Last year saw global economic growth of 3.8 per cent, the strongest since 2011. In addition, our analysis in the last issue (see Lennard, 2018) showed that this growth had been broad-based, with a very high degree of synchronisation across countries. While it is plausible to expect these two features of the global economy--relatively robust growth and synchronisation --to continue in the short term, there are a number of uncertainties about the outlook, reflected in the fan chart for global GDP growth shown in figure 1, which is drawn to reflect normal business cycle risks and does not include the downside risks associated with any possible escalation of protectionist trade policies.

For some advanced economies, GDP growth in the first quarter of the year was weaker than expected, partly related to the adverse weather in the quarter. In addition, the data so far indicate slow export growth as a factor. An immediate issue is whether the first quarter was a 'soft patch' or whether it marked something deeper. Initial readings from the second quarter, including PMI surveys which have shown some strengthening in the Euro Area, UK and US and continuing labour market trends that have indicated a tightening rather than a weakening market, suggest the temporary 'soft patch' narrative is plausible. The indicators suggest that growth in the second quarter will be stronger than in the first, especially in the US supported by the pro-cyclical fiscal boost.

As a consequence, our overall forecast judgement is little changed from May. The global economy looks set to continue growing this year at a pace slightly below 4 per cent, with a broadly synchronised pattern of growth. We continue to expect that further growth in the advanced economies will lead to more evident pressures on capacity and skills and that these will be reflected in (probably limited) upward pressure on inflation and policy moves towards less accommodative monetary policy. Robust growth in the advanced economies is helping the emerging market economies, especially the commodity producers, and emerging economies as a whole are continuing to expand more rapidly than the advanced economies. But as the forecast horizon extends, a combination of slowing domestic demand growth (partly from demographics: see Aksoy et al, 2017) and slightly higher interest rates in the advanced economies are expected to feed into slower growth in some emerging market economies. In turn, this will contribute to slower overall global growth.

An important factor in the global forecast is the expectation that the pace of growth in China will gradually slow, as the economy makes its transition and investment spending growth plays a less prominent part in determining overall annual growth. The scale of China's contribution to global growth is such that a slowing is also reflected in slightly slower global growth. Reflecting anticipated trends in demographics, productivity and structural factors, our medium-term forecast continues to expect global growth to run at around 3.5 per cent a year.

Two features of the outlook are particularly noteworthy. First, the possible escalation of protectionist trade policies are providing an increased downside risk to the outlook. The announcements by President Trump on 1 March of tariff increases, initially on steel and aluminium imports from a range of countries and effective from 1 June on products from a small number of focused sectors, are unlikely to have a significant negative effect on the global outlook. On 22 March further tariffs on a wider range of Chinese goods prompted retaliation. To date, the scale of the trade under consideration has been limited, with affected total Chinese trade of $50 billion, of which $34 billion was effective from 6 July. The initial actions are included in the baseline forecast. However, the President announced on 11 July a possible wider extension on Chinese trade of up to $200 billion and $500 billion has also been mentioned, which would mark a major change in both the size and breadth of tariff action. Box A provides a simulation of our NiGEM model that considers the effects of various tariff changes (see also Hantzsche and Liadze, 2018; Liadze and Hacche, 2017). The possibility of further impositions and retaliations is a risk for the prospects for both world trade and global economic growth. The change in direction of US trade policy is a significant one and has added uncertainty to the trading environment.

Secondly, stronger growth and falling unemployment rates have led to increasing concerns about reduced spare capacity, signs of skills shortages in recruiting and some anticipation of pressure building on wage and price inflation. So far, generally inflation figures have failed to register this build-up in capacity utilisation but there are some signs of rising annual inflation in Germany, France and the US. As we raised in the February Review, (1) oil prices are now about 60 per cent higher than their low in June 2017. The issue of whether continued growth and tighter labour markets will lead to faster wage growth and eventually higher inflationary pressure and further monetary policy tightening remains a key risk to the profile of growth and inflation in the forecast. The US has led the way in terms of reducing the extent of monetary accommodation, and our expectation remains that this process will spread. Our forecasts include gradual increases in policy rates in the UK and Euro Area over the medium term which are broadly in line with recent market expectations. The forecast does not assume dramatic changes in policy interest rates--rather a general gradual upward path of interest rates.

Recent developments and the baseline forecast

Recent economic developments

The developing data for the first quarter of 2018 have been dominated by indications of slower growth in the advanced economies, particularly in Japan, the Euro Area and the UK (figure 2). While part of this can be explained by one-off factors such as the adverse weather, a potential concern is that it could possibly be an early sign of a broader picture of slower growth. After world trade growth outpaced GDP growth in 2017, export growth surveys have generally pointed to slower growth in early 2018, possibly related to uncertainty following the protectionist rhetoric and tariff actions from the US. These possibly temporary factors in the first quarter have to be balanced against more positive survey readings for growth in the second quarter, especially in the US, and the apparent absence of 'one-off' negative factors in the quarter.

With the US expansion now the second longest on record, one feature of commentaries has been some understandable interest in whether a recession might be in prospect. The term spread (see Lenoel, 2018) has moved little over the past three months and the expansion phase looks set to continue. But, although the expansion has been long, it has not been strong (figure 3). US GDP is only 21 per cent above the trough in mid-2009. By contrast, the slightly shorter expansion after 1982 saw a 38 per cent rise in GDP, suggesting that the longevity of the expansion should not be taken as an indicator of its likely duration.

While growth in the Euro Area generally surprised on the upside in 2017, with growth of 2.6 per cent in 2017 showing a rebound from 2016's dip in growth (1.8 per cent), the overall pace of growth (at 0.7 per cent quarter-on-quarter in each quarter in 2017) masked a divergence between countries within the Euro Area.

Spain grew strongly (by 3.1 per cent) and continued that strong performance in the first quarter of 2018, while several other countries saw weaker growth in the first quarter, particularly in exports. As a result of stronger growth, unemployment has fallen but still remains high by pre-recession standards. Inflation within the Euro Area has so far remained subdued, enabling the ECB to continue its accommodative monetary policy. However, the ECB announced at its June meeting that continued quantitative easing would end in December 2018 and that policy interest rates were expected to remain at present levels at least through the summer of 2019.

Japan saw an unexpected fall in GDP in the first quarter, largely due to a reversal of the building of inventories, and growth is expected to resume. Among emerging economies, India and China continue to show growth well ahead of the global average and Turkey and Vietnam performed strongly in 2017 with output expanding by 7.4 and 6.7 per cent respectively, although in Turkey it was accompanied by rapid inflation. Argentina and Venezuela have continued to deal with economic problems and both have seen very rapid inflation. While continued low inflation elsewhere is notable (figure 4), the general pick-up in demand has benefitted commodity producers and oil prices, in particular, having risen strongly over the past two years.

Our revised baseline forecast

Taking the recent news as a whole, forward-looking developments have not been sufficient to lead us to make any major changes to our view for the global outlook. Global growth is expected to run at 3.9 per cent this year and 3.8 per cent in 2019, after 3.8 per cent last year. Into the medium term, the pace of growth is forecast to settle at about 3 1/2 per cent, reflecting a continued narrowing of output gaps in the recovery from the Great Recession, demographic effects (especially in the major industrial economies) and a gradual deceleration in growth in China. There are clearly risks around the forecast and these are illustrated by the fan chart for global economic growth (figure 1).

Our expectation remains for inflation to continue to be higher than in 2014-16 but to be broadly in line with policy targets. The reductions in unemployment rates and some reports of skilled labour shortages, together with the slow pace of investment since the crisis, could mean that capacity pressures are building and these would likely lead to higher inflation. Our policy rate expectations are for a gradual tightening internationally, reflecting a response to potential pressures from a narrowing of output gaps.

Monetary policy

Within the advanced economies, the US Federal Reserve raised policy rates three times in 2017 and has already acted twice so far this year (in March and June). At least one further increase this year is implied in the Federal Reserve's latest 'dot plot' chart and further increases are anticipated in 2019 as policy rates continue to be 'normalised'. However, the profile of policy rates remains dependent on the economic outlook and is not pre-set. The fiscal boost this year will feed through and one policy concern will be whether this contributes to capacity problems and creates pressures for inflation to rise above its target, something that it has failed to do consistently so far.

In contrast, the ECB is still continuing its policy of quantitative easing, with policy rates held at the lower bound, although the monthly scale of purchases has been scaled back and is due to end in December 2018. Given currency linkages, the pressure from US policy rate rises is likely to be transmitted to some emerging market economies, perhaps with some concerns about non-financial companies' debt intensifying (Naisbitt, 2018). With economies at different phases of the cycle, the pattern of potential policy and market rate movements is diverse.

Financial and foreign exchange markets

Bond yields in the US rose in May, with 10-year yields up to over 3 per cent, touching their highest level since mid2011, and 5-year rates at 2.90 per cent, regaining their high of June 2009. Since mid-May both yields have eased back, with 5-year at around 2.75 per cent and 10-year at around 2.85 per cent, at mid-July. In terms of longer-term 'guidance', the Federal Reserve's implied expectation for longer-term rates from the 'Dot Plot' chart stood at 2.75 per cent in December 2017. This has now risen to 3 per cent and market implied rates are at similar levels.

Movements in 10-year government bond yields in the Euro Area have shown a more steady path so far this year, with rates holding below 1.50 per cent since July 2015. This reflects the policy actions of the ECB, which has held the rate on the deposit facility at -0.4 per cent and continued with its quantitative easing policy. The latter is set to reduce further after September, but guidance has been that policy rates are expected to be held at least through much of 2019, providing continued support for low longer-term rates.

Although US short-term interest rates have risen as the US economy has performed relatively strongly, the US dollar depreciated against the euro through 2017 by almost 20 per cent, with a low point reached in early February 2018. After holding at around 1.23 [euro], from late April the US dollar has appreciated by around 6 per cent against the euro. This pattern also broadly holds in trade-weighted exchange-rate terms. This marks a contrast with the euro, which has depreciated since late April by around 2 per cent. For the Japanese Yen effective exchange rate, after appreciating by around 3 per cent during January and February, the second quarter was a period of stability.

With equity markets continuing their multi-year rise in 2017 (the S&P index rose by 19 per cent through the year, the Nikkei by 19 per cent and the FTSE 100 by 7 per cent), equity prices rose to record levels. This resulted in some warnings in press and market commentaries about the possible over-valuation of stocks. It appeared that some of the market risks had started to materialise in February when strong US labour market news prompted worries of sharper interest rate rises. The S&P index fell by 8.5 per cent in just over a week and this fall reverberated in other markets. However, markets calmed and the S&P rose by 6 per cent over the following month. Announcements of US tariffs on steel and automobiles and then on trade with China on 22 March led to further market jitters late in the first quarter. In the second quarter markets saw more of a consolidation, with the S&P 500 up 3 per cent, the Nikkei up 4 per cent and the FTSE 100 up 8 per cent.

The Vix index, (2) an indicator of financial market volatility or uncertainty (sometimes referred to as the 'fear index' for equity markets), traded at a lower level (by about 3 points) in the second half of 2017 than a year earlier. But the first quarter of this year saw much more volatility, including a spike on 5 February following strong data. After falling back (to 14) in early March, it peaked again (at 25) on 23 March. Since then volatility has gradually reduced, reaching a low of 12 in early June and it has remained close to that level to mid-July despite the escalating trade and tariff rhetoric.

Commodity markets

So far in 2018 oil prices have continued their sustained increase since early 2016. The Brent oil price has increased to around $75 per barrel and gives an upward revision to our assumptions. The sustained rise is being reflected in higher consumer prices for petrol and energy.

For other commodities, The Economist all-items commodity price index (in dollar terms) fell by about 5 per cent in the second quarter after a 1 per cent rise in the first quarter, with food prices falling by about 7 per cent after an earlier 6 per cent rise. Metals were up in the second quarter by just under 1 per cent after a fall of 6 per cent in the preceding quarter.

Risks to the global forecast

Our near-term global growth projections are for continued relatively robust growth but, with the focus on tariffs and speculation about a 'trade war', the downside risks have increased over the past three months and upside risks have receded. Our view is that the near-term risks around the central forecast are broadly balanced. However, the uncertainties around the possibility of a worse outcome into the medium term have increased with the more strident protectionist talk on tariffs and trade. Whether the recent strident talk will be matched by further actions is yet to be seen.

On the positive side, the synchronised nature of relatively strong activity could well have further to run, with domestic demand growth in economies being boosted by investment spending growth which is responding to stronger global demand. If inflation remains subdued, this transmission mechanism could provide a boost to global growth. Monetary policy has remained accommodative across most economies since the Great Recession and, if low inflation continues, this could continue and support a faster pace of growth.

While the output of economies has expanded, the pace of that expansion has been relatively slow. From a longer-term viewpoint, a key feature of the expansion has been the disappointing rate of productivity growth. This, as discussed in the February Review (Kazalova and Naisbitt, 2018), has been a generalised feature in the advanced economies, with productivity growth disappointing relative to previous experience. The exact causes of this shortfall are not agreed (Riley et al, 2018) but it is possible that a strong and synchronised expansion could lead to a stronger path for productivity growth. Stronger investment spending, in particular, could add to future capacity and result in stronger productivity growth, so supporting higher future real earnings growth. If productivity growth does strengthen, the upswing could continue more strongly than anticipated.

In addition, the fiscal measures in the US could add more momentum than expected, both in the US economy and through import demand channels, leading to a stronger outlook in the near term. There may also be scope for other economies to increase fiscal support, as discussed in Box B.

Downside risks to the global outlook come from several possible sources. The gradual tightening of US monetary policy since 2015 has been accompanied by the unemployment rate falling to an 18-year low of 3.8 per cent in May. Despite some worries about increased capacity usage leading to inflationary pressures, to date US inflation has been persistently below its target. But low inflation might not persist and the Federal Reserve could face tough decisions to raise interest rates more rapidly and substantially. At a time when equity markets appear to be richly valued relative to what might be regarded as fundamentals (see figure 5 for one such possible indicator), such a change in policy stance could lead to a fall in equity prices and so in household wealth, which would have direct and indirect (via reduced consumer confidence) negative effects on consumer spending, in turn reducing import demand.

The synchronised nature of the recent global expansion may, of itself, present a risk to sustained growth. Greater synchronisation may reflect greater connectivity of economies and so imply that a shock that is unique to one economy may be more readily transmitted to other economies. The imposition of tariffs and the direct effects of higher import costs could be supplemented by lower export growth due to retaliation and, so, reduced risk sharing across economies. In addition, uncertainty over future trade policy has increased this year with President Trump's pronouncements on tariffs. It is difficult to know how far the most recent announcements with regard to trade with China will become reality or what other possible trade actions President Trump may initiate, but heightened protectionist rhetoric turning into action and retaliation adds a substantial downside risk to the outlook for global trade growth (see Hantzsche and Liadze, 2018). With continued robust growth in China remaining a key contributing factor to global economic growth, any internal economic downside risks in China (perhaps due to the rapid credit growth that has already led to concerns being expressed) could be added to by downside external trade shocks.

Finally, the potential downside risk to global economic prospects from the build-up of debt--in both public and private sectors--is the subject of the Commentary in this issue (see also Naisbitt, 2018). As in the 2000s, higher debt can create a potential vulnerability even if the precise trigger that could realise that risk is not evident. After a long period of ultra-low interest rates perhaps the key risk is that borrowers may have grown too accustomed to low debt service costs and that even gradual and limited increases in interest rates may lead to a need for larger than anticipated changes in spending and saving patterns with adverse consequences for continued economic growth.

Box A. Trade wars--any winners?

On 6 July President Trump's administration imposed new tariffs on
goods worth $34bn of annual imports from China. China retaliated
with a package matching the magnitude of that of the US. At the
time of writing, further tariffs covering $ 16bn worth of imports
are expected to follow by both countries in the coming weeks. As
the tit-for-tat trade battle escalates, both the US and China have
threatened to levy tariffs up to the full range of imports (worth
about $500 billion per year in the case of US imports from China).

We use NIESR's Global Econometric Model (NiGEM) to run stylised
scenarios to investigate the impact of these increases in tariffs
on US and Chinese imports, continuing earlier work (Liadze and
Hacche, 2017; Hantzsche and Liadze, 2018), which shows that tariff
imposition not only harms the economies that the tariffs are aimed
at, but also the country that imposes them, as well as spilling
over to other economies who might be innocent bystanders in the
trade dispute. (1) We consider only the direct effects of tariffs
and do not take account here of the negative impact that
uncertainly is expected to have on business investment, which may
exacerbate the fall in output The Bank of England governor's
analysis of tariffs, also using NiGEM, does take account of this
effect (2)

In the simulations initially 25 per cent duties are assumed to be
applied to $50bn worth of imports from both the US and China. This
is followed by the introduction of a 10 per cent levy first on
$200bn worth of US imports from China, then expanded further to
cover the remaining $250bn worth of imports. Within NiGEM higher
tariffs work by raising import prices in the tariff imposing
country which leads ultimately to lower demand and output through a
number of channels including lower consumption, lower investment
and lower exports to countries that are disadvantaged by higher
tariffs. Shocks are applied exogenously for 3 years after which
they are allowed to return back to their initial levels.

The simulation results (see figure A1) suggest that the loss of
output from the first round of tariffs by both the US and China
would be modest, reducing GDP by less than 0.2 per cent relative to
what it would otherwise have been. However, the adverse impact on
GDP in both countries is significantly higher if duties are imposed
on a larger range of imports from China into the US. Even though
the shocks are of a bilateral nature, given the share of the US and
China in global output and trade (about 32 and 40 per cent
respectively), there is a material negative spillover effect on
other economies.

In all simulations, higher tariffs lead to an increase in domestic
inflationary pressures via an increase in import prices (see figure
A2). A tit-for-tat trade dispute leads to an increase in domestic
prices of a comparable magnitude in both China and the US, but the
impact on inflation in the US becomes more pronounced after the US
levy tariffs on a wider range of imports from China.

NOTES

(1) An expanded version of NiGEM v2.17b is used, enabling tariffs
to be imposed between die US and all countries. Monetary policy
reacts to deviations from nominal GDP and inflation targets;
financial markets are forward looking and respond to expected
changes in interest rates, so that if expectations of future
interest rates are raised, following tariff imposition, then bond
and equity prices will fall and the exchange value of the domestic
currency will increase immediately, bringing some effects forward.

(2) 'From protectionism to prosperity', speech by Mark Carney,
Governor of the Bank of England, 5 July 2018.

REFERENCES

Hantzsche, A. and Liadze, I. (2018), 'Box D, The World Economy',
National Institute Economic Review, 244, F46-47.

Liadze, I. and Hacche, G. (2017), 'The macroeconomic implications
of increasing tariffs on US imports', NiGEM Observations, No 12.

This box was prepared by Iana Liadze.

Box B. Intra-Euro Area spillovers--simulating the effects of fiscal
stimulus

What would European policymakers do if there was a severe slowdown
in the global economy now? Monetary policy ammunition is largely
exhausted and many countries appear to have little space to
implement expansionary fiscal measures. In this Box, we address the
heterogeneity of fiscal positions in the Euro Area, with a view to
examining the effectiveness of fiscal expansions undertaken
individually and collectively in stimulating aggregate demand in
the monetary union.

Fiscal policies implemented by a country in isolation have an
effect on other countries through trade linkages and resource
flows. These spillover effects are particularly important in the
Euro Area, given the comprehensiveness of its special agreements,
integration among member states and its common currency.
Nonetheless, there are large differences across Euro Area countries
in the amount of room that individual countries have available to
carry out fiscal expansions. Figure B1 shows the size of public
debt and the budget balances in Euro Area countries, and highlights
the degree of dispersion amongst them.

The medium-term budgetary objectives (MTOs) defined by the European
Commission in the Stability and Growth Pact are set to ensure sound
fiscal policies. According to those criteria, we assume here that a
country has 'fiscal space' (i.e. the space to expand fiscal policy)
if the levels of government debt-to-GDP and budget balance are
broadly in line with those commitments. Considering the five major
Euro Area economies, only Germany and the Netherlands appear to
have fiscal space to increase public spending. However, amongst the
constrained countries, Italy and France have recently legislated
for or are calling for fiscal measures. In this Box, we assess the
benefits that come with a more collective approach with regard to
fiscal policy.

The analysis uses the National Institute's Global Econometric Model
(NiGEM) to examine the effect of a co-ordinated Euro Area fiscal
expansion and an expansion conducted by member states in isolation.
The different scenarios simulate an expansion to government
spending of the same magnitude (1 per cent of GDP) and duration
(for two years), before they gradually revert to baseline. Monetary
policy and exchange rates are kept exogenous for the duration of
the shock.

Table B1 below shows the effect of fiscal expansions on first year
output and contrasts the effects of the fiscal stimulus when done
in isolation and when it is co-ordinated across the Euro Area as a
whole. (1) The diagonal elements report the effects of the fiscal
expansion in the country originating the fiscal expansion, while
the off-diagonal elements show the spillover effect onto the other
countries. At the bottom of the table, the line 'Isolated' reports
once again the fiscal multiplier in the country originating the
stimulus, and the line 'Co-ordinated' shows the fiscal multipliers
from the co-ordinated Euro Area expansion on the individual
countries and Euro Area as a whole. (2) Finally, the trade spillovers
are reported.

The domestic first-year fiscal multipliers are country-specific and
are larger for countries where the number of liquidity-constrained
consumers is higher, such that a rise in output determines a
greater response of consumption. That is the case for Spain, where
the isolated expansion yields a significantly higher increase in
output relative to the same isolated expansion conducted elsewhere.
In contrast, the same isolated expansion in Germany has a smaller
fiscal multiplier as the estimated marginal propensity to consume
out of current income is lower. However, a German expansion would
yield the most beneficial effects to Euro Area growth relative to a
fiscal shock adopted in the other member countries separately
(around 0.2 percent points higher).

Comparing the size of domestic fiscal multipliers with the
off-diagonal values, spillovers on other Euro Area states arising
from the fiscal stimulus adopted only in one country are relatively
small compared to their domestic effects. However, when all
countries adopt them simultaneously, the trade spillovers account
for around 30 per cent of the rise in output one year after the
stimulus.

The magnitude of trade spillovers reflects the structure of Euro
Area trade linkages and the degree of countries' openness, which
determines their sensitivity to foreign demand shocks. The
spillover effects of a co-ordinated Euro Area shock are bigger for
countries that are more sensitive to a shock to Euro Area demand
for their exports. For example, the co-ordinated fiscal multiplier
in the Netherlands is more than double that of the isolated
scenario (1.1 percentage points higher GDP when coordinated
compared to 0.5 percentage points when done in isolation).

What if the expansion was limited to countries with fiscal space?

We have also simulated the effect of a co-ordinated expansion of
only the countries that have space to expand fiscal policy--as
defined before--and assessed the impact on the constrained
countries that are not shocked. Figure B2 shows that the spillover
effects generate benefits to those countries from the fiscal
stimulus co-ordinated across the 'stimulators'.

The fiscal multiplier generated by the co-ordinated expansion
conducted by the five countries with fiscal space is around 0.1
percentage points higher than if the expansion were implemented in
Germany alone. Compared to table BI, the impact of a fully
co-ordinated Euro Area expansion is significantly greater than an
expansion limited to the five countries with fiscal space.

These results show that, if there were to be a fiscal expansion by
Euro Area countries, the dispersion in Euro Area members' fiscal
positions calls for a more collective approach. Many factors would
contribute to the size of the final effect of a fiscal expansion.
These results, however, provide a basis for ranking the
effectiveness of various policies either co-ordinated across
countries or undertaken in isolation. If a fiscal boost is
implemented simultaneously, the fiscal multipliers are larger for
all countries in the monetary union, with the trade spillover
channel accounting for some 30 per cent of the average rise in
output.

NOTES

(1) The analysis excludes Cyprus, Luxembourg and Malta as they are
not modelled separately in NiGEM; also Estonia, Latvia, Lithuania,
Slovakia and Slovenia are not included as, although in NiGEM, there
is not an explicit model for the government sector.

(2) Pain, N., Rusticelli, E., Salins, V. and Turner, D. (2018), in
'A model-based analysis of the effects of increased public
investment' (National Intitute Economic Review, May), used NiGEM to
estimate the size of fiscal multipliers across the G7 from an
expansion to government consumption relative to government
investment.

This box was prepared by Marta Lopresto.

Prospects for individual economies

United States

After another relatively soft performance in the first quarter of the year, economic activity appears to have picked up significantly in the second quarter of 2018, underpinned by stronger consumption. The labour market has continued to strengthen with total non-farm payroll employment expanding by 213,000 in June, almost identical to the 6-month average. The unemployment rate has increased marginally to 4 per cent due to a rise in the labour force participation rate (see figure 6). Labour markets are expected to continue to tighten, and the participation rate to increase somewhat as the economy expands. Fiscal policy is set to become expansionary over the course of this year and the next, with a projected reduction in tax revenue coupled with an increase in government spending leading to a widening of the government budget deficit and hence an increase in the debt position. As the fiscal stimulus takes more effect, we expect economic growth to strengthen through this year to about 3 per cent, marginally stronger than our forecast three months ago. The assessment of risks around the baseline forecast in the US economy is shown in the GDP growth rate fan chart (figure 7).

After remaining below the Federal Reserve's target for the most of the time since 2012, inflation based on the consumer expenditure deflator is back to 2 per cent. Business surveys and the producer price index are indicating rising input costs that can be a result of tightening supply chains. However, the main driver of the rise in consumer price inflation so far has been health care costs, which are not trade related. The fiscal boost, coupled with the introduction of tariffs on imported goods, is expected to generate upward pressure on prices and, as a result, we expect inflation to overshoot the target slightly during the course of the next two years.

With the economy growing steadily, the Federal Reserve has continued its gradual monetary policy normalisation and increased the federal funds rate by 50 basis points in two rounds since the beginning of this year. With the economy operating already at about its capacity and a sizeable fiscal easing taking place, further increases in interest rates are expected.

Recent escalation of trade related disputes creates uncertainty and adds downside risks to the economic outlook. So far, the US tariffs have been aimed at intermediate products and the impact on output is expected to be modest. Based on our simulation (see Box A in this chapter) 25 per cent tariffs on $50 billion worth of imports between the US and China is expected to reduce GDP (relative to the baseline case) in the US by about 0.05 per cent and increase inflation by about 0.1 percentage point in the first year. However, if the threat to impose more substantial tariffs on a much wider range of imported goods materialises, then the negative impact on the economy and the pass through to domestic inflation are expected to be much larger.

Canada

Despite finding itself in the direct firing line of US trade policy, the Canadian economy has so far remained resilient and has expanded at a pace very close to potential. However, the shift in the composition of GDP growth away from domestic consumption to exports and investment in the current trade environment may make it more vulnerable in the near term. GDP rose by only 0.3 per cent in the first quarter of 2018, mainly due to a slowdown in household spending, non-energy exports and housing investment, continuing the slower pace seen in the second half of 2017. Tighter mortgage rules and a slower pick-up of wage growth than under similar circumstances in the past look to be restraining consumption growth. On the other hand, the business outlook remains positive. As an energy producer, higher oil prices support export growth and business investment continues to profit from favourable financial conditions. Overall, we expect Canadian GDP to grow by 2.4 per cent in 2018, softening to around 2.2 per cent in 2019.

The stronger reliance on export-led growth makes the economic outlook more uncertain in the face of NAFTA renegotiations and the imposition of tariffs by the US administration and the counter-measures announced by the Canadian government. At the time this Review went to press, US tariffs in place on Canadian exports of newsprint, softwood lumber, steel and aluminium products affected 4.1 per cent of total Canadian exports. An escalation to include, for instance, the automobile sector would have substantially larger consequences for exporters and firms linked through supply chains as well as for business investment; while tariffs imposed by the Canadian government on US imports would put pressure on consumer prices (see also Box A).

Headline consumer price inflation in June stood near the middle of the Bank of Canada's target range at 2.5 per cent per annum, and so did the Bank's preferred measures of core inflation at close to 2.0 per cent (these include a trimmed inflation measure similar to the one examined for the UK in Box D of the UK Economy chapter). Abstracting from possible inflationary pressures arising from trade barriers, the inflation outlook is mixed. On one hand, indicators suggest that capacity constraints are increasingly binding--in the most recent Business Outlook Survey 57 per cent of firms reported facing difficulties meeting unanticipated increases in demand (up from 47 per cent in 2017) and 34 per cent of firms reported labour shortages (up from 25 per cent in 2017). On the other hand, signals about wage growth are mixed. Researchers at the Bank of Canada have constructed a measure that reflects a common wage growth component across a number of data sources (Brouillette et al., 2018). As illustrated in figure 8, common wage growth has flatlined since the start of last year. At the same time, employment growth eased at the beginning of 2018 and unemployment rose slightly above its 40-year low to 6 per cent in June. Against this backdrop, the central bank continued its gradual path of raising interest rates by setting its main policy rate to 1.5 per cent in July, 25 basis points higher than after its last hike in January this year. We forecast inflation to hover around 2 per cent in 2018 and 2019 as a whole.

Euro Area

In the Euro Area, growth in the first quarter of 2018 at 0.4 per cent was weaker than at any time in 2017 (at 0.7 per cent in each quarter). The lower reading raised the issue of whether the weakness was specific to that quarter (a temporary 'soft patch' due to factors such as the adverse weather) or a reflection of the above-par rate of growth in 2017 returning to trend. The 2.6 per cent growth in 2017 was the strongest since 2007.

Within the first quarter figures, Spain maintained its strong 0.7 per cent quarterly growth, while growth in France slipped from 0.7 per cent to 0.2 per cent and in Germany it dropped from 0.6 per cent to 0.3 per cent. Within the first quarter, Euro Area consumer spending growth actually strengthened, from 0.2 per cent to 0.5 per cent. In contrast, fixed investment spending growth dropped from a very strong 1.3 per cent in the first quarter of 2017 to 0.5 per cent. The external sector also contributed to the weaker performance, with strong quarterly export growth in the second half of 2017 (1.5 per cent in Q3 and 2.2 per cent in Q4) not being repeated in the first quarter of 2018 (see figure 9) when exports fell by 0.4 per cent and Germany, France and Italy all saw falls in exports. Our expectation is that this is likely to have been a temporary fall and that export growth will contribute to a strengthening of growth in the rest of the year. That said, overall growth is expected to slow from last year's very strong performance, to 2.2 per cent in 2018, and 2.0 per cent next year. Into the medium term, the Euro Area is anticipated to show average annual growth of just under 1.5 per cent a year, reflecting broader demographic trends.

Consumer price inflation was 2.0 per cent in the twelve months to June, up sharply from 1.3 per cent in April, with the increase in the month widespread across the member countries. Increases in the prices of energy, services and food, alcohol and tobacco, were the main contributors to the sharp jump in annual inflation. Our expectation is that inflation will continue to remain "close to but below its 2 per cent" target over the forecast horizon.

If domestic price pressures, particularly from faster average earnings growth, build, then there could be a limited over-shoot of the 2 per cent target. Nevertheless, the European Central Bank (ECB) has indicated that it sees no immediate need to raise policy interest rates, perhaps implicitly viewing a sizeable output gap as preventing significant upward pressure on inflation, especially with the unemployment rate still currently above 8 per cent, and higher than its level before the financial crisis. Accordingly, while quantitative easing is expected to end this year (as announced by the ECB), the interest rate outlook is assumed to be for very gradual rate rises into the medium term.

Germany

Most recent indicators suggest that the German economy has left behind the soft patch it appeared to hit at the beginning of the year. We expect output growth to continue to be solid in 2018, albeit not as strong as in 2017. GDP expanded by only 0.3 per cent in the first quarter as a consequence of a global slowdown in trade and a severe influenza outbreak. Since then, orders data have picked up in May, as did industrial production.

As a result, we have revised our projections of GDP growth for 2018 to 2.1 per cent, and for 2019 to 2.0 per cent. Domestic demand is expected to make a substantial positive contribution to growth, as is demand from Euro Area trading partners. Fiscal policy will buffer the expected deceleration of growth, in particular in 2019 when most of the expansionary measures that were agreed by the German government in July will come into force. Given higher than expected revenue, the budgetary position remains favourable and would provide room for additional spending (see also Box B) should the government wish to use it. Additional spending could be used to upgrade the country's transport and broadband infrastructure in order to raise the economy's productive potential. We expect the government budget to remain in surplus over the whole of the forecast horizon.

The unemployment rate remains at a three-decade low of 3.4 per cent and shortages of labour are increasingly reported as constraining the rate of economic growth from moving above potential. Solid wage settlements in some sectors, like construction, the metal industries and the public sector, suggest that the reduction in slack may finally be translating into stronger wage pressure in areas that face particular recruitment difficulties. Low rates of overall unemployment, however, conceal the fact that the share of non-permanent employment contracts reached a 20-year high of 8.3 per cent last year (IAB, 2018). This may explain why in the economy as a whole wages and inflation have struggled to move up further. Real wages were 1.1 per cent higher in 2018Q1 than a year previously, which is below the post-crisis average and more recent data on negotiated wages does not suggest this trend has yet reversed. Without a sustained rise in the pace of earnings increases, we expect consumer prices to rise by about 2.0 per cent in 2018 and 2019.

The main risk to the German economy is a slowdown in international trade as a result of new tariff and non-tariff barriers (see also Box A). Figure 12 illustrates that the volume of exports to the United Kingdom has been falling since the Brexit referendum. Similarly, the growth in exports to the United States has slowed down over the past twelve months, despite favourable exchange-rate movements, possibly reflecting some fear about protectionist measures. German exporters have instead relied more on demand from the Euro Area and China. Political uncertainty in the currency union and an economic reversal in China would therefore have important implications for the German economy. Against this, the recent trade agreement between the EU and Japan should be positive for German exporters.

France

The French economy expanded in 2017 at a rate much faster than potential: 2.3 per cent versus a potential estimated at around 1 1/4 per cent. (3) In the first quarter of 2018, GDP growth slowed to 0.2 per cent after expanding by about 0.7 per cent in each of the previous four quarters, driven by a slowdown in consumption, investment and net trade. Household consumption growth was lacklustre at 0.1 per cent in the quarter as real personal income was hit by a combination of higher consumer price inflation, which rose from 1.2 per cent in the previous quarter to 1.5 per cent in the first quarter, and an increase in generalised social contribution (CSG), a tax on income and wealth used to finance social security. Fixed investment growth declined sharply from 0.9 per cent in the fourth quarter of 2017 to 0.2 per cent in the first quarter of 2018. In addition to the slowdown in domestic demand, exports fell in the first quarter by 0.3 per cent as the euro appreciated against the US dollar, which made French exports less competitive. Although industrial production declined by 0.8 per cent in the three months to May 2018, service sector output rose by 0.5 per cent in the three months to April 2018 (after a rise of 1.7 per cent in the previous three months).

The inflation rate reached 2.3 per cent in May and June, the highest since August 2012 (figure 13). Domestic factors--the economy growing above potential and closing its output gap--and external factors--a spike in energy prices--contributed to higher inflation. Higher inflation is likely to further dampen households' purchasing power unless earnings growth picks up.

The unemployment rate, which reached a peak of 10.5 per cent in 2015, has been declining steadily but appears to have stalled at slightly above 9 per cent since the fourth quarter of 2017, as a result of slightly fewer new jobs being created and an increase in labour force participation. We expect the downward trend to resume in the second half of 2018 as there is still evidence of slack in the labour market. Following a temporary dip in the first quarter, we forecast quarterly French GDP growth to stabilise at around 0.4 per cent in each of the following three quarters and annual inflation to stabilise at just under 2 per cent.

Italy

Our annual projections for the short term are for continued economic expansion, although at a rate slightly weaker than we anticipated in May. We expect GDP to grow by 1.3 per cent this year and 1.2 per cent next. Since the turn of the year, growth has been slightly softer than expected, with the slowdown driven by the domestic political uncertainty and a deceleration in global trade.

Consumption was the main driver of growth in the first quarter and we expect it to continue to be strong in the second quarter on the back of lower unemployment in the months to May and positive consumer confidence surveys. On the output side, the projections for the second quarter are for weak industrial production, partially compensated by stronger service sector output, in line with the outlook conveyed by activity surveys.

The headline inflation rate softened slightly during the first quarter of this year, but then rose to 1.4 per cent in June largely due to higher energy prices. We expect headline inflation to stabilise at just above 1 per cent this year and next. The unemployment rate could fall to just below 11 per cent in the second quarter of this year and we expect it to moderate below that in the rest of this year and the next.

The main risks to these projections are driven by the continued domestic political uncertainty and also the external trading environment. The process of coalition negotiations at the end of May added significant turbulence to financial markets and government bond yields which, although they have now stabilised somewhat, are still some 100 basis points above the levels in early May. Importantly, the new government has called into question the EU fiscal rules and that adds risk to our fiscal projections in the medium term (although we have not incorporated any new budget proposals to our forecasts as they will not be formally presented until autumn).

Spain

The positive economic outlook in Spain continues to hold. Annual economic growth was 3 per cent in the first quarter of 2018, marking the twelfth consecutive quarter at which it has been 3 per cent or above. Unemployment has continued to fall steadily, from 16.1 per cent in March to 15.8 per cent in June. Prices increased by 2.3 per cent in the year to May, with inflation rising from 1.1 per cent in April, in part reflecting higher energy prices. Given the apparent degree of spare capacity remaining in the Spanish economy, the spike in inflation is likely to be due to the recent surge in oil prices.

There have been a number of important developments in the Spanish economy over the past quarter. Firstly, the government approved the 2018 Stability Programme in April. The main budgetary measures include income tax cuts for low income households and a 1 per cent increase in public sector wages. Secondly, the People's Party, which had held a majority since 2011, was replaced in government by the Spanish Socialist Workers' Party on 1 June following a vote on the corruption scandal. While this political crisis led to a sharp spike in economic policy uncertainty, the overall positive economic trends have continued.

Looking ahead, we forecast that economic growth will be around 2.8 per cent in 2018 and 2.5 per cent in 2019. Unemployment should continue to fall, reaching 15.5 per cent this year and around 14.5 per cent next. Inflation is likely to peak this year as the energy price increase works through and edge back thereafter, reflecting the transitory effect of the increase in oil prices. With a robust outlook as our central forecast, the risks to our forecast are tilted to the downside. Domestically, the situation in Catalonia remains uncertain, while externally the key risks are a rise in protectionism and the effects of a gradual normalisation of monetary policies.

Japan

Japanese economic activity contracted by 0.2 per cent in the first quarter of 2018, down from an upwardly revised 0.3 per cent growth in the previous quarter. This is the first quarterly contraction since 2015 and was largely due to firms running down inventories, following a build-up of inventories in previous quarters. Housing investment also continued to decline following a contraction of bank lending for apartment construction as increasing numbers of new-builds lie vacant. Domestic demand was flat in the first quarter of this year. Since inventories are unlikely to continue to be run down and household consumption is likely to be supported in the near-term by rising wages, this fall in GDP looks to be temporary and we expect growth to return in the second quarter and for Japan to show growth of 1.0 per cent this year and next.

Consumer price inflation rose slightly to 0.7 per cent year-on-year in May, up from 0.6 per cent in April.

While this reading was above consensus estimates of 0.3 per cent, it remains well below the rates of inflation seen in the first quarter of this year and the central bank's 2 per cent target. We expect inflation to edge up to 1.4 per cent in 2019, in part reflecting stronger wage growth, which for March showed the largest annual increase in earnings since 2003, with nominal earnings increasing by 2.1 per cent year-on-year. While this figure was boosted by large increases in bonus payments, base pay rose by 1.3 per cent, the strongest increase since 1997. Although labour shortages are becoming increasingly acute, there has been little sign of pass-through to wages until now. To ease the problem of labour shortages, Japan is set to loosen immigration rules, allowing up to 500,000 guest workers into the country.

The Japanese government has pushed back its target date for achieving a primary budget balance to 2025, citing slow growth in tax revenues, a delay in raising the consumption tax and plans to increase spending on education as factors that meant the initial 2020 goal would be difficult to meet. From our forecast projections this target will prove to be tough to meet.

China

Output grew by 6.7 per cent year-on-year in the second quarter of 2018, just 0.1 percentage point lower than in the preceding three quarters. Since the first quarter of this year, high frequency indicators have been pointing to a somewhat softer pace of economic activity, largely as a reaction to financial deleveraging. The rate of growth of retail sales, investment and industrial output weakened in May and June. Looking forward, we maintain our view of a very gradual reduction in the rate of GDP growth and expect annual output growth to be about 6.6 per cent and 6.3 per cent this year and next respectively.

As the political drive to reduce financial risks continues, the pace of increase of corporate debt has slowed. After reaching a high of over 165 per cent of GDP in 2016, the ratio has edged down recently to around 160 per cent as policy changes have had an effect. Stricter financial rules seems to have affected liquidity as well, with the 12-month growth in M2 money supply for the past four months under 9 per cent and spreads between AA-rated corporate and government bond yields have risen since late 2016.

The introduction of a series of tariffs by the US on imports from China complicates implementation of domestic reforms. Tariffs imposed up to now are expected to have a modest impact on GDP growth and inflation. Based on our simulation results presented in Box A, the imposition of 25 per cent tariffs on $50 billion worth of imports from China to the US and vice versa is expected to reduce (the level of) GDP in China by about 0.02 per cent and add about 0.2 percentage points to inflation in the first year.

However, the negative impact on the economy is expected to be significantly larger if a threat by the US President to apply tariffs on half or even the full range of imported goods from China materialises. News of the tariffs announcement led to a fall in Chinese domestic stock markets. Equity prices in China have declined by about 18 per cent since the start of this year, reaching lows last seen two years ago. The People's Bank of China reacted to the uncertainty by cutting banks' cash reserve ratio, which is a signal for banks to expand their balance sheets and hence liquidity in the system. However, as the statement accompanying the announcement stressed --the "prudent" monetary policy stance is expected to continue, which is an indication that the authorities are not planning a large stimulus. The escalation of the trade dispute creates uncertainty, increases volatility and creates a downside risk to economic activity. Nevertheless, output growth in China is largely domestically driven (see figure 19) and the government still has enough ammunition to soften the negative effect from the trade dispute with the US.

Russia

Following a landslide election victory on 18 March 2018 with 77 per cent of the vote, President Putin has set about his agenda. After the inauguration for another 6-year term on 7 May he signed a 'May decree' setting out the national development targets for the next term to 2024. The measures aim to raise Russia's potential growth rate, with the overriding objective of joining the group of the world's five largest economies by the end of the term (currently Russia is the world's 12th largest economy as measured at market exchange rates). The implementation of the 'May decree' requires an additional 8 trillion rubles (about US$130 billion) over six years, which amounts to about half of total federal expenditure set out in Russia's 2018 budget. The plan is viewed as ambitious, with Prime Minister Medvedev admitting that the timeframe is "rather tight".

On 14 June 2018, the start of the World Cup held in Russia, the government outlined a package of budget measures to fund the 'May decree'. This contained three main components of note. First, value added tax (VAT) will rise from 18 per cent to 20 per cent from 2019. Second, the retirement age will increase from one of the lowest in the developed world--at 60 for men and 55 for women--to 65 and 60 for men and women respectively. Third, a tax reform of the oil industry will abolish export duties for crude and oil products and raise a production levy. International sanctions remain a key factor hindering recovery: in addition to the EU's further extension of its economic sanctions until 31 January 2019, there remains controversy over the alleged cyber interference in the 2016 US elections, and in June several companies and individuals had sanctions imposed for allegedly aiding Russia's main intelligence agency.

Annual consumer price inflation slowed a little to 2.3 per cent in June from 2.4 per cent in March. The decline in inflation into June was a result of seasonal lower food inflation. Having peaked at 16.9 per cent in the year to March 2015, inflation has now fallen below the Central Bank's target of 4 per cent, and has been around the 2.02.5 per cent range for the eight months to June 2018. The VAT increase due to be implemented in January 2019 should lead to an uptick in inflation into 2019. The current harvest has been estimated to be some 20-25 per cent lower than usual and will be another factor driving higher prices in the next 12-18 months. We expect inflation to pick up towards 2.7 per cent in 2018 and 4.0 per cent in 2019, reflecting the pass-through of exchange rate depreciation and commodity price rises to domestic prices. The VAT increase adds a further upside risk to inflation.

Following six rounds of reductions in interest rates which took them from 10 to 7.75 per cent in 2017, the central bank lowered its benchmark interest rate in mid-February to 7.50 per cent and in late-March to 7.25 per cent, where it has been held since. At the 15 June 2018 meeting the Governor cited the forthcoming VAT increase as the main reason for postponing more monetary easing.

We have revised our GDP forecast down slightly to 1.8 per cent from 1.9 per cent in 2018 and to 1.9 per cent from 2.3 per cent in 2019. The current year revision reflects the existing weakness in 2018 data, the weak harvest and tightening US sanctions, whilst the 2019 revisions reflect the balance of the new fiscal package.

India

The rate of growth of the Indian economy continued to increase in the first quarter of 2018, with the economy expanding by 7.7 per cent year-on-year, up from 7.0 per cent in the previous quarter. Some of this continued rapid expansion can be attributed to a continued bounce back following disruption due to demonetisation in November 2016 and the implementation of radical tax reforms in July 2017. However, a large contribution to growth has come from increases in government spending in the run-up to next year's general election, while private investment has been broadly flat. India's economy had benefitted from the low oil price, but with oil at around $75 per barrel, this stimulus to growth has been removed. Thus, unless private sector investment surprises on the upside, we expect growth to slow next year, averaging 7.8 per cent this year and 7.5 per cent in 2019.

The annual inflation rate increased for the third consecutive month in June, reaching 5.0 per cent. India's increasingly protectionist stance is likely to push up consumer prices further, as well as hurting domestic producers as the prices of imported goods rises. Increases in tariffs on a range of goods imported from the US will come into effect on 4 August, in retaliation for President Trump's decision to increase duties on steel and aluminium imports from India.

Increasing inflationary pressure and concerns around rising oil prices and uncertainty in financial markets prompted the Reserve Bank of India to raise policy interest rates on 6 June for the first time since 2014, with the benchmark repo rate rising by 25 basis points to 6.25 per cent. We expect inflation to average 5.2 per cent this year before easing slightly to 4.9 per cent in 2019.

Brazil

Driven by stronger investment growth than anticipated, we have revised up our projections for GDP growth in Brazil for this year and next, with growth forecast at 2 per cent and 2.7 per cent respectively. The weakening of inflation from a peak of almost 9 per cent in 2015 to just above 3 per cent last year gave space for monetary policy to lower the policy rate to 6.5 per cent in March which is likely to support investment. Also, the recent reform plan from the government has improved confidence and restored stability in financial markets. Inflation is assumed to settle at a rate within the 2018 Central Bank's target of 3-6 per cent this year and the next, which will continue to provide space for an accommodative monetary policy stance, and further support investment and consumption. The regional, as well as global, upturn in demand has driven a sustained increase in demand for Brazilian exports. This has aided the net trade position, although we expect the recent strength in exports to soften gradually going forward.

Some risks to these forecasts come from continued political uncertainty. The 2015-16 recession took its toll on traditional politics which had leaned to the left, and this may jeopardise the recent reform effort. According to the latest polls, the elections due in October 2018 could see an overhaul of the current left-wing government by a right-wing party. In addition, the adverse fiscal position represents a risk to our forecasts, as the primary balance required to stabilise the public debt ratio in the medium term is estimated to be around 2 per cent, while it currently stands at a negative 1.6 per cent of GDR

NOTES

(1) 'Oil and the macroeconomy' (2018), National Institute Economic Review, February.

(2) The Vix index is seen as a barometer of investor sentiment and market volatility and is a measure of market expectations of uncertain volatility implied by S&P 500 index option prices.

(3) European Commission estimate: 1.3 per cent, French Treasury estimate: 1.25 per cent.

REFERENCES

Aksoy, Y., Basso, H.S. and Smith, R.P. (2017), 'Medium-run implications of changing demographic structures for the macro-economy', National Institute Economic Review, August.

Brouillette, D., Lachaine, J. and Vincent, B. (2018), 'Wages: measurement and key drivers', Bank of Canada Staff Analytical Note 2018-2.

Hantzsche, A. and Liadze, I. (2018), The war on trade: beggar thy neighbour--beggar thyself?', National Institute Economic Review, May.

IAB (Institut fur Arbeitsmarkt-und Berufsforschung) (2018), IAB Kurzbericht, 16/2018.

Kazalova, Y. and Naisbitt, B. (2018), 'Disappointing productivity growth: an international dimension', National Institute Economic Review, February.

Lennard, J. (2018), 'The great synchronisation', National Institute Economic Review, May.

Lenoel, C. (2018), 'Predicting recessions in the United States with the yield curve', National Institute Economic Review, May.

Liadze, I. and Hacche, G. (2017), 'The macroeconomic implications of increasing tariffs on US imports', NiGEM Observations, No. 12. Naisbitt, B. (2018), 'The re-emergence of concerns about debt', National Institute Economic Review, May.

Riley, R., Rincon-Aznar, A. and Samek, L. (2018), 'Below the aggregate: a sectoral account of the UK productivity puzzle', ESCoE Discussion Paper 2018-06, May.

Appendix A: Summary of key forecast assumptions by Iana Liadze and Barry Naisbitt

The forecasts for the world economy and the UK economy reported in this Review are produced using the National Institute's global econometric model, NiGEM. NiGEM has been in use at NIESR for forecasting and policy analysis since 1987, and is also used by a group of more than 40 model subscribers, mainly in the policy community. Further details, including articles by model users, are provided in the May 2018 edition of the Review. Most countries in the OECD are modelled separately, (1) and there are also separate models for Argentina, Brazil, Bulgaria, China, Hong Kong, India, Indonesia, Lithuania, Romania, Russia, Singapore, South Africa, Taiwan and Vietnam. 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 determined in the long run by factor inputs and technical progress interacting through production functions, but is also affected by demand in the short to medium term. Economies are linked through trade, competitiveness and financial markets and are fully simultaneous. Further details on NiGEM are available on http://nimodel.mesr.ac.uk/.

The key interest rate and exchange rate assumptions underlying our current forecast are shown in tables A1-A2. Our short-term interest rate assumptions are generally based oncurrent financial market expectations, as implied by the rates of return on treasury bills and government bonds of different maturities. Long-term interest rate assumptions are consistent with forward estimates from short-term interest rates, allowing for a country-specific term premium. Where term premia do exist, we assume they gradually diminish over time, such that long-term interest rates in the long run are simply the forward convolution of short-term interest rates.

Short-term interest rates in the US, UK and Canada are expected to rise in 2018, but remain unchanged in the Euro Area and Japan. Interest rates in the US are broadly consistent with the path signalled by the most recent Federal Open Market Committee (FOMC) minutes. As discussed in the UK chapter in this Review, we expect the UK economic growth to stabilise at a rate that is close to its potential. Our central forecast assumes a soft Brexit scenario and is conditioned on Bank Rate rising 25 basis points in August this year and February 2019. Bank Rate is expected to reach 1.5 per cent in 2020, this being the point at which the MPC is assumed to stop reinvesting the proceeds from maturing gilts it currently holds, allowing the Bank of England's balance sheet to shrink 'naturally'. (2)

Figure A1 illustrates the recent movement in, and our projections for, 10-year government bond yields in the US, Euro Area, the UK and Japan. The levels of 10-year sovereign bond yields in the second quarter of 2018 have increased slightly since the first quarter in the US by about 20 basis points, but remained largely unchanged in the Euro Area, the UK and Japan. Expectations currently for bond yields for the end of 2018 are slightly lower, by about 30 basis points, for the UK compared to expectations formed just three months ago, but are largely unchanged for the US, the Euro Area and Japan. The forecast implies gradual increases for 10-year bond yields but, given the risks around the forecast, more volatile paths could emerge.

Sovereign risks in the Euro Area were a major macroeconomic issue for the global economy and financial markets over several years after the financial crisis. Figure A2 depicts the spread between 10-year government bond yields of Spain, Italy, Portugal, Ireland and Greece over Germany's. After remaining relatively flat or somewhat decreasing over the course of last year, spreads increased in May and have remained elevated since. Italy experienced the largest increase in spreads. In our current forecast, we have assumed that spreads over German bond yields narrow slightly in all Euro Area countries.

Figure A3 shows the spreads 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. Since the beginning of February corporate bond spreads in the US, UK and Euro Area have been on an upward trend, with private sector borrowing costs rising more than the observed increase in risk-free rates. Our forecast assumption for corporate spreads is that they gradually converge towards their long-term average level.

Nominal exchange rates against the US dollar are generally assumed to remain constant at the rate prevailing on 12 July 2018 until the end of March 2019. After that, they follow a backward looking uncovered-interest parity condition, based on interest rate differentials relative to the US. Figure A4 plots the recent history as well as our short-term forecast of the effective exchange rate indices for Canada, the Euro Area, Japan, UK, and the US. Between the first and the second quarters of 2018, in trade-weighted terms, the US dollar appreciated slightly, by about 2 per cent, which leaves it at just about 4 per cent below the recent peak reached at the beginning of 2017. After having strengthened over the past year, the euro weakened marginally in effective terms in the second quarter of this year relative to the previous quarter. Among the emerging market currencies in our model, the largest movement in trade-weighted terms between the second and the first quarters of 2018 has been the depreciation of the Argentinian peso by about 13 per cent, followed by the Turkish lira, which lost about 11 per cent of its value, and the Brazilian real, which depreciated by about 8 per cent.

Our oil price assumptions for the short term generally follow those of the US Energy Information

Administration (EIA), published in July 2018, and updated with daily spot price data available up to 12 July 2018. The EIA uses information from forward markets as well as an evaluation of supply conditions. As illustrated in figure A5, oil prices, in US dollar terms, have continued to increase since their recent trough in 2016, and gained about 12 per cent between the second and the first quarters of 2018. Expectations of oil prices by the end of 2019 are somewhat higher, compared to the expectation three months ago, which leaves oil prices about $35 per barrel lower than their nominal level in mid--2014.

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. Since the beginning of this year stock market performance has been mixed, without major falls or gains in equity prices in the largest developed economies. Figure A6 illustrates the key short-term equity price assumptions underlying our current forecast.

NOTES

(1) With the exception of Iceland and Israel.

(2) Interest rate assumptions are based on information available for the period to 12 July 2018.

Table A1. Interest rates

Per cent per annum

                 Central bank intervention rates

              US    Canada   Japan   Euro Area    UK

2014         0.25    1.00     0.10     0.16      0.50
2015         0.26    0.65     0.10     0.05      0.50
2016         0.51    0.50    -0.08     0.01      0.40
2017         1.10    0.70    -0.10     0.00      0.29
2018         1.91    1.35    -0.10     0.00      0.60
2019         2.69    1.94    -0.10     0.06      1.08
2020-24      3.55    3.29     0.26     1.31      2.31

2016    Q1   0.50    0.50     0.00     0.04      0.50
2016    Q2   0.50    0.50    -0.10     0.00      0.50
2016    Q3   0.50    0.50    -0.10     0.00      0.34
2016    Q4   0.55    0.50    -0.10     0.00      0.25
2017    Q1   0.80    0.50    -0.10     0.00      0.25
2017    Q2   1.05    0.50    -0.10     0.00      0.25
2017    Q3   1.25    0.79    -0.10     0.00      0.25
2017    Q4   1.30    1.00    -0.10     0.00      0.41
2018    Q1   1.53    1.20    -0.10     0.00      0.50
2018    Q2   1.80    1.25    -0.10     0.00      0.50
2018    Q3   2.08    1.43    -0.10     0.00      0.66
2018    Q4   2.24    1.50    -0.10     0.00      0.75
2019    Q1   2.42    1.75    -0.10     0.00      0.92
2019    Q2   2.60    1.88    -0.11     0.00      1.00
2019    Q3   2.78    2.01    -0.10     0.00      1.16
2019    Q4   2.96    2.13    -0.08     0.25      1.25

                 10-year government bond yields

             US    Canada   Japan   Euro Area   UK

2014         2.5    2.2      0.6       1.9      2.5
2015         2.1    1.5      0.4       1.0      1.8
2016         1.8    1.3      0.0       0.7      1.3
2017         2.3    1.8      0.1       1.0      1.2
2018         2.9    2.2      0.1       1.1      1.4
2019         3.2    2.8      0.3       1.6      2.0
2020-24      3.9    3.8      1.1       3.0      3.4

2016    Q1   1.9    1.2      0.1       0.8      1.5
2016    Q2   1.7    1.3     -0.1       0.7      1.4
2016    Q3   1.6    1.1     -0.1       0.4      0.8
2016    Q4   2.1    1.5      0.0       0.8      1.3
2017    Q1   2.4    1.7      0.1       1.1      1.3
2017    Q2   2.3    1.5      0.0       1.0      1.0
2017    Q3   2.2    1.9      0.0       1.0      1.2
2017    Q4   2.4    2.0      0.0       0.9      1.3
2018    Q1   2.8    2.2      0.1       1.0      1.5
2018    Q2   2.9    2.3      0.0       1.0      1.4
2018    Q3   2.8    2.2      0.0       1.0      1.3
2018    Q4   3.0    2.3      0.1       1.2      1.5
2019    Q1   3.1    2.5      0.2       1.4      1.8
2019    Q2   3.2    2.7      0.3       1.5      2.0
2019    Q3   3.3    2.8      0.3       1.7      2.1
2019    Q4   3.4    3.0      0.4       1.8      2.3

Table A2. Nominal exchange rates

             Percentage change in effective rate

              US      Canada     Japan     Euro
                                           Area

2014          3.8      -5.7      -5.5       3.1
2015         13.2     -11.2      -6.3      -6.0
2016          5.2       0.3      15.2       4.8
2017          0.6       2.0      -2.4       3.0
2018         -0.8      -1.5       0.9       4.7
2019          1.2      -0.4       0.7       0.8

2016   Q1     1.6       4.2       6.5       2.5
2016   Q2    -1.7       2.1       5.7       1.1
2016   Q3     1.1      -1.2       5.9       0.3
2016   Q4     3.6      -0.6      -4.1       0.0
2017   Q1     1.1      -0.1      -2.9      -0.6
2017   Q2    -2.4       0.0       1.0       1.1
2017   Q3    -3.4       7.3      -1.5       4.3
2017   Q4     1.3      -3.7      -1.7       0.6
2018   Q1    -1.9      -2.1       2.5       2.0
2018   Q2     2.0       1.0       0.5      -0.4
2018   Q3     2.1      -1.5      -0.3       0.3
2018   Q4     0.0      -0.1      -0.1       0.0
2019   Q1     0.0       0.0       0.0       0.0
2019   Q2    -0.2       0.1       0.5       0.5
2019   Q3    -0.2       0.1       0.5       0.5
2019   Q4    -0.2       0.1       0.6       0.5

            Percentage change in effective rate

            Germany   France     Italy      UK

2014          1.6       1.5       2.5       7.4
2015         -3.7      -3.8      -3.1       5.6
2016          2.4       2.5       2.9      -9.9
2017          1.3       2.0       2.0      -5.2
2018          2.5       2.6       3.1       2.4
2019          0.5       0.3       0.5      -0.4

2016   Q1     1.3       1.2       1.5      -5.6
2016   Q2     0.5       0.8       0.7      -1.6
2016   Q3     0.0       0.4       0.0      -7.9
2016   Q4    -0.1       0.1       0.2      -2.6
2017   Q1    -0.4      -0.2      -0.2       0.8
2017   Q2     0.6       0.7       0.7       1.1
2017   Q3     2.3       2.3       2.6      -1.6
2017   Q4     0.3       0.4       0.5       1.7
2018   Q1     0.9       1.2       1.4       2.0
2018   Q2    -0.1      -0.4      -0.2       0.1
2018   Q3     0.3       0.0       0.2      -1.0
2018   Q4     0.0       0.0       0.0       0.0
2019   Q1     0.0       0.0       0.0       0.0
2019   Q2     0.3       0.2       0.3       0.1
2019   Q3     0.3       0.3       0.3       0.1
2019   Q4     0.3       0.3       0.3       0.0

                   Bilateral rate per US $

            Canadian    Yen      Euro     Sterling
               $

2014         1.112     105.8     0.754     0.607
2015         1.299     121.1     0.902     0.654
2016         1.314     108.8     0.904     0.741
2017         1.294     112.2     0.887     0.776
2018         1.306     110.3     0.842     0.742
2019         1.317     110.9     0.849     0.753

2016   Q1    1.323     115.2     0.908     0.699
2016   Q2    1.289     107.9     0.886     0.697
2016   Q3    1.310     102.4     0.896     0.762
2016   Q4    1.333     109.5     0.927     0.805
2017   Q1    1.339     113.6     0.939     0.807
2017   Q2    1.330     111.1     0.909     0.781
2017   Q3    1.229     111.0     0.852     0.764
2017   Q4    1.277     112.9     0.849     0.753
2018   Q1    1.294     108.3     0.814     0.718
2018   Q2    1.291     109.2     0.840     0.736
2018   Q3    1.320     111.9     0.856     0.757
2018   Q4    1.321     112.0     0.857     0.757
2019   Q1    1.321     112.0     0.857     0.757
2019   Q2    1.318     111.3     0.851     0.755
2019   Q3    1.316     110.6     0.846     0.752
2019   Q4    1.314     109.8     0.840     0.749

Appendix B: Forecast detail

Table B1. Real GDP growth and inflation

                             Real GDP growth (per cent)

                  2015    2016    2017    2018    2019    2020-24

Argentina          2.7    -1.8     2.9     2.0     2.3        2.2
Australia          2.5     2.6     2.2     3.1     2.8        2.7
Austria (a)        1.1     1.5     3.2     2.4     1.7        1.5
Belgium (a)        1.4     1.4     1.7     1.7     1.9        1.0
Bulgaria (a)       3.6     3.9     3.7     4.0     3.3        1.8
Brazil            -3.5    -3.5     1.0     2.0     2.7        2.1
Chile              2.3     1.2     1.6     3.1     2.6        2.7
China              6.9     6.7     6.9     6.6     6.3        5.8
Canada             1.0     1.4     3.0     2.4     2.2        1.8
Czech Rep.         5.4     2.4     4.5     3.2     2.8        1.3
Denmark (a)        1.6     2.0     2.3     1.7     1.8        1.1
Estonia (a)        1.7     2.2     4.7     3.7     3.9        2.2
Finland (a)        0.1     2.3     2.7     2.7     2.3        1.1
France (a)         1.0     1.1     2.3     1.9     1.8        1.5
Germany (a)        1.5     1.9     2.5     2.1     2.0        1.2
Greece (a)        -0.3    -0.3     1.3     2.0     1.9        1.1
Hong Kong          2.4     2.2     3.8     3.7     2.4        2.4
Hungary (a)        3.3     2.1     4.2     3.8     3.1        1.3
India              7.6     7.9     6.2     7.8     7.5        7.2
Indonesia          4.9     5.0     5.1     5.2     5.7        4.9
Ireland (a)       25.0     4.9     7.2     6.4     3.0        2.7
Italy (a)          0.8     1.0     1.6     1.3     1.2        1.1
Japan              1.4     1.0     1.7     1.0     1.0        0.9
Lithuania (a)      2.0     2.3     3.9     3.4     3.2        1.0
Latvia (a)         2.8     1.5     5.0     3.3     2.4        1.5
Mexico             3.3     2.6     2.3     2.1     2.5        2.5
Netherlands (a)    2.0     2.1     3.0     2.9     2.7        1.2
New Zealand        4.2     4.1     3.0     2.6     3.2        2.5
Norway             1.8     1.0     2.0     2.4     2.1        1.5
Poland             3.8     3.0     4.7     4.7     3.6        2.4
Portugal (a)       1.8     1.6     2.7     2.2     2.3        1.9
Romania (a)        4.0     4.8     6.8     3.7     2.7        2.2
Russia            -2.5    -0.2     1.5     1.8     1.9        2.6
Singapore          2.2     2.4     3.6     3.2     2.8        3.8
South Africa       1.3     0.6     1.2     1.4     1.7        2.4
S. Korea           2.8     2.9     3.1     3.0     3.1        3.1
Slovakia (a)       3.9     3.3     3.4     3.7     3.9        1.5
Slovenia (a)       2.0     3.2     5.4     4.1     3.9        2.1
Spain (a)          3.4     3.3     3.1     2.8     2.5        1.5
Sweden (a)         4.3     3.0     2.5     2.7     2.6        1.7
Switzerland        1.2     1.4     1.1     2.0     1.5        1.8
Taiwan             0.8     1.4     2.9     2.5     2.8        2.6
Turkey             5.9     3.2     7.4     4.6     3.7        4.0
UK (a)             2.3     1.8     1.7     1.4     1.7        1.8
US                 2.9     1.5     2.3     2.9     2.7        2.2
Vietnam            6.6     6.1     6.7     7.0     7.4        5.7
Euro Area (a)      2.0     1.8     2.6     2.2     2.0        1.3
EU--28 (a)          2.2     1.9     2.6     2.2     2.1        1.5
OECD               2.5     1.8     2.6     2.5     2.3        1.9
World              3.5     3.2     3.8     3.9     3.8        3.6

                         Annual inflation (a) (per cent)

                  2015    2016    2017    2018    2019    2020-24

Argentina         26.5    41.4    26.3    27.1    19.3       12.3
Australia          1.5     0.9     1.2     2.3     2.2        2.7
Austria (a)        0.8     1.0     2.2     2.3     1.5        1.7
Belgium (a)        0.6     1.8     2.2     2.1     1.6        1.9
Bulgaria (a)      -1.1    -1.3     1.2     2.5     1.8        1.9
Brazil             9.0     8.7     3.4     3.8     5.1        5.4
Chile              4.3     3.8     2.2     2.7     2.9        2.6
China              1.4     2.0     1.6     1.9     2.2        2.7
Canada             1.1     0.9     1.1     2.0     2.1        2.0
Czech Rep.         0.3     0.7     2.4     2.4     2.3        2.4
Denmark (a)        0.2     0.0     1.1     1.1     1.9        1.6
Estonia (a)        0.1     0.8     3.7     3.6     2.7        2.2
Finland (a)       -0.2     0.4     0.8     1.4     2.0        1.8
France (a)         0.1     0.3     1.2     2.0     1.4        1.7
Germany (a)        0.1     0.4     1.7     2.0     1.9        1.8
Greece (a)        -1.1     0.0     1.1     0.5     1.4        2.3
Hong Kong          1.3     1.5     2.4     3.7     2.3        3.3
Hungary (a)        0.1     0.4     2.4     3.1     3.8        3.9
India              4.9     5.0     3.3     5.2     4.9        4.7
Indonesia          6.4     3.5     3.8     4.0     4.3        3.5
Ireland (a)        0.0    -0.2     0.2     0.7     1.4        1.9
Italy (a)          0.1    -0.1     1.3     1.3     1.3        1.4
Japan              0.4    -0.5     0.2     0.8     1.4        1.2
Lithuania (a)     -0.7     0.7     3.7     3.2     1.9        1.3
Latvia (a)         0.2     0.1     2.9     3.0     2.3        1.7
Mexico             2.7     2.8     6.0     4.9     3.6        3.5
Netherlands (a)    0.2     0.1     1.3     1.7     2.1        1.9
New Zealand        0.7     0.7     1.5     1.5     2.4        2.3
Norway             2.5     3.4     1.5     2.3     2.0        1.9
Poland            -0.7    -0.2     1.6     1.6     2.2        2.2
Portugal (a)       0.5     0.6     1.6     1.6     2.1        1.6
Romania (a)       -0.4    -1.1     1.1     4.8     2.2        2.4
Russia            15.5     7.1     3.6     2.7     4.0        4.0
Singapore         -0.5    -0.5     0.6     0.5     1.5        2.9
South Africa       4.0     6.2     4.6     5.1     5.0        3.8
S. Korea           0.7     1.0     1.9     1.9     2.4        2.2
Slovakia (a)      -0.3    -0.5     1.4     2.7     1.8        1.4
Slovenia (a)      -0.8    -0.2     1.6     2.5     1.7        1.7
Spain (a)         -0.6    -0.3     2.0     1.9     1.5        1.9
Sweden (a)         0.7     1.1     1.9     1.7     1.8        2.0
Switzerland       -0.6    -0.2     0.2     0.7     1.3        1.2
Taiwan            -0.7     0.8     0.0     1.5     1.0        2.1
Turkey             7.7     7.8    11.1    12.7    10.2        6.9
UK (a)             0.1     0.7     2.7     2.3     1.9        2.0
US                 0.3     1.2     1.7     2.3     2.3        2.1
Vietnam            0.6     2.7     3.5     3.2     3.9        3.7
Euro Area (a)      0.0     0.2     1.5     1.8     1.6        1.8
EU-28 (a)          0.0     0.3     1.7     1.0     1.4        1.9
OECD               0.8     1.1     2.1     2.6     2.5        2.3
World              3.8     4.0     4.2     4.5     4.5        3.7

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

Table B2. Fiscal balance and government debt

                  Fiscal balance (per cent of GDP) (a)

              2015    2016    2017    2018    2019    2024

Australia     -1.5    -2.1    -1.7    -1.6    -1.0    -1.2
Australia     -1.1    -1.5    -0.5    -0.5    -0.5    -1.1
Austria       -1.0    -1.6    -0.7    -0.3    -0.1    -1.1
Belgium       -2.5    -2.5    -1.0    -1.0     0.0    -2.1
Bulgaria      -1.6     0.2     0.9     1.0     0.7    -0.6
Canada        -0.1    -1.1    -1.1    -1.6    -1.5    -1.6
Czech Rep.    -0.6     0.7     1.6     1.4     1.4    -0.8
Denmark       -1.5    -0.4     1.0    -0.2     0.3    -0.9
Estonia        0.1    -0.3    -0.3    -0.4    -0.6    -1.3
Finland       -2.8    -1.8    -0.6    -0.2     0.3    -1.5
France        -3.6    -3.4    -2.6    -2.1    -2.1    -2.8
Germany        0.8     1.0     1.3     1.6     1.2    -0.9
Greece        -5.7     0.6     0.8     0.3     0.9     0.3
Hungary       -1.9    -1.7    -2.0    -2.2    -2.0    -2.4
Ireland       -1.9    -0.5    -0.3     0.2     0.0    -0.9
Italy         -2.6    -2.5    -2.3    -2.1    -2.0    -2.6
Japan         -3.6    -3.4    -3.5    -3.2    -3.1    -3.9
Lithuania     -0.2     0.3     0.5     0.6     0.3    -1.0
Latvia        -1.4     0.1    -0.5    -0.3    -0.4    -0.8
Netherlands   -2.0     0.4     1.1     2.1     1.8    -1.4
Poland        -2.6    -2.3    -1.7    -1.3    -0.7    -2.0
Portugal      -4.4    -2.0    -3.0    -1.6    -1.1    -1.8
Romania       -0.8    -3.0    -2.9    -3.5    -3.3    -2.0
Slovakia      -2.7    -2.2    -1.0    -0.1     0.3     0.1
Slovenia      -2.9    -1.9     0.0     0.4     0.1    -1.5
Spain         -5.3    -4.5    -3.1    -2.3    -2.0    -2.4
Sweden         0.2     1.2     1.3     1.9     1.8    -0.5
UK            -4.2    -2.9    -1.8    -1.9    -1.7    -1.7
US            -4.3    -5.0    -3.6    -5.3    -5.1    -4.0

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

               2015     2016     2017     2018      2019     2024

Australia      43.9     44.9     45.5     45.2      44.1     38.2
Australia      40.3     40.9     42.6     43.0      42.6     37.4
Austria        84.6     83.5     78.2     73.2      69.4     61.3
Belgium       106.1    106.0    103.4     99.0      95.5     86.6
Bulgaria         --       --       --       --        --       --
Canada         97.3     95.7     92.3     89.8      87.4     79.6
Czech Rep.     38.7     35.6     33.3     31.8      29.1     24.7
Denmark        39.9     37.9     36.4     35.1      34.2     32.2
Estonia          --       --       --       --        --       --
Finland        63.5     63.0     61.4     59.6      57.2     53.7
France         95.6     96.7     96.7     96.5      95.4     91.8
Germany        71.0     68.2     64.1     59.1      54.2     42.5
Greece        177.1    181.1    179.2    174.5     168.1    134.9
Hungary        76.5     75.2     73.1     68.9      66.8     62.4
Ireland        77.1     72.9     68.1     61.6      58.8     49.9
Italy         131.6    132.0    131.7    129.4     127.4    121.4
Japan         216.4    221.8    222.2    224.4     222.0    212.6
Lithuania        --       --       --       --        --       --
Latvia           --       --       --       --        --       --
Netherlands    64.6     61.8     56.7     51.7      47.8     43.3
Poland         52.2     53.5     51.4     46.6      43.9     42.1
Portugal      128.8    129.9    125.7    122.6      119.2   107.9
Romania          --       --       --       --        --       --
Slovakia         --       --       --       --        --       --
Slovenia         --       --       --       --        --       --
Spain          99.4     99.0     98.3     96.2      93.7     85.1
Sweden         44.2     42.2     40.6     37.3      33.8     26.5
UK             87.3     87.3     87.0     85.5      84.2     77.8
US            104.1    105.4    103.4    103.5     103.7    103.8

Notes: (a) General government financial balance; Maastricht
definition for EU countries, (b) Maastricht definition for
EU countries.

Table B3. Unemployment and current account balance

                    Standardised unemployment rate

              2015    2016    2017    2018    2019    2020-24

Australia      6.1     5.7     5.6     5.5     5.1        5.2
Austria        5.7     6.0     5.5     4.7     4.5        4.5
Belgium        8.5     7.8     7.1     6.0     6.2        5.7
Bulgaria       9.1     7.6     6.2     5.0     5.2        5.9
Canada         6.9     7.0     6.3     6.0     6.2        6.1
China           --      --      --      --      --         --
Czech Rep.     5.1     3.9     2.9     2.5     2.8        3.3
Denmark        6.2     6.2     5.7     5.1     5.1        5.3
Estonia        6.2     6.8     5.8     5.2     5.2        6.4
Finland        9.3     8.9     8.6     7.9     7.9        7.8
France        10.4    10.1     9.4     9.1     8.7        8.3
Germany        4.7     4.1     3.8     3.4     3.2        3.7
Greece        25.0    23.5    21.5    20.4    19.7       16.6
Hungary        6.8     5.1     4.2     4.0     4.1        3.7
Ireland        9.9     8.4     6.7     5.5     5.2        5.1
Italy         11.9    11.7    11.3    10.9    10.7       10.5
Japan          3.4     3.1     2.8     2.3     2.7        3.2
Lithuania      9.1     7.9     7.1     6.8     7.3        7.6
Latvia         9.9     9.6     8.7     7.3     6.8        6.6
Netherlands    6.9     6.0     4.8     4.0     3.6        3.8
Poland         7.5     6.2     4.9     4.0     4.0        3.8
Portugal      12.6    11.2     9.0     7.7     7.5        6.4
Romania        6.8     5.9     4.9     4.7     4.9        4.9
Slovakia      11.5     9.7     8.1     7.2     7.6        8.1
Slovenia       9.0     8.0     6.6     5.3     5.8        6.3
Spain         22.1    19.6    17.2    15.5    14.3       14.0
Sweden         7.4     6.9     6.7     6.4     6.3        6.6
UK             5.4     4.9     4.4     4.2     4.2        4.7
US             5.3     4.9     4.3     3.8     3.7        4.6

                 Current account balance (per cent of GDP)

              2015    2016    2017    2018    2019    2020-24

Australia     -4.7    -3.1    -2.5    -2.0    -1.5       -1.6
Austria        1.9     2.1     1.9     3.0     3.0        2.1
Belgium       -0.2     0.1    -0.2     0.8    -0.4        0.5
Bulgaria       0.0     2.3     4.6     3.3     4.5        1.9
Canada        -3.6    -3.2    -2.9    -2.7    -1.9       -0.4
China          2.8     1.8     1.3     0.6     0.5        1.1
Czech Rep.     0.2     1.5     0.9    -1.3    -2.1       -0.8
Denmark        8.8     7.3     7.9     7.9     6.9        8.6
Estonia        1.9     1.9     3.2     1.8     0.6       -1.1
Finland       -0.9    -0.4     0.7    -0.2    -0.5        0.6
France        -0.4    -0.8    -0.6    -0.4    -0.2       -0.2
Germany        9.0     8.5     8.1     8.5     8.2        7.3
Greece        -0.2    -1.0    -0.7     0.3     0.7        1.3
Hungary        3.5     6.1     3.1     4.5     4.8        2.3
Ireland       10.9     3.4    12.4     7.3     7.5       11.5
Italy          1.5     2.6     2.8     2.3     2.6        4.3
Japan          3.1     3.8     4.0     3.4     3.4        4.6
Lithuania     -2.8     -1.1    0.8     0.5    -1.9       -3.5
Latvia        -0.5     1.4    -0.8     0.6     0.4       -1.0
Netherlands    6.3     8.0    10.5    10.0     9.0        8.4
Poland        -0.6    -0.3     0.3     0.9     2.3       -0.4
Portugal       0.3     0.6     0.7    -0.3    -1.1       -1.1
Romania       -1.2    -2.1    -3.4    -4.0    -3.0       -2.4
Slovakia      -1.7    -1.5    -2.1    -2.8    -1.8       -0.8
Slovenia       4.4     5.3     6.4     6.2     3.1        0.5
Spain           1.1    1.9     1.9     0.7     1.1        2.5
Sweden         4.5     4.2     3.3     3.9     5.3        6.6
UK            -4.9    -5.2    -3.9    -3.3    -3.5       -3.4
US            -2.3    -2.3    -2.3    -2.8    -3.2       -3.6

Table B4. United States

Percentage change

                                      2014     2015     2016     2017

GDP                                    2.6      2.9      1.5      2.3
Consumption                            2.9      3.6      2.7      2.8
Investment : housing                   3.5     10.2      5.5      1.8
           : business                  6.9      2.3     -0.6      4.7
Government : consumption              -0.5      1.3      1.0      0.1
           : investment               -1.4      1.6     -0.2      0.1
Stockbuilding (a)                     -0.1      0.2     -0.4     -0.1
Total domestic demand                  2.7      3.5      1.6      2.4

Export volumes                         4.3      0.4     -0.3      3.4
Import volumes                         4.5      5.0      1.3      4.0

Average earnings                       2.6      2.8      1.1      1.6
Private consumption deflator           1.5      0.3      1.2      1.7
RPDI                                   3.6      4.1      1.4      1.1
Unemployment, %                        6.2      5.3      4.9      4.3
General Govt, balance as % of GDP     -4.9     -4.3     -5.0     -3.6
General Govt, debt as % of GDP (b)   103.0    104.1    105.4    103.4

Current account as % of GDP           -2.1     -2.3     -2.3     -2.3

                                                       Average
                                      2018     2019    2020-24

GDP                                    2.9      2.7        2.2

Consumption                            2.5      2.7        2.0
Investment : housing                   2.9      5.6        3.3
           : business                  7.3      5.3        2.8
Government : consumption               1.2      1.5        1.6
           : investment                1.3      1.3        1.7
Stockbuilding (a)                      0.0      0.0        0.0
Total domestic demand                  2.9      2.9        2.1

Export volumes                         5.5      4.3        3.6
Import volumes                         5.2      5.4        2.6

Average earnings                       2.6      3.3        3.2
Private consumption deflator           2.3      2.3        2.1
RPDI                                   2.1      2.8        1.7
Unemployment, %                        3.8      3.7        4.6
General Govt, balance as % of GDP     -5.3     -5.1       -4.4
General Govt, debt as % of GDP (b)   103.5    103.7      104.2

Current account as % of GDP           -2.8     -3.2       -3.6

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

Table B5. Canada

Percentage change

                                     2014     2015    2016    2017

GDP                                   2.9      1.0     1.4     3.0

Consumption                           2.6      2.2     2.3     3.4
Investment : housing                  2.2      3.8     3.3     2.9
           : business                 4.5    -11.0    -9.2     2.9
Government : consumption              0.5      1.6     2.2     2.3
           : investment              -3.4      0.3     5.1     3.8
Stockbuilding (a)                    -0.4     -0.2    -0.2     0.7
Total domestic demand                 1.8      0.3     1.0     3.8

Export volumes                        5.9      3.5     1.0     1.1
Import volumes                        2.3      0.7    -1.0     3.6

Average earnings                      3.3      1.7     1.1     2.6
Private consumption deflator          1.9      1.1     0.9     1.1
RPDI                                  1.3      3.4     1.5     3.6
Unemployment, %                       6.9      6.9     7.0     6.3
General Govt, balance as % of GDP     0.2     -0.1    -1.1    -1.1
General Govt, debt as % of GDP (b)   91.0     97.3    95.7    92.3

Current account as % of GDP          -2.4     -3.6    -3.2    -2.9

                                                     Average
                                     2018    2019    2020-24

GDP                                   2.4     2.2        1.8

Consumption                           2.3     2.0        1.5
Investment : housing                  1.6     2.3        2.2
           : business                 7.2     1.9        0.7
Government : consumption              2.7     2.0        1.8
           : investment               5.6     2.7        2.0
Stockbuilding (a)                     0.1     0.0        0.0
Total domestic demand                 2.9     2.0        1.5

Export volumes                        3.0     4.9        3.5
Import volumes                        4.9     4.1        2.5

Average earnings                      3.8     3.2        3.5
Private consumption deflator          2.0     2.1        2.0
RPDI                                  3.0     1.7        1.5
Unemployment, %                       6.0     6.2        6.1
General Govt, balance as % of GDP    -1.6    -1.5       -1.6
General Govt, debt as % of GDP (b)   89.8    87.4       82.3

Current account as % of GDP          -2.7    -1.9       -0.4

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

Table B6. Japan

Percentage change

                                2014     2015     2016     2017

GDP                              0.3      1.4      1.0      1.7
Consumption                     -0.9      0.0      0.1      1.0
Investment : housing            -4.0     -1.2      5.6      2.7
           : business            5.2      3.4      0.6      2.9
Government : consumption         0.5      1.5      1.3      0.4
           : investment          0.6     -1.3      0.1      1.2
Stockbuilding (a)                0.1      0.3     -0.2     -0.1
Total domestic demand            0.3      1.0      0.4      1.2

Export volumes                   9.3      2.9      1.7      6.7
Import volumes                   8.2      0.7     -1.6      3.5

Average earnings                 0.9      0.9      1.7      0.9
Private consumption deflator     2.0      0.4     -0.5      0.2
RPDI                            -1.7      1.3      1.7      1.0
Unemployment, %                  3.6      3.4      3.1      2.8
Govt, balance as % of GDP       -5.4     -3.6     -3.4     -3.5
Govt, debt as % of GDP (b)     216.8    216.4    221.8    222.2

Current account as % of GDP      0.8      3.1      3.8      4.0

                                                 Average
                                2018     2019    2020-24

GDP                              1.0      1.0        0.9
Consumption                      0.6      0.7        1.1
Investment : housing            -2.4      2.4        2.7
           : business            2.4      1.6        1.1
Government : consumption         0.3      0.1        0.2
           : investment          0.2      1.2        0.4
Stockbuilding (a)                0.1      0.0        0.0
Total domestic demand            0.8      0.8        1.0

Export volumes                   4.4      3.4        3.5
Import volumes                   3.4      2.3        3.7

Average earnings                 2.2      2.1        1.7
Private consumption deflator     0.8      1.4        1.2
RPDI                             1.2      0.3        1.5
Unemployment, %                  2.3      2.7        3.2
Govt, balance as % of GDP       -3.2     -3.1       -3.3
Govt, debt as % of GDP (b)     224.4    222.0      215.5

Current account as % of GDP      3.4      3.4        4.6

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

Table B7. Euro Area

Percentage change

                              2014    2015    2016    2017

GDP                            1.4     2.0     1.8     2.6
Consumption                    0.9     1.8     1.9     1.7
Private investment             2.3     3.0     3.6     5.0
Government : consumption       0.7     1.3     1.8     1.2
           : investment       -0.8     3.2     1.2     1.2
Stockbuilding (a)              0.3     0.0    -0.2     0.0
Total domestic demand          1.3     1.9     2.0     2.1

Export volumes                 4.6     6.2     3.3     5.5
Import volumes                 4.9     6.5     4.6     4.5

Average earnings               1.4     1.6     1.4     1.4
Harmonised consumer prices     0.4     0.0     0.2     1.5
RPDI                           0.9     1.4     1.9     1.2
Unemployment, %               11.6    10.9    10.0     9.1
Govt, balance as % of GDP     -2.5    -2.0    -1.5    -0.9
Govt, debt as % of GDP (b)    92.6    90.7    89.7    87.3

Current account as % of GDP    2.4     3.2     3.6     3.5

                                              Average
                              2018    2019    2020-24

GDP                            2.2     2.0        1.3
Consumption                    1.6     1.5        1.1
Private investment             4.4     3.7        1.7
Government : consumption       1.3     1.8        1.4
           : investment        1.7     2.4        1.5
Stockbuilding (a)              0.2     0.0        0.0
Total domestic demand          2.3     2.0        1.3

Export volumes                 2.2     2.9        2.8
Import volumes                 2.1     3.1        2.8

Average earnings               2.1     2.4        2.9
Harmonised consumer prices     1.8     1.6        1.8
RPDI                           1.6     2.0        1.5
Unemployment, %                8.4     8.0        7.9
Govt, balance as % of GDP     -0.4    -0.5       -1.3
Govt, debt as % of GDP (b)    83.8    80.5       74.7

Current account as % of GDP    3.7     3.5        3.6

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

Table B8. Germany

Percentage change

                              2014    2015    2016    2017

GDP                            1.9     1.5     1.9     2.5
Consumption                    1.0     1.6     1.9     2.0
Investment : housing           3.1    -1.2     3.8     3.6
           : business          4.8     1.4     2.5     4.0
Government : consumption       1.5     2.9     3.7     1.5
           : investment       -1.2     4.5     2.6     4.6
Stockbuilding (a)             -0.3    -0.3    -0.1     0.1
Total domestic demand          1.3     1.5     2.4     2.4

Export volumes                 4.5     4.7     2.4     5.3
Import volumes                 3.5     5.2     3.8     5.6

Average earnings               2.5     3.0     2.9     2.3
Harmonised consumer prices     0.8     0.1     0.4     1.7
RPDI                           1.5     1.9     2.2     2.0
Unemployment, %                5.0     4.7     4.1     3.8
Govt, balance as % of GDP      0.5     0.8     1.0     1.3
Govt, debt as % of GDP (b)    74.7    71.0    68.2    64.1

Current account as % of GDP    7.5     9.0     8.5     8.1

                                              Average
                              2018    2019    2020-24

GDP                            2.1     2.0        1.2
Consumption                    1.6     2.4        0.8
Investment : housing           2.8     2.1        1.9
           : business          4.0     3.9        1.6
Government : consumption       1.8     2.9        1.0
           : investment        4.8     3.9        1.2
Stockbuilding (a)             -0.1     0.0        0.0
Total domestic demand          2.0     2.7        1.1

Export volumes                 2.5     3.3        2.8
Import volumes                 2.5     5.2        2.7

Average earnings               3.2     3.4        3.2
Harmonised consumer prices     2.0     1.9        1.8
RPDI                           1.8     2.1        1.2
Unemployment, %                3.4     3.2        3.7
Govt, balance as % of GDP      1.6     1.2       -0.1
Govt, debt as % of GDP (b)    59.1    54.2       46.1

Current account as % of GDP    8.5     8.2        7.3

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

Table B9. France

Percentage change

                              2014    2015    2016    2017

GDP                            1.0     1.0     1.1     2.3

Consumption                    0.8     1.4     2.0     1.1
Investment : housing          -3.0    -1.5     2.8     5.6
           : business          3.0     3.4     3.4     5.2
Government : consumption       1.3     1.0     1.4     1.4
           : investment       -5.4    -4.7     0.1     1.6
Stockholding (a)               0.7     0.3    -0.1     0.4
Total domestic demand          1.5     1.5     1.8     2.4

Export volumes                 3.4     4.4     1.5     4.7
Import volumes                 4.9     5.7     3.1     4.1

Average earnings               1.8     0.9     1.4     1.2
Harmonised consumer prices     0.6     0.1     0.3     1.2
RPDI                           1.2     0.9     1.8     1.4
Unemployment, %               10.3    10.4    10.1     9.4
Govt, balance as % of GDP     -3.9    -3.6    -3.4    -2.6
Govt, debt as % of GDP (b)    94.7    95.6    96.7    96.7

Current account as % of GDP   -1.0    -0.4    -0.8    -0.6

                                              Average
                              2018    2019    2020-24

GDP                            1.9     1.8        1.5

Consumption                    1.0     0.8        0.6
Investment : housing           3.3     4.8        6.2
           : business          3.4     3.6        1.9
Government : consumption       1.3     1.3        1.7
           : investment        2.7     3.5        2.0
Stockholding (a)              -0.2     0.0        0.0
Total domestic demand          1.3     1.6        1.4

Export volumes                 4.4     3.9        2.9
Import volumes                 2.6     3.3        2.7

Average earnings               1.1     1.3        2.9
Harmonised consumer prices     2.0     1.4        1.7
RPDI                           1.1     1.3        1.4
Unemployment, %                9.1     8.7        8.3
Govt, balance as % of GDP     -2.1    -2.1       -2.5
Govt, debt as % of GDP (b)    96.5    95.4       92.3

Current account as % of GDP   -0.4    -0.2       -0.2

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

Table B10. Italy

Percentage change

                               2014     2015     2016     2017

GDP                             0.2      0.8      1.0      1.6

Consumption                     0.2      1.9      1.4      1.4
Investment : housing           -6.8     -1.7      2.9      2.2
           : business           0.6      4.0      4.3      5.7
Government : consumption       -0.7     -0.6      0.6      0.1
           : investment        -5.4     -1.2     -1.0     -2.5
Stockbuilding (a)               0.7      0.0     -0.3     -0.2
Total domestic demand           0.3      1.4      1.3      1.3

Export volumes                  2.4      4.2      2.6      6.0
Import volumes                  3.0      6.6      3.8      5.7

Average earnings                0.4      0.9      0.1      0.3
Harmonised consumer prices      0.2      0.1     -0.1      1.3
RPDI                            0.5      1.2      1.3      0.6
Unemployment, %                12.6    1 1.9     11.7     11.3
Govt, balance as % of GDP      -3.0     -2.6     -2.5     -2.3
Govt, debt as % of GDP (b)    131.7    131.6    132.0    131.7

Current account as % of GDP     1.9      1.5      2.6      2.8

                                                Average
                               2018     2019    2020-24

GDP                             1.3      1.2       1.1

Consumption                     1.1      0.6       0.5
Investment : housing            2.3      1.2       0.8
           : business           3.7      3.6       0.6
Government : consumption        0.6      1.2       0.9
           : investment         2.8      2.8       1.0
Stockbuilding (a)               0.4      0.0       0.0
Total domestic demand           1.8      1.2       0.6

Export volumes                 -0.2      2.0       3.0
Import volumes                  1.3      1.8       1.5

Average earnings                1.7      1.7       1.7
Harmonised consumer prices      1.3      1.3       1.4
RPDI                            2.1      1.6       0.5
Unemployment, %                10.9     10.7      10.5
Govt, balance as % of GDP      -2.1     -2.0      -2.4
Govt, debt as % of GDP (b)    129.4    127.4     123.1

Current account as % of GDP     2.3      2.6       4.3

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

Table B11. Spain

Percentage change

                               2014    2015    2016    2017

GDP                             1.4     3.4     3.3     3.1
Consumption                     1.5     3.0     3.0     2.4
Investment : housing           11.3    -1.0     4.4     8.3
           : business          -2.5     7.7     3.2     3.8
Government : consumption       -0.3     2.1     0.8     1.6
           : investment         8.8    16.5     2.2     2.5
Stockbuilding (a)               0.2     0.4     0.0     0.1
Total domestic demand           2.0     4.0     2.6     2.9

Export volumes                  4.3     4.2     4.8     5.0
Import volumes                  6.6     5.9     2.7     4.7

Average earnings                0.0     1.9    -0.1     1.3
Harmonised consumer prices     -0.2    -0.6    -0.3     2.0
RPDI                            1.2     2.3     1.9     0.0
Unemployment, %                24.5    22.1    19.6    17.2
Govt, balance as % of GDP      -6.0    -5.3    -4.5    -3.1
Govt, debt as % of GDP (b)    100.4    99.4    99.0    98.3

Current account as % of GDP     1.0      1.1    1.9     1.9

                                              Average
                              2018    2019    2020-24

GDP                            2.8     2.5        1.5
Consumption                    2.4     1.8        1.7
Investment : housing           7.8     4.0        3.2
           : business          4.1     2.5       -0.4
Government : consumption       1.9     1.9        1.9
           : investment       -0.3     1.0        1.8
Stockbuilding (a)              0.0     0.0        0.0
Total domestic demand          2.7     2.1        1.6

Export volumes                 3.1     3.2        2.1
Import volumes                 2.7     1.9        2.7

Average earnings               2.1     2.0        3.4
Harmonised consumer prices     1.9     1.5        1.9
RPDI                           1.4     2.7        2.0
Unemployment, %               15.5    14.3       14.0
Govt, balance as % of GDP     -2.3    -2.0       -2.3
Govt, debt as % of GDP (b)    96.2    93.7       87.2

Current account as % of GDP    0.7      1.1       2.5

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

Barry Naisbitt with Arno Hantzsche, Jason Lennard, Cyrille Lenoel, Iana Liadze, Marta Lopresto, Rebecca Piggott and Craig Thamotheram *

* All questions and comments related to the forecast and its underlying assumptions should be addressed to Iana Liadze (i.liadze@niesr.ac.uk). We would like to thank Jagjit Chadha, Amit Kara and Garry Young for helpful comments and Yanitsa Kazalova for compiling the database underlying the forecast The forecast was completed on 25 July, 2018. Exchange rate, interest rate and equity price assumptions are based on information available to 12 July 2018. Unless otherwise specified, the source of all data reported in tables and figures is the NiGEM database and NIESR forecast baseline.

Caption: Figure 1. World annual GDP growth fan chart (per cent per annum)

Caption: Figure 2. World GDP growth and its components

Caption: Figure 3. US GDP in expansions

Caption: Figure 4. Consumer price inflation

Caption: Figure 5. Shiller cyclically adjusted price-earnings ratio for the S&P 500

Caption: Figure A1. Impact on the level of GDP (in the third year)

Caption: Figure A2. Impact on inflation (in the third year)

Caption: Figure B1. 2017 public debt and budget balance in Euro Area countries (per cent of GDP)

Caption: Figure B2. First-year fiscal multipliers and spillovers from a 1 per cent of GDP temporary fiscal expansion

Caption: Figure 6. US: Unemployment and labour force participation rates

Caption: Figure 7. US: Annual GDP growth fan chart (per cent per annum)

Caption: Figure 8. Canada: Labour market developments

Caption: Figure 9. Euro Area: Export growth

Caption: Figure 10. Euro Area: GDP growth and inflation

Caption: Figure 11. Germany: GDP growth and inflation

Caption: Figure 12. Germany: Growth in exports to main trading partners

Caption: Figure 13. France: Harmonised consumer price inflation

Caption: Figure 14. France: GDP growth and inflation

Caption: Figure 15. Italy: GDP growth and inflation

Caption: Figure 16. Spain: GDP growth and inflation

Caption: Figure 17. Japan: GDP growth and inflation

Caption: Figure 18. China: Credit growth to non-financial corporations

Caption: Figure 19. China: Contributions to GDP growth

Caption: Figure 20. Russia: GDP growth and inflation

Caption: Figure 21. India: GDP growth and inflation

Caption: Figure 22. Brazil: GDP growth and inflation

Caption: Figure A1. 10-year government bond yields

Caption: Figure A2. Spreads over 10-year German government bond yields

Caption: Figure A3. Corporate bond spreads. Spread between BAA corporate and 10-year government bond yields

Caption: Figure A4. Effective exchange rates

Caption: Figure A5. Oil prices

Caption: Figure A6. Share prices

Caption: Figure B1. World GDP is estimated to have expanded by 3.8 per cent (year-on-year) in the first quarter of 2018

Caption: Figure B2. NIESR estimates that world trade grew by 4.9 per cent (year-on-year) in 2018Q1

Caption: Figure B3. China is not expected to become the world's biggest importer of goods and services before 2023

Caption: Figure B4. Since 2014, on a PPP basis, China has remained the world's largest economy

Table 1. Forecast summary

Percentage change

                          Real GDP (a)

          World   OECD   China   EU-28    Euro      USA

2008-13    3.3    0.8     9.1     0.0     -0.2      0.8
2014       3.6    2.2     7.3     1.8      1.4      2.6
2015       3.5    2.5     6.9     2.2      2.0      2.9
2016       3.2    1.8     6.7     1.9      1.8      1.5
2017       3.8    2.6     6.9     2.6      2.6      2.3
2018       3.9    2.5     6.6     2.2      2.2      2.9
2019       3.8    2.3     6.3     2.1      2.0      2.7
2020-24    3.6    1.9     5.8     1.5      1.3      2.2

                             Real GDP (a)

          Japan   Germany   France   Italy    UK     Canada

2008-13    0.2      0.7      0.4     -1.5     0.4     1.4
2014       0.3      1.9      1.0      0.2     2.9     2.9
2015       1.4      1.5      1.0      0.8     2.3     1.0
2016       1.0      1.9      1.1      1.0     1.8     1.4
2017       1.7      2.5      2.3      1.6     1.7     3.0
2018       1.0      2.1      1.9      1.3     1.4     2.4
2019       1.0      2.0      1.8      1.2     1.7     2.2
2020-24    0.9      1.2      1.5      1.1     1.8     1.8

                      Private consumption deflator
            World
          trade (b)   OECD    Euro    USA    Japan
                              Area

2008-13      3.2       1.8    1.5     1.7    -0.7
2014         3.9       1.6    0.5     1.5     2.0
2015         2.8       0.8    0.3     0.3     0.4
2016         2.6       1.1    0.3     1.2    -0.5
2017         5.0       2.1    1.5     1.7     0.2
2018         4.1       2.6    1.6     2.3     0.8
2019         4.2       2.5    1.6     2.3     1.4
2020-24      4.0       2.3    1.7     2.1     1.2

                Private consumption deflator

          Germany   France   Italy   UK    Canada

2008-13     1.3      1.0      1.9    2.5    1.3
2014        0.9      0.1      0.3    1.9    1.9
2015        0.6      0.3      0.2    0.5    1.1
2016        0.6     -0.2      0.1    1.4    0.9
2017        1.7      1.3      1.2    2.1    1.1
2018        1.9      1.6      1.2    2.5    2.0
2019        1.9      1.4      1.3    1.9    2.1
2020-24     1.8      1.7      1.4    2.0    2.0

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

2008-13    0.6     0.2     1.5       95.5
2014       0.3     0.1     0.2       99.6
2015       0.3     0.1     0.1       52.8
2016       0.5    -0.1     0.0       43.4
2017       1.1    -0.1     0.0       53.5
2018       1.9    -0.1     0.0       72.1
2019       2.7    -0.1     0.1       74.7
2020-24    3.5     0.3     1.3       78.7

Notes: Forecast produced using the NiGEM model,
(a) GDP growth at market prices. Regional aggregates
are based on PPP shares, 2011 reference year. (b) Trade
in goods and services, (c) Central bank intervention rate,
period average, (d) Average of Dubai and Brent spot prices.

Table B1. First-year fiscal multipliers from a
1 per cent of GDP temporary fiscal expansion
(percentage deviations of GDP from baseline)

                              Effects on:

Fiscal             Germany   France   Italy   Spain
expansion by:

Germany             0.42      0.07    0.05    0.04
France              0.05      0.53    0.03    0.04
Italy               0.04      0.04    0.49    0.03
Spain               0.02      0.03    0.01    0.76
Netherlands         0.02      0.01    0.01    0.01
Others              0.04      0.03    0.02    0.03

Isolated            0.42      0.53    0.49    0.76

Co-ordinated        0.59      0.71    0.61    0.91

Trade spillovers     0.3      0.3      0.2     0.2

                         Effects on:

Fiscal             Netherlands   Others   Euro Area
expansion by:

Germany               0.25        0.09      0.19
France                0.12        0.03      0.15
Italy                 0.09        0.03      0.11
Spain                 0.04        0.02      0.11
Netherlands           0.50        0.01      0.05
Others                0.10        0.44      0.11

Isolated              0.50        0.44

Co-ordinated          1.09        0.63      0.72

Trade spillovers       0.5        0.3

Sources: NiGEM database and simulations

Notes: trade spillovers are computed as the differential
between the fiscal multiplier generated by the co-ordinated
expansion relative to the isolated one, as a share of the
co-ordinated.