiscal stimulus programmes have just come to an end. Meanwhile, the rise in the UK will remain moderate as consolidation measures are mostly based on spending cuts. The effective corporate tax rate is expected to rise this year in Canada, Finland, Italy, Japan and the US, whilst falling in the UK. Finally, government spending in 2012 and 2013 should continue to fall sharply as a share of GDP in Greece, Ireland, Portugal and Spain, with more moderate adjustments planned in all other countries to address budget deficits.

[FIGURE A5 OMITTED]

doi: 10.1177/002795011221900115

REFERENCES

Barrell, R., Delannoy, A. and Holland, D. (2011), 'The impact of high oil prices on the economy', National Institute Economic Review, 217, pp. F68-F74.

Euroframe (2012), Economic Assessment of the Euro Area, Winter 2011/2012 Report.

NOTE

(1) With the exceptions of Chile, Iceland, Israel, Luxembourg and Turkey.

Table A1. Interest rates

Per cent per annum

                  Central bank intervention rates

              US    Canada   Japan   Euro Area    UK

2009         0.25    0.44    0.10      1.28      0.65
2010         0.25    0.59    0.10      1.00      0.50
2011         0.25    1.00    0.10      1.25      0.50
2012         0.33    1.18    0.12      1.00      0.50
2013         0.74    1.45    0.18      1.23      0.50
2014         1.01    1.92    0.23      1.83      0.78
2015-2019    2.18    2.80    0.77      2.99      2.01
2011    Q1   0.25    1.00    0.10      1.00      0.50
2011    Q2   0.25    1.00    0.10      1.22      0.50
2011    Q3   0.25    1.00    0.10      1.47      0.50
2011    Q4   0.25    1.00    0.10      1.30      0.50
2012    Q1   0.25    1.00    0.10      1.00      0.50
2012    Q2   0.25    1.22    0.10      1.00      0.50
2012    Q3   0.25    1.25    0.10      1.00      0.50
2012    Q4   0.56    1.25    0.16      1.00      0.50
2013    Q1   0.63    1.25    0.17      1.00      0.50
2013    Q2   0.75    1.40    0.17      1.15      0.50
2013    Q3   0.75    1.50    0.18      1.30      0.50
2013    Q4   0.83    1.65    0.18      1.45      0.50
2014    Q1   1.00    1.75    0.20      1.60      0.59
2014    Q2   1.00    1.90    0.22      1.75      0.75
2014    Q3   1.00    2.00    0.24      1.90      0.79
2014    Q4   1.05    2.02    0.26      2.05      1.00

                 10-year government bond yields

             US    Canada   Japan   Euro Area   UK

2009         3.2    3.2      1.3       3.7      3.7
2010         3.2    3.2      1.2       3.3      3.6
2011         2.8    2.8      1.1       3.9      3.1
2012         2.1    2.2      1.0       4.1      2.1
2013         2.4    2.6      1.1       4.1      2.3
2014         2.7    3.0      1.2       4.1      2.5
2015-2019    3.6    3.8      1.6       4.3      3.2
2011    Q1   3.4    3.3      1.2       3.9      3.7
2011    Q2   3.2    3.1      1.2       4.0      3.4
2011    Q3   2.4    2.5      1.0       3.7      2.8
2011    Q4   2.0    2.2      1.0       3.8      2.3
2012    Q1   2.0    2.0      1.0       4.0      2.0
2012    Q2   2.0    2.1      1.0       4.1      2.1
2012    Q3   2.1    2.2      1.0       4.2      2.1
2012    Q4   2.2    2.3      1.0       4.2      2.2
2013    Q1   2.3    2.5      1.0       4.2      2.2
2013    Q2   2.4    2.6      1.1       4.1      2.3
2013    Q3   2.5    2.7      1.1       4.1      2.3
2013    Q4   2.5    2.8      1.1       4.1      2.4
2014    Q1   2.6    2.9      1.1       4.1      2.5
2014    Q2   2.7    3.0      1.2       4.1      2.5
2014    Q3   2.8    3.1      1.2       4.1      2.6
2014    Q4   2.9    3.2      1.3       4.2      2.6

Table A2. Nominal exchange rates

            Percentage change in effective rate

           US    Canada   Japan   Euro   Germany
                                  Area

2009       7.0    -3.0    15.5     6.0     2.4
2010      -3.1     9.5     4.6    -6.1    -3.6
2011      -2.9     2.1     7.3     2.1     0.7
2012       3.3    -0.4     5.5    -2.4    -1.1
2013       0.4    -0.4    -0.6     0.1     0.0
2014       0.6    -0.6    -0.2     0.1     0.0
2011 Q1   -0.8     3.1    -0.4    -0.2    -0.2
2011 Q2   -2.0    -0.8    -0.8     3.1     1.3
2011 Q3    1.1    -2.3     5.5    -0.3    -0.3
2011 Q4    3.9    -1.0     3.1    -0.7     0.0
2012 Q1    0.5     1.7     1.0    -2.5    -1.3
2012 Q2   -0.3     0.1    -0.3     0.1     0.0
2012 Q3   -0.1     0.0    -0.1    -0.1     0.0
2012 Q4    0.2    -0.2    -0.2     0.0     0.0
2013 Q1    0.1    -0.1    -0.1     0.1     0.0
2013 Q2    0.1    -0.1    -0.1     0.1     0.0
2013 Q3    0.1    -0.1    -0.1     0.1     0.0
2013 Q4    0.2    -0.1    -0.1     0.0     0.0
2014 Q1    0.2    -0.2    -0.1     0.0     0.0
2014 Q2    0.2    -0.1     0.0     0.0     0.0
2014 Q3    0.2    -0.2     0.0     0.0     0.0
2014 Q4    0.2    -0.2     0.0     0.0     0.0

           Percentage change in
              effective rate             Bilateral rate per US $

          France   Italy    UK     Canadian   Yen    Euro    Sterling
                                      $

2009        1.7     2.4    -10.6    1.132     93.6   0.720    0.641
2010       -2.8    -3.2     -0.2    1.026     87.8   0.755    0.647
2011        1.0     1.4      0.1    0.995     79.8   0.720    0.624
2012       -1.4    -1.2      1.8    1.009     77.0   0.769    0.642
2013        0.1     0.2      0.5    1.014     77.5   0.771    0.642
2014        0.1     0.2      1.0    1.022     78.0   0.775    0.640
2011 Q1     0.0     0.0      0.8    0.977     82.3   0.732    0.624
2011 Q2     1.5     1.6     -1.8    0.977     81.7   0.695    0.614
2011 Q3    -0.4    -0.2      0.2    1.002     77.7   0.709    0.621
2011 Q4    -0.6    -0.4      1.5    1.023     77.4   0.743    0.636
2012 Q1    -1.2    -1.2      1.1    1.010     77.0   0.770    0.643
2012 Q2     0.1     0.1     -0.1    1.008     77.0   0.767    0.642
2012 Q3     0.0     0.0      0.0    1.008     77.0   0.767    0.642
2012 Q4     0.0     0.0      0.1    1.010     77.2   0.769    0.642
2013 Q1     0.0     0.1      0.2    1.012     77.3   0.770    0.642
2013 Q2     0.0     0.1      0.2    1.013     77.5   0.770    0.642
2013 Q3     0.0     0.1      0.2    1.015     77.6   0.771    0.642
2013 Q4     0.0     0.1      0.2    1.017     77.7   0.772    0.641
2014 Q1     0.0     0.1      0.3    1.019     77.8   0.773    0.641
2014 Q2     0.0     0.0      0.3    1.021     77.9   0.775    0.640
2014 Q3     0.0     0.0      0.3    1.023     78.0   0.776    0.640
2014 Q4     0.0     0.0      0.3    1.026     78.1   0.778    0.639

Table A3. Government revenue assumptions

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

              2011   2012   2013   2011   2012   2013

Australia     13.7   13.9   13.9   24.7   24.7   24.7
Austria       31.1   31.1   31.1   20.9   20.9   20.9
Belgium       32.0   33.0   33.0   23.9   23.9   23.9
Canada        21.5   21.7   21.8   24.3   25.1   25.9
Denmark       37.6   37.6   37.6   20.7   20.7   20.7
Finland       31.6   31.5   31.6   17.5   17.5   18.0
France        29.6   30.1   30.1   23.8   23.8   23.8
Germany       28.0   28.0   28.5   26.6   26.6   26.6
Greece        17.6   17.6   17.8   23.3   23.3   23.3
Ireland       21.9   22.5   22.5    5.8    5.8    5.8
Italy         28.6   29.5   29.4   26.2   28.6   28.6
Japan         22.1   22.3   22.3   27.2   27.6   28.0
Netherlands   33.5   33.5   33.5   25.3   25.3   25.3
Portugal      20.6   21.0   21.3   18.4   18.4   18.4
Spain         23.2   23.2   23.3   25.2   25.2   25.2
Sweden        31.3   31.3   31.3   19.3   19.3   19.3
UK            23.8   23.9   24.1   19.6   18.3   17.3
US            17.1   17.6   17.8   29.6   29.9   31.2

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

              2011   2012   2013

Australia     31.9   32.8   32.6
Austria       39.0   39.0   38.7
Belgium       41.5   43.6   42.7
Canada        35.3   35.0   35.1
Denmark       41.6   40.4   41.3
Finland       44.6   44.9   45.0
France        43.2   44.4   44.6
Germany       44.3   44.2   44.5
Greece        36.1   35.8   35.7
Ireland       28.3   29.5   28.5
Italy         42.7   46.3   46.6
Japan         33.3   33.0   33.0
Netherlands   38.6   38.9   38.5
Portugal      38.9   39.9   39.6
Spain         33.4   34.0   33.9
Sweden        44.6   44.7   44.4
UK            37.8   38.4   38.3
US            27.4   28.2   28.8

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

Table A4. Government spending assumptions (a)

                Gov't spending        Gov't interest
              excluding interest       payments (%       Deficit
                   payments          of GDP) to fall    projected
                                                         below 3%
              2011   2012   2013   2011   2012   2013     of GDP

Australia     33.4   32.6   32.1    1.8    1.8    1.7      2012
Austria       39.7   39.7   39.4    2.6    2.6    2.5      2014
Belgium       42.0   43.5   42.2    3.4    3.7    3.6      2014
Canada        36.7   35.6   35.4    3.6    3.4    3.2      2014
Denmark       43.5   42.5   42.0    2.1    2.0    1.9      2013
Finland       44.2   44.4   44.1    1.3    1.2    1.1       --
France        46.7   47.3   47.1    2.3    2.4    2.5      2017
Germany       43.1   43.1   43.6    2.3    2.1    1.9      2011
Greece        39.4   37.2   37.4    6.2    6.7    6.8      2018
Ireland       33.8   31.9   29.5    4.4    4.9    5.0      2019
Italy         42.4   43.4   43.3    4.2    4.8    5.3      2012
Japan         39.6   38.6   38.0    2.7    2.6    2.4       --
Netherlands   41.3   40.6   39.8    1.9    1.9    1.9      2014
Portugal      41.5   40.9   39.7    3.4    3.6    3.7      2014
Spain         39.2   38.4   37.7    2.2    2.7    3.2      2019
Sweden        42.7   42.1   42.1    0.9    0.6    0.4       --
UK            40.5   41.5   40.5    3.2    3.3    3.3      2016
US            34.3   33.8   33.2    2.8    2.6    2.6       --

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