The world economy.

Hacche, Graham ; Baker, Jessica ; Carreras, Oriol 等

World Overview

Recent developments and the baseline forecast

The renewed decline in global oil prices in the past three months, to levels not seen for twelve years, accompanied by sharp falls in equity prices worldwide, have increased uncertainty about the global economic outlook. The decline in oil prices seems mainly attributable to supply factors (as discussed below) and would therefore normally be viewed as a positive development for global demand and activity. But its recent apparent correlation with falls in equity markets raises questions about whether there are fears in the markets that cheaper energy mainly signals weaker demand--perhaps particularly in China --or fears that it may increase the threat of deflation, in a situation where inflation in the advanced economies is well below targets and the scope for further monetary easing is limited. Or it may indicate that the market has been focusing on the effects of cheaper oil on oil-producing countries and companies, including reduced investment spending in the energy sector, increased fiscal restraint in oil-producing countries, and sales of equities by oil producers' diminishing sovereign wealth funds.

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The interpretation of equity price movements is never straightforward, and their recent decline could be due not to falling oil prices but, for example, to the correction of an overvaluation of equities by historical standards (for which there has been evidence for some time in price-earnings ratios) combined with increased risk aversion or reduced confidence in prospects for a normalisation of growth, inflation, and monetary policy after seven years of lacklustre recovery, or reduced confidence in policymaking, for instance in China following recent questionable management of the equity and currency markets. Or the decline may partly represent over-reaction to developments, and there seem to have been several instances of this in recent months following movements in economic data of questionable significance, especially for China, and statements by policymakers that are no different substantively from what has been said before. (As with the bout of global market turmoil last August, the recent instability seems to have begun with a steep drop in Chinese equity markets at the beginning of January, apparently in response to disappointing PMI data and exacerbated by newly introduced, poorly designed, and subsequently removed market circuit-breakers and speculation about the status of controls on the selling of shares.)

In any event, the declines in equity prices may be expected to reduce demand and activity in the short term, through wealth effects on spending and higher costs of equity finance, while the fall in oil prices should have the opposite effect, while also lowering inflation. Our revised forecast reflects these implications of developments up to mid-January. It also reflects recent economic data, which have been somewhat less favourable than we assumed in the November Review. Growth seems to have slowed unexpectedly in the fourth quarter in the United States and also in Germany and France. Among emerging market economies, the economic slowdown in China seems to have proceeded in late 2015 broadly in line with the government's plan and our November forecast, but in Brazil economic conditions broadly have worsened further, while signs of economic stabilisation in Russia late last year have since been overshadowed by the effects and implications of the renewed weakness in oil prices.

Taking these developments into account, our forecast of global GDP growth has been revised down by 0.2 percentage points for 2016, to 3.2 per cent, and by 0.3 percentage point for 2017, to 3.8 per cent. Our estimate of global growth in 2015 is unchanged from November, at 3.0 per cent. This was the slowest annual growth since the crisis, and growth this year is now expected to be only slightly faster. In the advanced economies, the modest and uneven recovery is expected to continue. Among the major emerging market economies, in China the gradual slowing of growth and rebalancing of the economy towards consumption and services, and away from investment and manufacturing, is projected to continue. Brazil, Russia and South Africa are examples of countries facing significant economic challenges partly owing to recent declines in commodity export prices; they are projected to recover gradually in the forecast period. India, now the fastest growing major economy, is benefiting particularly from the decline in oil prices.

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Inflation in the advanced economies generally remains well below targets, although in some cases, including the United States and Japan, but not the Euro Area, there have been tentative signs of inflation picking up from close to zero. The recent renewed declines in oil and other global commodity prices are likely to lower inflation especially headline rates--again in the short term. In our forecast, average annual inflation reaches 2 per cent in the medium term in the United States, but remains below targets in the Euro Area and Japan. In the emerging market economies, consumer price inflation in China in 2015, at 1.5 per cent, was also below target, but in other cases, including Brazil and Russia, it is significantly higher than official objectives, partly reflecting currency depreciations related partly to commodity price declines.

In December, both the European Central Bank (ECB) and the US Federal Reserve took action to adjust monetary conditions, in opposite directions. The ECB lowered its deposit rate by 10 basis points to -0.3 per cent and announced a six-month extension of its asset purchase programme. These measures fell short of market expectations, so that market interest rates in the Euro Area and the exchange value of the euro subsequently rose. The Federal Reserve raised its target range for the federal funds rate by 25 basis points from the near-zero level that had prevailed for seven years. This action had been widely anticipated, including by increases in longer-term interest rates, and the immediate market reaction was generally limited and benign, including rises in equity markets.

Bond markets globally, like equity markets, turned around at the beginning of January, indicating increased risk aversion. Ten-year sovereign yields, which had risen by about 20 basis points in the previous two months in the United States and the Euro Area, partly in anticipation of the hike in rates by the Fed and on disappointment with the ECB's action, subsequently fell back to around their end-October levels by late January. Government bond yields in Japan also eased in January, after being stable in the previous two months. By contrast, government bond yields in Russia, which had eased by about 50 basis points in November and December, rose by about 130 basis points in January, and corresponding yields in Brazil, which had been stable late last year, rose by about 80 basis points in January.

In foreign exchange markets, the US dollar has appreciated against most other major currencies since late October--by about 2 per cent against the euro; 4 per cent against the Chinese renminbi and Indian rupee; 8-9 per cent against sterling, the Canadian dollar, and Brazilian real; and by 32 per cent against the Russian rouble. The strongest currency in the past three months has been the Japanese yen, which has appreciated by about 3 per cent in terms of the US dollar, apparently reflecting its role as a safe-haven currency in Asia. The US dollar's trade-weighted value in late January was about 3 per cent higher than in late October, 1 per cent higher than the peak reached last March, and about 24 per cent above its low of May 2014. The Chinese currency has depreciated by about 6 per cent in terms of the US dollar since the authorities announced last August a change in the exchange rate arrangement to allow greater flexibility. In December, they further announced that they would henceforth pay more attention to the renminbi's value in terms of a 13-currency basket, and in trade-weighted terms the currency's value has been broadly stable over the past year. As discussed below in the section on China, this stability has been maintained partly through substantial official intervention in support of the renminbi in the foreign exchange market which, given China's current account surplus, indicates large-scale capital outflows. China's foreign exchange reserves at the end of 2015 were 17 per cent smaller than the peak reached in mid-2014.

The recent appreciation of the US dollar can account for only a small part of the recent decline in the dollar-denominated prices of energy. Oil prices in late January, at just below $30 a barrel, were about 33 per cent lower than in late October, and close to their lowest levels since 2003. The renewed decline in prices since early November, which accelerated in January, seems to stem from a number of factors: increased inventories; increased projections of supply, related partly to Iran's return to world markets in January with the end of international sanctions, but also to the unexpected resilience of shale production; OPEC's failure at its December meeting to agree on a production ceiling; and downward revisions of estimates of demand. These factors were all highlighted in mid-January when the International Energy Agency warned that oil markets could "drown in oversupply" this year, with slower demand growth and additional supply from Iran offsetting a decline in non-OPEC production. Other commodity prices have also weakened since late October, but generally by much less than oil prices: the Economist all-items dollar index (which excludes oil and iron ore) in mid-January was 5 per cent lower than in late October--a fall attributable largely to the dollar's strength--while the sub-indices for industrial materials and metals were 7 per cent and 9 per cent lower, respectively. The much larger decline in oil prices is strong evidence that supply factors have been its dominant cause. In particular, the idea that weakening Chinese demand has been the main factor behind cheaper oil is negated by the relatively mild fall in the prices of metals, of which China is a relatively larger consumer.

In Europe, the influx of refugees and other migrants from Syria, Iraq, and other countries in the Middle East and North Africa, has continued in recent months. Its economic implications are examined in Box B.

Risks to the forecast and implications for policy

Recent developments have highlighted several risks to the outlook.

First, the downturn in oil and other commodity prices carries both downside and upside risks. Particularly in the advanced economies, it will directly impede the rise in inflation toward official targets and increase the short-term risk of deflation. This indicates the importance of continuing highly accommodative monetary policies. In the United States, the path of interest rate increases envisaged by the Fed in December now looks too steep. Our forecast assumes that the target federal funds rate will be raised by 50 basis points this year--half the FOMC's median projection in December--and, depending on economic and financial developments, including the economy's response to the dollar's appreciation and the decline in the stock market, even this may be too much. In the Euro Area, the ECB will reconsider in March the adequacy of the adjustments announced in December to its interest rates and asset purchase programme: at present, the need for further action seems clear. The Bank of Japan's inflation objective has lost some credibility as the target date for its achievement has been pushed back, and it too may need to take additional easing action, especially in light of the yen's recent appreciation. Meanwhile, for oil-producing countries, weakness in oil prices will increase imbalances in external payments and fiscal accounts, which may need to be addressed by adjustment policies that damage growth in the short term.

On the other hand, the decline in oil prices may provide a larger boost to global demand and activity than our forecast assumes. The positive demand response to the decline in oil prices since mid-2014 has generally been more muted than might have been expected from past experience. Part of the explanation lies in increased household saving, notably in the United States. With the decline in prices now larger and becoming more prolonged, consumers may become more confident in the durability of their real income gains, and spend accordingly. But while this upside risk should be borne in mind, the larger costs of the materialisation of the downside risk indicates that that should be the dominant consideration.

Second, while recent declines in equity prices may turn out to be temporary market corrections, they may go further, reducing confidence and household wealth and raising the cost of finance. At times in the past, some central banks have given the impression of providing a floor under equity prices--for example, the notion of the 'Greenspan put'. Such a monetary policy response now seems unlikely, and this may make markets less grounded on the downside, especially given the indications of overvaluation.

Third, one of the most striking developments in the global economy in 2015 was the increased outflow of capital from emerging market economies. The Institute of International Finance has estimated that net capital outflows from emerging markets last year amounted to $735 billion, up from $111 billion in 2014, with $676 billion accounted for by China. Related to this is the $513 billion decline in China's official foreign exchange reserves in 2015, although this also reflects valuation changes, especially the depreciation of the non-dollar currencies in which some reserves are held. A significant proportion of the capital outflow from China last year is reported to have comprised the repayment of foreign currency debt (including by Chinese banks), and the decline in reserves may be viewed partly as a reduction in the corresponding hedge. This, as well as the natural international diversification of Chinese residents' growing assets, illustrates how capital outflows may, in part, be benign. However, capital outflows from emerging markets have been more widespread than the IIF data suggest, because where exchange rates are flexible, outflows will have been reflected not in reserves changes and measured capital flows but in currency depreciation, which has been the general experience in emerging markets over the past year. Rising interest rates in the United States will tend to increase outflows from emerging markets in the period ahead and exacerbate the policy challenges they face. At the same time, further appreciation of the US dollar will increase the burden of dollar-denominated liabilities to unhedged foreign borrowers.

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Fourth, a sharper than projected slowdown in China would be likely to have significant international spillovers. These were discussed in Box B of the August 2015 Review.

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Fifth, the inflow of refugees and other migrants to Europe has added to the challenges facing the EU. If migrants, who still represent a very small proportion of the EU's population, are distributed reasonably evenly among member countries, and if governments take appropriate action to assist their integration into communities and the labour force, they should benefit economic growth in the medium term without risking social cohesion. The relatively small fiscal expenditures involved should also boost demand and activity in the short term. Without cooperation among member countries, however, the consequences could be serious for the EU's cohesion. With regard to the Euro Area, some progress is being made in reducing high unemployment, and in the adjustment of relative costs among member countries, with wages rising relatively rapidly in Germany, in particular, though by only small margins. This process needs to be speeded up: our forecast shows no decline in Germany's current account surplus, of 8 per cent of GDR The continuing failure to make significant progress to complete the architecture of economic and monetary union is another factor that leaves the Area vulnerable to financial shocks and political reaction.

A sixth risk relating to the slowdown of global trade, is discussed in Box A.

Finally, the global economy remains vulnerable to a deterioration in geopolitical tensions, amid current conflicts in the Middle East and elsewhere.

Box A. Is the global trade slowdown a risk to our forecast outlook?
by Oriol Carreras and Simon Kirby

During the Great Recession, the volume of world trade dropped
sharply (see figure Al). The resumption of world trade growth did
not result in a return to the pre-crisis trajectory. Rather, world
trade volumes have continued to deviate from the prerecession trend
and at the end of 2014 trade volumes stood at a level 22'A per cent
below that trend. This raises two fundamental questions: to what
extent is this moderation in trade growth a structural change in
the global economy, and how much does/ would a slowdown matter for
global growth? This box briefly surveys the main reasons put
forward in the literature to explain this phenomenon and discusses
the risks to world output growth that come with it.

The weakness in global demand due to the recent crisis, first in
advanced economies and more recently in emerging markets and low
income economies, may explain some of the relative weakness of
world trade growth. If, in light of revised expectations about
future income growth or through increased saving in order to
improve the position of their balance sheets, economic agents
adjust their consumption and investment plans, one would expect
imports volumes to adjust accordingly to a period of weaker than
expected demand. However, even with the tepid global growth of the
post-Great Recession period, the import intensity of global demand
has remained subdued (see figure A2).

Compositional effects might be behind the story presented in figure
A2. If the share of high import-intensive goods and services within
global demand has fallen in favour of less import-intensive ones,
global demand should become less import intensive and trade growth
should slow down. This is the result that Bussiere et al. (2013)
found. In their paper, the authors show that investment is the most
import-intensive component of demand, and as investment, within the
group of developed economies, is the component of output that
declined the most at the onset of the crisis, standard trade
equations that account for the differentials in import intensities
of each component of output do a good job at accounting for the
initial decline in global trade growth. By the same token, as the
share of investment to GDP has not recovered pre-crisis levels, it
is only normal to expect trade growth to remain subdued. However,
Constantinescu et al. (2015) have suggested that weak demand alone,
even when accounting for compositional effects, cannot explain the
totality of the drop in trade growth and the subdued path it has
followed afterwards. As figure A3 shows, trade growth has become
less sensitive to income growth in recent years, which implies that
even if global output growth were to return to pre-crisis levels,
trade growth would not.

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One reason that has been proposed to explain figure 3 relates to
the reintegration into the global economy of China and Eastern
Europe (see for instance Gaulier et al., 2015). As these regions
opened up to the rest of the world, trade increased spectacularly.
However, as the integration process finalises, trade growth should
be expected to be at a more subdued pace.

Another explanation that has been explored relates to the role of
global value chains (GVC). If a firm reallocates some stages of its
own production process to different countries, trade will increase,
as it is calculated on a gross value basis, i.e. it includes the
value of the intermediates that have been imported to produce a
final good or service. After several years in the 1990s of intense
growth of GVCs, firms may have already exploited all the benefits
derived from it. If so, we should expect trade to grow at a more
moderate pace (see for instance Crozet et al., 2015).

China's government's desire to see the economy transition to one
where domestic consumption is the key driver of growth as well as
the recent policy shift to increase the share of domestic value
added in its own exports, implying a defragmenting of some global
supply chains, may thus be reducing the volume of imports into the
economy, all else equal, potentially reducing the import intensity
of global demand.

Protectionism has also been put forward as another explanation for
the lower sensitivity of world trade to income growth. Since the
beginning of the crisis, there have been a number of
trade-restrictive measures, such as tariffs, that were meant to be
temporary but have not been removed yet (see World Trade
Organization, 2014). However, these measures affect only a very
small proportion of total trade (below 5 per cent), implying, at
most, a very modest contribution to the moderation in global growth
rates.

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Trade is of relevance as it is a source of growth: it constitutes
demand for goods and services, provides a means of growth for
crisis-hit economies, helps the diffusion of knowledge and may
induce product specialisation (Hoekman, 2015). While trade can
clearly have welfare enhancing properties, in the context of global
GDP growth forecasts, how much of a risk does a slowdown in trade
volumes growth pose?

At the global level, concerns do appear to be overstated. Weakness
in global demand was accompanied by a slump in global trade, but
the slowdown in trade growth does not appear to be the cause of the
global crisis. It is also not a reason for concern that the
re-integration of China and Eastern Europe to the world is
finalising. Rather, we should have always expected that trade flows
owing to this convergence process would not last. Instead, we do
believe that the slowdown in trade may pose a risk to certain
countries. For instance, certain firms may decide to re-shore their
production processes which could harm the economic prospects of the
countries that hosted that particular stage of production. However,
this process, while harmful for that one country in particular,
just reflects the re-optimization of production processes of firms
that operate globally.

Is the recent slowdown in trade growth here to stay? While some of
the arguments covered in this box suggest that trade is not likely
to regain pre-crisis rates of growth, there are still several areas
left to explore that could reignite trade growth. Firstly, the
finalisation of the reintegration to the world economy of China and
Eastern Europe reminds us that other areas of the world, such as
Africa, hold a lot of potential for trade expansion. Secondly,
while successive trade liberalisation agreements have removed the
bulk of trade barriers in goods, there are still many barriers in
place that prevent trade in services. Recent trade agreements such
as the Trans-Pacific Partnership walk in the right direction. The
World Bank (2016) estimates that trade within the members of the
agreement could increase by 11 per cent by 2030. Last but not
least, technological progress has the potential to bring
international trade, an area of business so far exclusive to large
firms due to the large costs of engaging in international trade,
within the reach of small and medium firms (see Ahmed et al.,
2015), opening new possibilities for trade expansion.

REFERENCES

Ahmed, U., Bieron, B. and Melin, H. (2015), 'Supporting the
micro-multinationals to help achieve peak trade', The Global Trade
Slowdown: A New Normal?, pp. 317.

Bussiere, M., Callegari, G., Ghironi, F., Sestieri, G. and Yamano,
N. (2013), 'Estimating trade elasticities: demand composition and
the trade collapse of 2008-2009', American Economic Journal:
Macroeconomics, 5(3), pp. 118-51.

Constantinescu, C., Mattoo, A. and Ruta, M. (2015), The global
trade slowdown: cyclical or structural?', World Bank Policy
Research Working Paper, WPS 7158.

Crozet, M., Emlinger, C. and Jean, S. (2015), 'On the gravity of
world trade's slowdown', The Global Trade Slowdown: A New Normal?,
pp. 179.

Gaulier, G., Santoni, G., Taglioni, D. and Zignago, S. (2015), 'The
power of the few in determining trade accelerations and slowdowns',
The Global Trade Slowdown: A New Normal?, pp. 93.

World Bank, Global Economic Prospects (2016), Potential
Macroeconomic Implications of the Trans-Pacific Partnership, World
Bank Group, Washington, DC., Chapter 4, pp. 219.

Hoekman, B. (2015), Trade and growth-end of an era?', The Global
Trade Slowdown: A New Normal?, pp. 3.

World Trade Organization (2014), 'Report to the TPRB from the
Director-General on Trade-Related Developments', Report WT/
TPR/ov/w/8, Geneva.

Prospects for individual economies

Euro Area

Modest economic growth has continued, at an annual rate of about 1 1/2 per cent, contributing to a further decline in unemployment. With consumer price inflation remaining well below its medium-term objective of 'below, but close to, 2 per cent', the ECB announced in early December that it was taking further action to increase the degree of monetary accommodation. The measures announced fell short of expectations, so that both market interest rates and the euro's exchange value rose after the announcement. Subsequently, ECB officials emphasised their readiness to take further easing action, if necessary. Our forecast of GDP growth has been revised down slightly for 2016, to 1.5 per cent, but is unchanged for 2017 at 1.9 per cent. The projected strengthening of the expansion is based on the easy stance of monetary policy, the depreciation of the euro since 2013, and the boost to demand from lower oil prices.

GDP rose by 0.3 per cent in the third quarter, to a level 1.6 per cent higher than a year earlier. Growth in the third quarter continued to diverge widely among member countries, with output declining in Greece (by 0.9 per cent) and Finland (by 0.5 per cent) but continuing to increase rapidly in Spain (by 0.8 per cent); growth was close to the Area's average rate in France, Germany (both 0.3 per cent) and Italy (0.2 per cent). Growth in the Area as a whole in the third quarter was driven by household and government consumption, and by inventory accumulation; fixed investment was flat and net exports were contractionary. GDP growth in the third quarter was the slowest in a year. Among more recent indicators, some have been weak--including industrial production, stagnant since early 2015, and retail sales--but PMIs suggest a pick-up in the final months of the year.

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Employment, like GDP, rose by 0.3 per cent in the third quarter. Unemployment fell to 10.5 per cent in November, the lowest since October 2011 but still well above its pre-crisis levels of below 8 per cent. The diversity of employment gaps among member countries is indicated by the range of unemployment rates in November: from 4.5 per cent in Germany to 10.1 per cent in France, 11.3 per cent in Italy, and 21.4 per cent in Spain; the most recent data for Greece show unemployment at 24.5 per cent in October.

Consumer price inflation, on a 12-month basis, has languished just above zero since mid-2015: in November and December it stood at 0.1 and 0.2 per cent. The core rate, meanwhile, has stabilised just below 1 per cent: in November and December it was 0.9 per cent. The increase in 12-month inflation seen in the early part of 2015--from a low of -0.6 per cent in January to 0.3 per cent in May, in terms of the all-items index--has thus petered out in recent months, despite the euro's depreciation since early 2014, by about 12 per cent in trade-weighted terms. This appears to reflect renewed weakness in global commodity prices as well as weak domestic demand. Wage inflation has remained subdued: wage costs in the Area rose by 1.1 per cent in the year to the third quarter of 2015, with divergences among member countries broadly consistent with adjustment needs: in particular, wage costs rose by more than the average rate in Germany and by less than the average rate in such countries as Italy and Spain.

On 3 December, the ECB announced that after an assessment of the factors slowing the return of inflation to its target, it was making four adjustments to its monetary instruments. First, it lowered the interest rate on its deposit facility (negative since June 2014) by 10 basis points to -0.30 per cent. Second, it extended its asset purchase programme (APP): its monthly purchases of 60 billion [euro] a month, previously intended to run until September 2016, or beyond, if necessary, will now run "until end-March 2017, or beyond, if necessary, and in any case until the Governing Council sees a sustained adjustment in the path of inflation consistent with its aim of achieving inflation rates below, but close to, 2 per cent over the medium term". If purchases end in March 2017, the programme, which began in March 2015, will have involved asset purchases totalling 1.50 trillion [euro[, compared with 1.14 trillion [euro] if the purchases had ended next September. Third, the list of assets eligible for purchase by national central banks was extended to euro-denominated debt issued by regional and local governments located in the Euro Area (in addition to central governments, public agencies and certain supranational organisations). This addition of municipal debt will relieve to some extent the constraints on the ECB's ability to expand its asset purchases (see National Institute Economic Review, November 2015, F14). Fourth, the ECB will reinvest the principal payments on the securities purchased under the APP as they mature, for as long as necessary, including after March 2017, thus ensuring, in President Draghi's words, "abundant liquidity ... for a longer horizon than we've been saying so far". (1) President Draghi estimated that the extension of net purchases to March 2017, together with the re-investment of principal payments, would add 680 billion [euro] in liquidity to the system by 2019, relative to the situation that would have prevailed without the measures--an amount equivalent to about 6.5 per cent of Euro Area GDP. (2)

President Draghi stated that the ECB was confident that these measures, which had been agreed not unanimously but by a "very large majority" of the Governing Council (there were subsequent reports of five dissenting votes out of 25), were "adequate to achieve its objectives", although they "might need time to be fully appreciated" by markets. Market disappointment--particularly with the small interest rate cut and the unchanged level of monthly asset purchases--was indicated by an increase in market interest rates in the Euro Area immediately following the announcement (the German 10-year government bond yield increased by 15-20 basis points to about 0.65 per cent), a corresponding narrowing of Euro Area-US interest differentials, and by an appreciation of the euro against the US dollar of close to 3 per cent. Following the announcement, President Draghi emphasised that if economic and financial conditions were to "change in directions that make it necessary to respond again, we are of course ready at any time to adjust [the ECB's] array of tools to secure the return of inflation to our objective without delay".

A new step was taken in the development of the Area's banking union on 1 January when the Single Resolution Mechanism came into effect and the Single Resolution Board (SRB) was established. The SRB has the power to decide when a bank has failed and which steps should then be taken to ensure a safe wind-down. With regard to the EU's plan for completing economic and monetary union by 2025 (see National Institute Economic Review, August 2015, F17), the European Commission published in late November proposals for a 45 billion [euro] bank deposit-guarantee scheme, under which funds would be levied on all Euro Area deposit-taking institutions to insure bank deposits valued up to 100,000 [euro]. A reinsurance scheme would back up national schemes until 2020, followed by a gradual process of mutualisation between 2020 and 2024. The proposal was discussed by EU finance ministers in early December, when it was rejected by the German finance minister on the grounds that such a pooling of risks should not occur until more measures are in place to curb risk-taking in the financial system. In mid-December, Chancellor Merkel told the German parliament that "a mutualisation of European deposit insurance would not reduce risks in the financial sector, including those tied to government, but instead have the opposite effect".

Also in November, the ECB unveiled proposals for the harmonisation of banking regulations across the Euro Area's members. This is intended to promote cross-border lending, reduce financial fragmentation, and facilitate ECB supervision. Following a consultation process, the ECB plans to put the rules into place by April 2016.

Germany

The economy grew by 1.5 per cent in 2015, implying GDP growth in the fourth quarter (data for which have not yet been released) of 0.3 per cent, marginally weaker than in the third. The largest contributor to growth last year was household consumption, which accounted for around 1 percentage point of the rise in GDP: see figure 5. Government consumption and private sector investment also contributed positively to growth in 2015, by about 0.5 and 0.3 percentage points respectively, the latter notably being half of investment's contribution to growth in 2014. Export growth seems to have slowed markedly in the second half of the year, most likely reflecting weaker demand growth globally, including from China. With domestic demand supporting imports, net trade made only a modest contribution to growth in 2015, and is expected to be neutral in 2016 with the external environment remaining difficult.

Box B. Simulating the effects of refugee influx on the European
Union macroeconomy by Jessica Baker, Simon Kirby, Iana Liadze and
Rebecca Piggott

Civil war in Syria, in addition to conflicts and political
instability elsewhere in the Middle East and some parts of Africa,
has led to a significant increase in the number of refugees
globally. The number of people forcibly displaced at the end of
2014 was 59.5m, the highest ever recorded (UNHCR, 2015). The member
states of the European Union (EU) have seen a dramatic increase in
the number of people arriving and claiming asylum. In 2015 the EU
countries received 1.2 million asylum applications, compared to
430,000 and 630,000 in 2013 and 2014 respectively. Figure B1.1
illustrates the number of asylum applications (both total and of
working age) by destination country. Germany received the largest
number of applicants, followed by Sweden, Hungary (in part owing to
geographic location) and Austria.

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On average across the EU, 29 per cent of asylum applicants were 17
years of age or younger, 70 per cent were between 18 and 64, and
less than I per cent were 65 years of age or older. However, these
averages conceal wide variation among member countries in the
proportion of applicants who are aged between 18 and 64, ranging
from 54 percent in Sweden to 91 per cent in Italy. In Sweden almost
half of applicants are less than 18.

While the surge in asylum applications has been considerable, it
amounts to only 0.24 per cent of the EU population. By contrast,
the share of Syrian refugees in the populations of Lebanon and
Jordan is estimated to be about 18.3 per cent and 8.4 per cent
respectively. (1)

The distribution of asylum applications, relative to the
populations of EU destination countries, has not been uniform
either. Figure B1.2 illustrates the wide variation. (2) While
Germany received the largest number of applications in 2015,
relative to its population (around 1/2 per cent), its applications
were only the fifth largest in the EU (figure Bl .2) behind Sweden
(at just under 2 per cent), Hungary, (3) Austria and Finland.

Most applications for asylum last year came from Syrians, amounting
to about 29 per cent of the total, followed by Afghans (13 per
cent) and Iranians (9 per cent). Overall, about 60 per cent of
asylum applications to the EU in 2015 came from citizens of
countries in the Middle East, North Africa, Afghanistan and
Pakistan. (4)

The increasingly high proportion of applicants from Syria has been
reflected in a rise in the average recognition rate of asylum
seekers in the EU from 32 per cent in 2012 to 57 per cent in 2015,
(5) with the recognition rate of Syrian nationals in 2015 around 98
per cent. There is some variation in the recognition rates across
EU member countries. In 2014, the rate was 22 per cent in France
compared to 77 per cent in Sweden, with an average of 47 per cent.
However this disparity may be reduced somewhat as the proportion of
asylum seekers originating from Syria, who have a recognition rate
of close to 100 per cent, rises or at least remains high through
2016 and 2017.

Simulating the effects on the EU macroeconomy: assumptions

Immigration is a complex issue, and we use a stylised approach to
illustrate the impact of the increased inflow of asylum seekers on
EU member country economies, by running a simulation using our
global econometric model, NiGEM. In order to capture the effects of
the increased number of asylum seekers on recipient countries and
their labour forces, shocks are applied to both country populations
and labour force participation rates. Both monetary and fiscal
policy makers are assumed not to respond by changing in monetary or
fiscal targets for at least the first three years of the shocks.
The removal of fiscal target allows for a fiscal expansion--fiscal
authorities do not apply a balanced budget approach to increases in
welfare and government consumption spending in our simulation.

Changes to the population projections are calibrated by using
asylum application data from Eurostat for 2015 and the European
Commission's assumptions for the total number of asylum
applications to the EU in 2016 and 2017, i.e. 1.22, 1.5 and 0.5
million in each year respectively. (6) The distribution of
applications in 2016 and 2017 by destination country and age group
is assumed to be the same as that in 2015. (7) It is assumed that
92 per cent of asylum seekers who arrived in the EU have left the
Middle East, with the remaining 8 per cent coming from Africa.

New arrivals are assumed to enter the labour force after they have
been in a country for one year, which we treat as a comparatively
quick integration scenario, given how long, on average, it takes to
process asylum applications. (8) We assume that the labour force
participation rate of working age migrants who have been in the
country for at least one year is 80 per cent of the average
participation rate in that country in 2015. This is in line with
the reduced participation rate of new arrivals compared to the
existing working age population as discussed in Aiyar et al.
(2016). Data on the movements of failed asylum applicants is
sparse, at best. For simplicity, we assume that they remain in the
host country but are unable to enter the labour force.

NiGEM is a large estimated quarterly model of the world economy,
which uses a 'New-Keynesian' framework in that agents are assumed
to be forward-looking but nominal rigidities slow the process of
adjustment to the long-run equilibrium. In the long term, output is
determined by a CES production function with labour-augmenting
technical progress. The labour market embodies an equilibrium level
of employment. We assume that employers have the right to manage,
and hence the bargain in the labour market is over the real wage.
Real wages, therefore, depend on the level of trend labour
productivity as well as the rate of unemployment. The labour force
is assumed to grow in line with the population of working age and
any exogenous changes in the participation rate. The model does not
differentiate between different types of labour and the relative
productivity of migrants is unknown, so we assume that the
representative working age migrant is identical to the
representative member of the working age population of the
recipient country. (9)

Simulation results

The overall impact on country GDP is largely determined by the
number of working age applicants received, combined with how many
of these people enter the labour market and transition into
employment. In the first year it is assumed that there is no impact
on the labour supply, and a small positive impact on output is
largely demand-driven, as an increase in government spending on the
migrants, including transfers, leads to higher private consumption
and increased in output. After the first year, successful asylum
applicants enter the labour market and supply starts increasing
gradually. As a result of the uneven distribution of migrants among
EU countries, the impact on output is widely dispersed, with the
largest effect in Sweden, closely followed by Austria and Finland.
Output (relative to the baseline) is expected to increase by about
0.3-0.8 per cent in Germany, Finland, Austria and Sweden, by the
third year of the simulation.

The impacts on EU GDP and the labour force are illustrated in
figure B2. The positive effect on GDP builds over time as more and
more refugees are integrated into the labour force. In the medium
term the number of employed people is expected to increase by about
0.6 per cent and GDP by about 0.4 per cent (compared to baseline).
As the increase in employment lags the rise in the labour force,
initially, there is an increase in the unemployment rate. However,
as we assume that the new labour force does not have an effect on
the parameters explaining the functioning of European labour
markets, there is no long-run effect on the rate of unemployment.
The impact on output will be smaller if immigrants' participation
rates are lower than we assume, integration into the labour force
takes longer or there are barriers to employment.

[FIGURE B2 OMITTED]

REFERENCES

Aiyar, S., Barkbu, B., Batini, N., Berger, H., Detragiache, E.,
Dizioli, A., Ebeke, C., Lin, H., Kaltani, L., Sosa, S.,
Spilimbergo, A. and Topalova, P. (2016), The refugee surge in
Europe: economic challenges', IMF Staff Discussion Notes.

UNHCR annual Global Trends Report: World at War, released 18/6/15.

NOTES

(1) Source: http://data.unhcr.org/syrianrefugees/regional.php and
http://esa.un.org/unpd/wpp/; the number for Lebanon may be even
higher, because "as of 6 May 2015, UNHCR Lebanon has temporarily
suspended new registration as per Government of Lebanon's
instructions. Accordingly, individuals awaiting to be registered
are no longer included."

(2) The first bar displays total asylum applications as a per cent
of the total population in the destination country. The second bar
shows working age applicants as a per cent of the working age
population.

(3) The high number of asylum seeker applications registered in
Hungary partly reflects its geographical location; many of its
registered asylum seekers may have subsequently re-applied in
another destination country such as Austria, Germany or Sweden.

(4) Countries grouped in the Middle East and North Africa follow
the IMF's country group classification.

(5) Defined as a percent of asylum decisions which are positive.

(6) European Commission, European Economic Forecast, Autumn 2015
http://ec.europa.eu/economy_finance/publications/eeip/
pdf/ip011_en.pdf.

(7) The data source for asylum applications is Eurostat. If an
asylum seeker makes a repeat application in a different reference
period (month) it is re-recorded, so the aggregate figures could
overstate the number of people seeking asylum. To put this in
context, in the third quarter of 2015 96 per cent of total asylum
applications in the EU were first-time applications. Additionally
there could be double-counting if an asylum seeker submits an
application in more than one country. Missing data observations in
2015 are constructed by utilising the growth rate over the same
period of the previous year. Population data are as of the end of
2014.

(8) Average time to process application in Germany is 5.3 months,
while in Sweden is has increased from an average of 4.5 months in
2014 to 7 months 2015 (Aiyar et al., 2016).

(9) Further details on the NiGEM model are available on
http://nimodel.mesr.ac.uk.

Growth is projected to pick up marginally in 2016 to 1.6 per cent. Exports should strengthen with the global economy and world trade, and from 2017 net exports will begin to take the place of private consumption as the dominant driver of growth. Our forecast thus shows no adjustment of Germany's current account surplus, which is estimated to have been as large as 8.2 per cent of GDP in 2015: in fact, it is expected to widen slightly, to 8.4 per cent of GDP, in the medium term.

Headline inflation has remained close to zero, with the 12-month increase in the harmonized index of consumer prices (HICP) at 0.2 per cent in December 2015, the same as the Euro Area average. However, domestic inflationary pressure is greater than the headline rate suggests. Thus core inflation has been stable at around 1.2 per cent since May 2014, and the growth of wages has picked up since early 2014: in the year to the third quarter of 2015, labour costs (on Eurostat's index) rose by 2.4 per cent, higher than the Euro Area average of 1.1 per cent, whereas the corresponding data one year earlier show a rise in labour costs in Germany of 1.2 per cent, lower than the Euro Area average of 1.4 per cent. This reflects the relatively tight labour market in Germany, with unemployment in recent months at 4.5 per cent, less than half the Euro Area average. The stability in recent months of the headline consumer price index, together with recent declines in global commodity prices and the general stability of the euro's exchange rate since last spring, suggest that headline inflation will remain subdued through most of 2016. But underlying inflationary pressures seem likely to start pushing inflation up towards the end of this year, and we are projecting average inflation of 1.6 per cent in 2017, after 0.5 per cent this year, and 1.8 per cent in the medium term.

[FIGURE 6 OMITTED]

With the economy virtually at full employment, the growth of employment, 0.8 per cent in 2015, has recently relied on immigration. It may be expected to pick up in the course of this year as more of the roughly one million refugees who have entered Germany since the start of 2015 find their way into the labour force. The unemployment rate is expected to remain broadly flat over our forecast horizon.

The government budget in 2015 is estimated to have been in surplus by around 0.5 per cent of GDP--the largest surplus in fifteen years. We expect the surplus to decline this year as increased spending on recently arrived migrants is funded without significant increases in taxation. However, the budget seems likely to be kept in surplus this year and next, allowing the public debt to be reduced from 70 per cent to under 55 per cent of GDP by the end of 2020. Government investment is expected to grow slightly.

France

After stagnation in the second quarter of 2015, economic growth appears to have resumed in the second half of the year. GDP increased by 0.3 per cent in the third quarter and we estimate that it rose marginally less in the final quarter of the year, leaving annual growth at 1.1 per cent, as in our November forecast. Albeit modest, this would be the strongest annual expansion since 2011. PMIs and other data indicate that growth in the fourth quarter shifted towards manufacturing away from services and retail trade. Thus the PMI for manufacturing in December indicated the strongest growth since early 2014, while PMIs for both services and retail trade indicated the sharpest contractions since early 2015. These developments seem partly to reflect the terrorist attack in Paris in mid-November, which is likely to have damaged tourism in particular.

Household consumption was the main driver of GDP expansion in 2015, but its growth is expected to slow this year. Growth in private sector investment has shown signs of strengthening and is expected to increase through this year and next. We expect net exports to contribute negatively to GDP growth this year, by 0.3 percentage point. GDP is projected to rise by 1.3 per cent this year and, with the first positive contribution from net trade since 2012, by 1.8 per cent in 2017.

Unemployment declined significantly late last year, from a peak of 10.6 per cent in August to 10.1 per cent in November, its lowest level since May 2014. But this is still high, and a matter of political concern. On 18 January, President Hollande referred to it as "an economic and social emergency" and announced measures involving the creation of half a million vocational training schemes, additional subsidies for small companies' recruitment of young or unemployed people, and a programme to boost apprenticeships. The two-year plan will cost 2 [euro] billion, to be financed by spending cuts elsewhere. We do not expect these measures to have a substantial effect on the overall unemployment level, which we expect to remain around 10 per cent this year and next.

Twelve-month consumer price inflation, in terms of the HICP, picked up slightly to 0.3 per cent in December. Core inflation was 0.8 per cent in December, little changed from the previous seven months. With wage costs subdued--as in the Euro Area as a whole, they rose by 1.1 per cent in the year to the third quarter--we expect average inflation to rise from zero in 2015 to 0.4 per cent this year and 1.1 per cent in 2017.

In November the European Commission expressed scepticism about the government's ability to meet its fiscal deficit target for 2017 of less than 3 per cent of GDP. Our current baseline forecast is that the deficit will reach 2.9 per cent of GDP in 2017, meeting the target by the finest of margins. As indicated in previous issues of this Review, however, such fine margins leave the attainment of the target highly vulnerable to shocks, and there remains a significant probability that the target will not be met.

Italy

Modest economic growth, generated mainly by consumer spending, has been sustained since the recovery resumed in early 2015. GDP growth eased off in the second and third quarters of last year, to 0.3 per cent and 0.2 per cent respectively, from 0.4 per cent in the first, mainly on account of two factors: a downturn in fixed investment after the first quarter--when there was a one-off jump in spending on transport equipment equivalent to more than half that quarter's rise in GDP--and a downturn in exports in the third quarter. More recent indicators, including PMIs for both manufacturing and services, suggest that modest growth has continued.

Private consumption has been sustained by subdued consumer price inflation, related partly to the decline in global oil prices; more favourable credit conditions; and increased consumer confidence. We view the contraction of exports in the third quarter of 2015 as an aberration and expect export growth to resume in the near term as Italy benefits from the depreciation of the euro over the past two years, the economic recovery among its Euro Area partners, and competitiveness gains within the Euro Area arising from Italy's relatively low wage inflation: in fact, in the year to the third quarter, wage costs in Italy declined by 0.4 per cent, compared with the average increase of 1.1 per cent in the Area as a whole. Consumer price inflation has also been below the Euro Area average, albeit slightly: in the year to December, it was 0.1 per cent, with the core rate at 0.6 per cent. We expect inflation to remain subdued in 2016, especially given the recent renewed fall in oil prices.

The weakness of fixed investment remains a significant concern as growth has still failed to materialise after a decline of more than 20 per cent since 2008. To spur investment, the government has introduced various measures, including tax deductions on investment in machinery and equipment ('super ammortamento') and the opening of new lines of credit at favourable rates for small and medium-sized enterprises from its own national promotional bank (Cassa Depositi e Prestiti).

The labour market is another cause of concern. Robust job creation remains elusive despite a number of measures that the current government has implemented (Job Acts, tax deductions when hiring, and more). Unemployment has fallen quite rapidly from its peak of 13.1 per cent, in November 2014, to 11.3 per cent in November 2015, but the increase in employment in this period accounts for less than half of the decline in numbers unemployed, indicating that most of the decline is attributable to a fall in labour force participation.

The draft budget for 2016, released in November, sets a deficit target of 2.2 per cent of GDP, larger than the 1.8 per cent target set last April. The target will be raised to 2.4 per cent if the European Commission approves Italy's request for additional leeway to compensate for the costs of increased immigration. The target date for budget balance has been postponed to 2018 from 2017. The draft budget is being assessed by the European Commission. We estimate that the government deficit in 2015 was 2.6 per cent of GDP, and project that it will narrow to 2.2 per cent in 2016.

Our estimate of GDP growth in 2015 and our forecast for 2016 are unchanged from the November Review, at 0.7 and 0.9 per cent, respectively. Our projection for growth in 2017 has been lowered to 1.3 per cent.

Spain

The solid economic recovery--one of the strongest recent growth performances in the Euro Area--has maintained its momentum. In the third quarter of 2015, GDP grew by 0.8 per cent, to a level 3.4 per cent higher than a year earlier, and the Bank of Spain expects the same rate of expansion in the last quarter of the year. We have raised our estimate of growth in 2015 as a whole marginally to 3.2 per cent, and while our projection for growth in 2016 is unchanged, at 2.6 per cent, our forecast for 2017 has been raised slightly, to 2.8 per cent.

As has generally been the case since early 2014, output growth in the third quarter was generated by domestic demand, with both private consumption and fixed investment rising by about 1 per cent. Easing credit conditions, the resumption of house price inflation, strong employment growth, reduced oil prices and the reintroduction of bonus pay for civil servants, which the government had suspended in 2012, have all helped to spur private consumption. We expect this trend to persist in 2016, particularly given the recent fall in oil prices.

Net trade, which has not contributed positively to growth in most of the period since 2013, subtracted 0.3 percentage points in the third quarter after a neutral contribution in the second. Exports have been growing strongly--by 2.8 per cent in the third quarter alone--benefitting from the depreciation of the euro as well from the competitive gains that come from wage moderation and Spain's favourable inflation differential with the Euro Area. However, the strong expansion of domestic demand has pulled in imports at a generally faster rate.

Unemployment remains extremely high, but it has been falling quickly. In November 2015 it stood at 21.4 per cent, almost 5 percentage points below the peak of 26.3 per cent reached in early 2013, but still well above both the current Euro Area average of 10.5 per cent and the pre-crisis level in Spain of about 8 per cent. Almost 200,000 people, out of around 5 million people unemployed, found a job in Spain in the third quarter of 2015.

Consumer price inflation, on a 12-month basis, has been predominantly negative since mid-2014, but in recent months the rate of deflation has waned, to 0.1 per cent in November (in terms of the HICP). Core inflation rate has gradually risen from negative levels in late 2014 to about 1 per cent late last year.

The government seems likely to have reached the target budget deficit of 4.2 per cent of GDP required by the European Commission for 2015, but fiscal prospects are currently uncertain. The general election on 20 December produced a hung parliament, with no resolution a month later. The incumbent government remains in office for the time being, but another election may have to be called, and this could produce a similar result. In these circumstances, the reform agenda may stall and we are sceptical as to whether the government will deliver a deficit of 2.8 per cent of GDP for 2016, as the Commission expects. The current political uncertainty, which has been exacerbated by moves for independence in Catalonia, may, if prolonged, also cause significant damage to confidence and the pace of economic recovery.

United States

The growth of demand and output has continued at a broadly moderate pace, weakening somewhat in late 2015. Meanwhile, unemployment has fallen further, to 5.0 per cent throughout the fourth quarter, its lowest level since April 2008; this is the upper end of the Federal Reserve's newly revised range estimate of 4.8-5.0 per cent for the longer-run, normal unemployment level. Inflation has remained well below the Fed's medium-term objective of 2 per cent, partly reflecting the weakness of global prices of energy and other commodities and the strength of the dollar, but there have been tentative signs of a slight pick-up in wage as well as price increases. Against this background, as we assumed in the November Review, the Fed on 16 December raised the target range for the federal funds rate by 25 basis points to 0.25-0.50 per cent. This action, agreed unanimously by the Federal Open Market Committee, was taken seven years after the target range had been lowered close to zero, and six and a half years after the end of the recession of December 2007-June 2009. Partly reflecting relatively weak data for demand and activity in late 2015, as well as the further appreciation of the dollar, we have revised down slightly our estimate for GDP growth last year, to 2.4 per cent, and also our forecast for growth in 2016 and 2017, to 2.5 and 2.7 per cent respectively.

In the third quarter of 2015, GDP grew by 2.0 per cent at an annual rate, with robust growth in consumer spending (3.0 per cent) and private fixed investment (3.7 per cent) partly offset by negative contributions from stockbuilding and net exports. GDP in the first three quarters of last year was 2.6 per cent higher than in the corresponding period of 2014, compared with 2.4 per cent growth in 2014 as a whole. In the fourth quarter of 2015, GDP growth seems likely to have weakened, partly on account of slower growth in consumer spending reflecting increased saving. Among the production sectors, output contracted in the course of 2015 in both mining (-11.2 per cent in the year to December) and utilities (-6.9 per cent), and expanded only weakly in manufacturing (0.8 per cent), so that industrial production declined by 1.8 per cent. The recession in industry accelerated in the fourth quarter, with a decline in production of 0.9 per cent from the preceding three months.

The growth of employment slowed somewhat in 2015, although it picked up in the last quarter. In the year as a whole, non-farm payrolls increased by 2.65 million, compared with 3.12 million in 2014. In terms of 12-month percentage changes, the growth of non-farm jobs peaked at 2.3 per cent between December 2014 and March 2015--the fastest annual growth in employment since 2000--and subsequently moderated to 1.9 per cent by December. Unemployment fell further to 5.0 per cent in October-December, half its peak level of October 2009 and the lowest since April 2008. In December, the Fed lowered its range estimate of longer-run normal unemployment further to 4.8-5.0 per cent from 4.9-5.2 per cent. One indication of continuing slack in the labour market remains the labour force participation rate; it rose marginally to 62.6 per cent in December from the 38-year low of 62.4 per cent reached in September, but it remained lower than in any other month between November 1977 and May 2015, albeit partly because of demographic shifts.

[FIGURE 7 OMITTED]

Another indicator of labour market slack is the continuing subdued growth of wages. There have, however, been tentative signs recently of a modest pick-up in wage growth. Thus the 12-month growth rate of average hourly earnings was 2.5 per cent in October and December 2015 --the strongest annual growth in more than five years, though still significantly lower than rates compatible with the Fed's objective for price inflation. The employment cost index, which takes into account benefits as well as pay, also showed a pick-up in the third quarter. Consumer price inflation has also remained subdued. Thus the 12-month increase in the price index for personal consumption expenditures--the Fed's preferred index--was 0.4 per in the twelve months to November, slightly higher than earlier in 2015, while the corresponding core inflation rate was unchanged at 1.3 per cent. Measured by the narrower consumer price index, however, 12-month inflation rose to 0.7 per cent in December--the highest rate in a year--while the corresponding core rate was 2.1 per cent, the highest since July 2012.

[FIGURE 8 OMITTED]

In announcing the increase in its target range for the federal funds rate, the Fed referred to the two conditions it had earlier laid out for such action, and explained that it now both judged that there had been considerable improvement in labour market conditions and was reasonably confident that inflation would rise, over the medium term, to its 2 per cent objective, as the transitory effects of declines in energy and import prices dissipated and the labour market strengthened further. It also emphasised that monetary conditions remained accommodative after the increase, that the timing and size of future adjustments would depend on its assessment of actual and expected economic conditions relative to its objectives, and that it expected that only gradual increases in the rate would be warranted. The median expectation of the participants in the Fed meeting was that the appropriate increases in the target federal funds rate will be 1.0 percentage point in both 2016 and 2017, 0.875 percentage point in 2018, and a further 0.25 percentage point in the longer run, taking the rate to 3.5 per cent.

Developments since the Fed's mid-December interest rate hike--including the further weakening in the global prices of oil and other primary commodities, the declines in global equity prices, broader financial market turbulence, the continuing strength of the dollar, and relatively weak data for the US economy--have reduced the likelihood of a second increase in rates before June. Particularly notable is the fact that medium-term market-based inflation expectations remain well below the Fed's objective: for instance, the five-year breakeven inflation rate was 1.1 per cent in late January.

Canada

The economy emerged from a mild, six-month recession with GDP growth of 0.6 per cent in the third quarter of 2015, but this expansion seems to have been short-lived. More recent data indicate that the economy stalled in the fourth quarter. Thus monthly GDP was unchanged in October, after falling by 0.5 per cent in September, and manufacturing PMIs in recent months have indicated declining activity. Unemployment late last year was 7.1 per cent, up from 6.6 per cent at the start of 2015. Falling oil prices have been weighing heavily on exports and business investment, while recent declines in commodity prices have reduced average annual incomes in Canada by C$1500, according to estimates recently cited by Bank of Canada Governor Poloz.

Business investment fell by 1.5 per cent in the third quarter, following falls of 4.7 and 3.0 per cent in the previous two quarters. The Bank of Canada's Business Outlook Survey indicates that business sentiment has deteriorated significantly, with the negative effects of the commodity price shock extending beyond the resource sector. Investment and hiring intentions have fallen to their lowest levels since 2009. We expect business investment to continue to decline in 2016, before picking up in 2017.

On a more positive note, firms report that they are benefiting from strengthening foreign demand, with non-commodity exporters expecting strong sales growth. An important factor boosting non-commodity exports, and also restraining imports, is the recent marked depreciation of the Canadian dollar, to levels in late January that were about 10 per cent lower than three months earlier, and about 20 per cent lower than at the end of 2014, in both US dollar and trade-weighted terms. In terms of the US dollar, the Canadian currency has recently been at 12-year lows.

Consumer price inflation was 1.4 per cent in the year to November, the highest 12-month rise in prices for more than a year, pushed up particularly by the rising cost of food items but also reflecting the depreciation of the currency, which will continue to put upward pressure on prices in the months ahead. On the other hand, weak domestic demand will dampen price growth. Our forecast is for inflation to average 1.8 per cent in 2016, before rising to 2.4 per cent in 2017 and stabilising at 1.6 per cent in 2018-22.

On 20 January, the Bank of Canada decided to keep its benchmark interest rate at 0.5 per cent, the level to which it was reduced last July. The Governor indicated that the decision not to lower the rate further was related partly to the government's intention to introduce fiscal measures (not yet specified) to stimulate the economy, and partly to the boost to activity and inflation provided by the depreciation of the currency. Our forecast assumes a rate cut of 25 basis points in May. We are forecasting modest growth of 1.8 per cent in 2016, accelerating to 2.4 per cent in 2017. We expect unemployment to average 7.1 per cent in 2016 before falling slightly to 7.0 per cent in the medium term.

Japan

Economic growth resumed in the third quarter of 2015, with a rise in GDP of 0.3 per cent--close to the assumption in our November forecast--following the slight decline of 0.1 per cent in the preceding quarter. Contributions to GDP growth in the third quarter were evenly balanced between domestic and external demand components. Private consumption and investment grew by 0.4 per cent and 0.8 per cent, respectively, while export growth, at 2.7 per cent, outstripped that of imports, at 1.7 per cent. More recent indicators of activity have been mixed, but growth seems likely to have continued at a modest pace in the fourth quarter. Thus PMIs have consistently indicated moderate expansion in both manufacturing and services activity in recent months. Consumer confidence in late 2015 was at its highest level in more than two years, although early indications are that household expenditure and retail sales in the fourth quarter may have been lower than a year earlier. Our estimate of GDP growth in 2015 as a whole is unchanged from November, at 0.7 per cent.

Our growth forecast has been lowered since November for 2016, to 1.0 from 1.4 per cent, but raised slightly for 2017, to 1.2 from 0.9 per cent. There are risks on either side of this forecast. On the downside, a less favourable outturn in China than we are projecting, particularly in terms of economic growth, the exchange rate, or financial turbulence, would be likely to have negative spillovers to the region, and to Japan in particular. On the upside, larger declines in global energy prices than we are assuming could boost growth by leading to a larger than projected improvement in real incomes.

The 12-month 'headline' consumer price inflation rate has generally been positive but close to zero since last April; it was 0.3 per cent in October and November. However, the Bank of Japan's own measure of 'core' inflation, which excludes the prices of energy and fresh food, reached 1.2 per cent in October and November, the highest rate since 2008, suggesting an underlying positive impetus to prices. Recent falls in global energy prices will put downward pressure on the 'all items' index. The core index will not be affected directly by energy prices but it will reflect the effects on import prices of the recent appreciation of the yen, whose trade-weighted value has risen by about 8 per cent since mid-2015.

With regard to inflation expectations, the Bank of Japan's Tankan survey for December showed a decline in the expectations of both households and companies, below the Bank of Japan's objective of a 2 per cent annual rate. This may partly reflect the fact that the Bank in late October pushed back the date by which it is aiming to meet its objective to "around the second half of fiscal 2016", which ends in March 2017, from "around the first half". An important indication of inflation prospects will emerge from the spring round of wage negotiations. Early indications are that, even with the continued low unemployment rate--below 3.5 per cent since last February, the lowest levels since 1995--trade unions will be seeking smaller increases in base pay than in the previous two years, while firms remain cautious despite robust corporate profits. On balance wage increases seem unlikely, at least in the near term, to provide the inflationary impetus to create the much vaunted 'virtuous cycle'. Our forecast for average inflation is for zero and 0.7 per cent in 2016 and 2017 respectively.

On 18 December, the Bank of Japan announced the first modification of its programme of quantitative and qualitative easing (QQE) since it expanded purchases in October 2014. It lengthened the average maturity of bonds to be purchased from the beginning of 2016 to 7-12 from 7-10 years; (3) announced increased purchases of Japan real estate investment trusts and also of exchange-traded funds "composed of stocks issued by firms that are proactively making investment in physical and human capital"; and loosened collateral constraints by allowing foreign currency bonds and housing loans to be eligible. Governor Kuroda described these changes as technical rather than constituting additional easing.

On 22 December, the Cabinet approved a 96.72 [yen] trillion budget for fiscal 2016, beginning in March, largely focused on welfare spending to deal with population aging. An interesting feature is on the revenue side with an expected increase in tax receipts of 5.6 per cent, which in turn implies a fall in debt issuance of 6.6 per cent from fiscal 2015. The government's fiscal projections are based on a forecast of 1.7 per cent GDP growth in fiscal 2016, compared with our 1.2 per cent forecast for fiscal 2016 and well above the potential growth rate of the economy, which the Bank of Japan estimates is around 0.3 per cent, despite already low unemployment. Given the already short supply of publicly available bonds, the government announced that it would bring forward issuance of bonds, in order to avoid disrupting the Bank's QQE programme.

China

Despite renewed turmoil in financial markets in January, recent data generally indicate that the economy's slowdown has proceeded broadly in line with the government's plans. (4) GDP growth in the year to the fourth quarter was 6.8 per cent, marginally slower than in the year to the third quarter, and in 2015 as a whole it was 6.9 per cent, in line with both our November forecast and the government's target of "around 7 per cent". There have also been further indications of economic rebalancing, as planned, with output growth in the services sector in the year to the fourth quarter at 8.2 per cent, compared with 6.1 per cent growth in industry and construction. In 2015 as a whole, there were declines in both steel production (by 2.3 per cent) and power generation (by 0.2 per cent), in each case for the first time in 25 years. Meanwhile the growth of retail sales remained solid, at 11.1 per cent in the twelve months to December.

The economy's slowdown has been moderated by monetary easing--including six reductions in the central bank's benchmark interest rates, amounting to 150 basis points, in the year to October 2015--and also by fiscal support. Announced stimulus measures are expected to continue to support the economy in the short term, while overcapacity in some heavy industries and construction continue to act as a drag on growth. We project a further gradual slowing of growth this year and next, to annual rates of 6.5 and 6.3 per cent, respectively, little changed from our forecast of three months ago.

The Thirteenth Five-Year Plan, setting a development path for the period 2016-20, will be finalised in March. A preliminary summary published last October provides some indications of its directions and goals. Among other things, the Plan calls for average annual GDP growth of at least 6.5 per cent between 2015 and 2020 to meet the objective, set out in the previous Plan in 2010, of doubling GDP by the end of the decade; a rise in the consumption/ GDP ratio; and action to address environmental pollution. The Annual Central Economic Work Conference in December provided clearer indications of policies for 2016, with plans for more "pro-active" and "flexible" fiscal and monetary policies, including property-specific measures aimed at supporting demand while at the same time promoting the reduction of over-capacity; for the acceleration of de-stocking in the property market by helping rural migrant workers to settle in urban areas; and for tax cuts for the corporate sector.

The government continues to face a difficult balancing act as it tries to manage the inevitable slowing of economic growth while promoting the rebalancing of the economy that is needed for sustainable long-term growth. Efforts to support growth in the short run may risk increasing imbalances and thus postpone and complicate the adjustment process. In the real estate sector, announced supportive measures (like increased loan-to-value ratios and reduction in down-payments for second-home buyers) may support house sales in the short term, but lengthen the price adjustment process. Likewise, stimuli that limit incentives to reduce overcapacity in industry may hamper more productive investment, weigh on already falling corporate profits, reduce companies' ability to service debt obligation, and increase bad loans in banks and risks to the financial system.

Inflation has remained subdued on some measures and negative on others. Consumer price inflation, on a 12-month basis, picked up slightly in late 2015 to reach 1.6 per cent in December, just over half the authorities' 3 per cent target for the year. The core rate in December was 1.5 per cent. The 12-month change in producer prices was stable in the latter part of 2015, at -5.9 per cent. Mild deflationary pressures are also evident in recent GDP data: thus the growth of nominal GDP in the year to the fourth quarter, at 5.8 per cent, was 1 percentage point lower than the growth of real GDP.

There has been further downward pressure on the renminbi in the past three months. In late January, the currency's value in terms of the US dollar was 3.3 per cent lower than in late October and 5.8 per cent lower than the rate that prevailed before the change to a more flexible exchange rate arrangement last August. In mid-December, the People's Bank signalled that exchange-rate policy would henceforth pay more attention to a 13-currency basket of currencies of trading partners than to the US dollar alone, and in trade-weighted terms the renminbi has been broadly stable in recent months: see figure 9. This stability in trade-weighted terms has been supported by further official intervention in the foreign exchange market. In December, China's foreign exchange reserves fell by $108 billion--the largest ever monthly decline--to $3.33 trillion, 17 per cent below the peak of $3.99 trillion reached in mid-2014. Given China's current account surplus, the downward pressure on the renminbi indicates continuing net capital outflows.

[FIGURE 9 OMITTED]

The steep decline in equity prices that began last June, following more than a doubling of prices in the previous six months, resumed at the beginning of this year. Disappointing PMI data for December, together with the impending expiration of a six-month official ban on sales of equities by large investors introduced last July, seemed to be the main triggers for the renewed fall, but another contributor was a newly introduced circuit breaker, the design of which appeared to encourage sales in a falling market. This was suspended on 7 January. Nevertheless, and in spite of reported officially encouraged purchases of equities, prices in mid-January were about 19 per cent lower than at the end of 2015, and more than 40 per cent lower than the peaks reached last June, though higher than they had been before December 2014.

On 30 November, the IMF announced that it had decided that, beginning on 1 October, 2016, the renminbi would be included in the currency basket represented in Special Drawing Rights, the reserve currency that the IMF is empowered to create. The renminbi will have a weight of 10.92 per cent in the basket, smaller than the weights of the US dollar (41.73 per cent) and the euro (30.93 per cent), but larger than the weights of the Japanese yen (8.33 per cent) and pound sterling (8.09 per cent). The IMF thereby judged that the renminbi had satisfied two criteria: that China was one of the largest exporting countries in the world, and that the currency was "freely usable" according to the meaning set out in the IMF's Articles of Agreement. The IMF's decision is generally viewed as a vote of confidence by its membership in progress with reform of China's financial and exchange rate systems, as well as recognition of the country's increased economic weight. In fact, with the reform of IMF quotas soon to be implemented, China will become the second largest quota holder in the IMF and the country with the second largest share in the World Bank.

India

The robust growth of the economy continued through the third quarter of 2015, with GDP 7.4 per cent higher than a year earlier. Domestic demand remained the main driver of the expansion, with private consumption and fixed investment both growing by 6.8 per cent in this period. The external sector continued to subtract from GDP growth: exports registered their fifth consecutive quarter of contraction on a four-quarter basis, shrinking by 4.7 per cent, although this was partly offset by a 2.8 per cent contraction in imports. There are indications that economic growth slowed in the fourth quarter: industrial production fell by 8.2 per cent in November to a level 3.2 per cent lower than a year earlier, and the manufacturing PMI for December indicated contraction for the first time in more than two years. The composite PMI for December, however, showed continuing growth. We expect that robust domestic demand growth will continue through 2016, supported especially by the improvements in household purchasing power emanating from the further decline in global oil prices. A significant downside risk to both short- and medium-term growth rate remains the poor health of the balance sheets of publicly owned banks, which may depress private sector investment and thus potential as well as actual output. We expect India to remain the fastest growing major economy in the period ahead, with GDP growth of 7.3 and 7.8 per cent projected for 2016 and 2017, respectively.

Consumer price inflation, on a 12-month basis, picked up late last year, from a low of 3.7 per cent in July and August to 5.6 per cent in December. This occurred despite the relative stability of the rupee's exchange rate and the weakness of oil and other global commodity prices. The rise seems to be accounted for largely by a rise in domestic food prices. Wholesale prices, having declined in the second half of 2014, have risen since early last year, and in December stood only 0.7 per cent lower than a year earlier after the 12-month rate of deflation had peaked at 5.1 per cent last August.

The Reserve Bank has kept its benchmark interest rate unchanged since the reduction of 50 basis points, to 6.75 per cent, implemented last September. Some observers have called for a further reduction in the near term, partly to protect the economy from weakening external demand. However, while consumer price inflation has recently been below the Reserve Bank's target of less than 6 per cent for January 2015, it is above the 4 per cent mid-point of the 2-6 per cent target range for the financial year 2016-17 (which begins in April) and beyond. The impact of the fall in global commodity prices may allow the Bank some space to act if required. However, given our baseline forecast, such a policy action in the near term could risk failure to meet the target. In fact, our forecast of inflation at 4.9 and 5.9 per cent, respectively, for 2016 and 2017 suggests that monetary policy may need to be tightened for the target to be met.

Brazil

Brazil's economic situation and short-term outlook are bleak. The country faces a wide range of problems including deepening recession and rising unemployment; depressed commodity export prices; steep currency depreciation and increasing inflation, which is well above target; widening budget deficits; and political gridlock amid a major corruption investigation and a move to impeach the President.

GDP contracted by 1.7 per cent in the third quarter of 2015--the sixth quarterly decline of activity in two years--to a level 4.5 per cent lower than a year earlier. All the main components of domestic demand fell in the third quarter, with fixed investment suffering the largest drop, of 4.0 per cent. Investment has declined by about 25 per cent

in the past two years (see figure 10). Net exports have contributed positively to growth in recent quarters, but mainly on account of a steep decline in imports resulting from the weakness of domestic demand. Thus in the year to the third quarter, imports (in real terms) fell by 20 per cent while exports rose by only 1 per cent.

Unemployment rose steeply in 2015, to 7.9 per cent in October and 7.5 per cent in November, from a low of 4.3 per cent at the end of 2014; the October unemployment rate was the highest since 2009.

The government's primary deficit widened to 0.9 per cent of GDP in the twelve months to November 2015 from 0.6 per cent in the year to August. Including interest payments, the overall deficit in the year to November was 9.3 per cent of GDP, while the ratio of gross government debt to GDP at the end of November was 65.1 per cent, up from 57.2 per cent at the end of 2014. The government that entered into office in January 2015 initially committed itself to primary surpluses of 1.2 and 2.0 per cent, respectively, for 2015 and 2016, but in spite of substantial cuts in discretionary spending these targets have been lowered a number of times, and in early December the government obtained congressional approval for a primary deficit in 2015 of up to 2 per cent of GDP. Political gridlock has prevented the government from passing the reforms needed to reduce the deficit, including pension reforms that require constitutional amendment. A new finance minister was appointed in December. Partly reflecting these fiscal difficulties, the country has suffered downgrades by credit rating agencies, and 10-year government bond yields, which were below 13 per cent at the end of 2014, have recently risen above 16 per cent. The government's interest payments currently amount to 6.7 per cent of GDP. Reversing the deterioration in the fiscal position will require substantial reforms that will take time and drag on domestic demand.

[FIGURE 10 OMITTED]

Consumer price inflation, on a 12-month basis, rose to 10.7 per cent in December 2015, far above the Central Bank's target of 4.5 per cent and the highest inflation recorded since 2002. Inflation may ease somewhat in the near term as the removal in late 2014 of a cap on administered prices drops out of the 12-month comparison. But underlying inflationary pressures are significant, as shown by the 7.7 per cent rise in unregulated prices in the year to November, and also by the continued depreciation of the real--by about 35 per cent against the US dollar in the year to January--which will put significant upward pressure on import prices. The Central Bank has kept the Selic rate unchanged at 14.25 per cent since July last year, but the recent increase in inflation and weakness of the real seem to point to a need for further action. One concern in this context is 'fiscal dominance'--that the implications for debt service costs and the fiscal deficit of a rise in interest rates will deter a rise in rates that may be needed for the containment of inflation.

In light of recent developments, we have lowered our growth forecast. We now estimate that output contracted by 3.8 per cent in 2015 and project a further contraction of 2.5 per cent this year before a moderate recovery starts in 2017 with growth of 1.5 per cent.

Russia

The economy remains in recession. There were some tentative signs of economic stabilisation late last year but these have since been overshadowed by the renewed decline in global oil prices and its repercussions. GDP contracted by 0.6 per cent in the third quarter of 2015. This was the fifth consecutive quarterly decline in GDP, but the smallest of them. Russia relies on energy for about half its budget revenues and 40 per cent of its exports and thus has been hit hard by the collapse in oil prices since mid-2014. The renewed weakness in oil prices in recent months prompted the government to announce in January expenditure cuts of 10 per cent relative to the budget for 2016 adopted by the parliament in December, which had assumed an average oil price of $50 a barrel. The revised expenditure plans assume a price of $37 a barrel. Given the additional fall in oil prices in January, they may need to be reduced further if the 3 per cent deficit target is to be met.

The recession has been reflected in a rise in unemployment in recent months, to 5.8 per cent in November from 5.2 per cent in September, and by falling real wages, which were 9 per cent lower in November than a year earlier the thirteenth consecutive 12-month decline. Falling real household incomes will continue to restrain consumer spending in the coming months. Investment activity is also likely to remain weak due to continued economic uncertainty and unaccommodating financial conditions, partly reflecting continuing international sanctions.

Export revenues (in US dollar terms) are expected to fall given current conditions in commodity markets, but weak domestic demand will likely lead to a similar decline in imports, resulting in a negligible contribution from net exports to output growth in 2016, in spite of the steep depreciation of the rouble since mid-2014. By late January 2016, the rouble's value in terms of the US dollar was 56 per cent lower than in mid-2014, and 17 per cent lower than at the time of our November 2015 forecast. (The trade-weighted exchange rate index estimated by the Bank for International Settlements was 42 per cent lower in December 2015 than in June 2014.) There seems to have been little official intervention in the foreign exchange market in the past year: official reserves at the end of December were broadly unchanged from February 2015.

Consumer price inflation, on a 12-month basis, reached its lowest rate in a year in December 2015, at 12.9 per cent, down from 15.0 per cent in November. The recent further depreciation of the rouble seems likely to cause inflation to rise again in the short term, constraining the Central Bank's ability to ease monetary policy further: its benchmark interest rate has been 11.0 per cent since last August. However, given the weak economy we expect inflation to average 9.1 per cent this year, before falling further towards the central bank's 4 per cent target for 2017.

On 1 January, Russia imposed sanctions against Turkey, including restricting imports of goods, economic activities of Turkish companies in Russia and the suspension of a visa-free regime with Turkey, Since Turkish products comprise 15-20 per cent of Russian fruit and vegetable imports, sanctions will add upward pressure to already high rates of food price inflation. Additionally they will add to the uncertainty of doing business in Russia.

We estimate that output fell by 3.4 per cent in 2015 and are expecting a further fall of 1.1 per cent in 2016 before growth of 2.5 per cent in 2017 as commodity markets pick up.

South Africa

On 9 December, President Zuma surprised financial markets by replacing Finance Minister Nene with a little known parliamentarian, David van Rooyen. This led to a sharp depreciation of the rand, of 9.3 per cent against the US dollar, in the next three days, while 10-year bond yields jumped from 8.3 to 9.9 per cent. The subsequent replacement of van Rooyen with former finance minister Gordhan quickly helped to stabilise bond yields and the exchange rate, but an elevated risk premium appears to have remained, with average bond yields still at about 9.6 per cent in late January.

Over the past two years the economy has remained weak, with both internal factors, including the five-month miners' strike in 2014, and external factors, such as the fall in global commodity prices, subduing growth. The economy grew by 1.5 per cent in 2014 and, by our estimate, 1.3 per cent in 2015, compared with average annual growth of 3.1 per cent between 1998 and 2013. The recent increase in risk premia is likely to depress domestic demand while putting upward pressure on inflation through the currency depreciation. Consumer price inflation--4.8 per cent in the year to November--has recently been slightly above the mid-point of the Reserve Bank's target range of 3-6 per cent.

[FIGURE 11 OMITTED]

This situation is likely to present the Reserve Bank with a difficult choice in the period ahead--whether or not to support demand and output growth at the expense of its inflation target. In the short term we expect that the fall in global energy prices will offset some of both the inflationary pressure and the domestic demand impact of the recent shock. However, as noted by Kirby and Meaning (2014), movements in exchange rates take, on average, around a year and a half to fully pass through to the economy.

Taking these considerations into account, we forecast GDP growth of 0.8 and 1.5 per cent in 2016 and 2017, with inflation increasing to 6.2 per cent in 2016 and 7.1 per cent in 2017 before returning to the target range by 2019.

NOTES

(1) This is similar to the Fed's policy of reinvesting principal payments from its holdings of securities 'until normalization of the federal funds rate is well underway', reaffirmed in December. (Federal Reserve Monetary Policy Press Release, December 16, 2015, http://www.federalreserve.gov/newsevents/press/ monetary/20151216a.htm)

(2) Mario Draghi, 'Global and domestic inflation', speech delivered in New York, December 4, 2015, https://www.ecb.europa.eu/ press/key/date/2015/html/sp 151204.en.html.

(3) Potential problems for the timing of the fiscal burden as a result of increasing the average maturity are discussed in Kirby and Meaning (2015).

(4) Questions have been raised about the reliability of China's GDP data: these were discussed in Box B in the November 2015 Review.

REFERENCE

Kirby, S. and Meaning, J. (2014), 'Exchange rate pass-through: a view from a global structural model', National Institute Economic Review, 230, F59-F64.

--(2015), 'The impacts of the bank of England's Asset purchases on the public finances', National Institute Economic Review, 232, F73-8.

Poloz, S. (2016), 'Life after liftoff: divergence and US monetary policy normalization', speech given in Ottawa. Available at http:// www.bankofcanada.ca/2016/01 /life-after-liftoff-divergence-us-monetary/.

Appendix A: Summary of key forecast assumptions by Simon Kirby and Iana Liadze

The forecasts for the world and the UK economy reported in this Review are produced using the National Institute's model, NiGEM. The NiGEM model 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. Most countries in the OECD are modelled separately, (1) and there are also separate models of China, India, Russia, Brazil, Hong Kong, Taiwan, Indonesia, Singapore, Vietnam, South Africa, Latvia, Lithuania, Romania and Bulgaria. The rest of the world is modelled through regional blocks so that the model is global in scope. All models contain the determinants of domestic demand, export and import volumes, prices, current accounts and net assets. Output is tied down in the long run by factor inputs and technical progress interacting through production functions, but is driven by demand in the short to medium term. Economies are linked through trade, competitiveness and financial markets and are fully simultaneous. Further details on the NiGEM model are available on http://nimodel.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 on current 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 of 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. Policy rates in major advanced economies are expected to remain at extremely low levels, at least throughout 2016.

The Reserve Bank of Australia left its benchmark interest rate unchanged after cutting it by 50 basis points to 2 per cent in two rounds in the first half of 2015. During 2015, the central bank of New Zealand lowered its policy rate by 25 basis points in June and then by a further 75 basis points in three rounds: July, September and December, to 2.5 per cent. The People's Bank of China and the Indian central bank both reduced their interest rates throughout 2015 by a total of 125 basis points each. While the People's Bank of China lowered them in five steps, the Indian central bank cut its interest rates in four rounds to 4.35 and 6.75 per cent respectively. The Bank of Korea reduced its policy rate by 100 basis points in four steps between August 2014 and June 2015 and has left it unchanged since. After cutting its benchmark interest rate by 25 basis points in February 2015, Indonesia's central bank has lowered it again, by the same magnitude, in January this year. The Central Bank of Turkey has left its policy rate unchanged at 7.5 per cent since February last year, following a spell of reductions around the middle of 2014, where the interest rates were reduced by 250 basis points. Since the end of 2014, the Romanian Central Bank has reduced interest rates by 100 basis points in four steps, while the National Bank of Hungary has brought them down by 75 basis points over five rounds. The central banks of Norway and Poland have lowered their policy rates by 50 basis points each in 2015 to 0.75 and 1.5 per cent respectively. While the central bank of Norway cut its benchmark rate in two steps, the central bank of Poland lowered its rate in March and has left it unchanged since. Over the course of last year, the Swedish Riksbank cut its policy rate by 35 basis points to -0.35 per cent in three rounds. At the turn of 2015 the Swiss National Bank cut its benchmark rate by 25 basis points to -0.75 per cent, while the Central Bank of Denmark reduced them by 15 basis points to just 0.05 per cent. Both central banks have left their main policy rate unchanged since. The Central Bank of Russia kept its benchmark interest rate unchanged after reducing it by 600 basis points to 11 per cent over five stages in the first seven months of 2015. The Bank of Canada has kept its benchmark interest rate unchanged, at 0.5 per cent, after lowering it by 50 basis points over two rounds last year. These were the first changes by Bank of Canada since 2009.

In contrast, the Central Bank of Brazil and the South African Reserve Bank both increased interest rates in response to inflationary and financial market pressures in 2015. While the South African Reserve Bank increased its benchmark rate by 25 basis points in July last year, the Central Bank of Brazil has increased its interest rate by 200 basis points to 14.25 per cent, in a series of steps over the course of 2015. Following a rise in the federal funds rate in the US, the central bank of Mexico increased its interest rate by 25 basis points in January 2016, the first change since 2008, to stem depreciation pressures on the Peso. (2)

In December 2016, the Federal Reserve raised the target range for the federal funds rate by 25 basis points to 0.25-0.50 per cent. This action, agreed unanimously by the Federal Open Market Committee, was taken seven years after the target range had been lowered close to zero, and six and a half years after the end of the recession of December 2007-June 2009. The statement accompanying the Fed's decision emphasised that monetary conditions remained accommodative after the increase; that the timing and size of future adjustments would depend on its assessment of actual and expected economic conditions relative to its objectives, and that it expected that only gradual increases in the rate would be warranted.

The expectation of the first rate change of the Monetary Policy Committee (MPC) of the Bank of England is based on our view of how the economy will evolve over the next few years. At the time of writing, financial markets expect the MPC to first raise rates towards the end of 2018. We think a much earlier move is likely. The market expectations published are based on the mean of the distribution of market participant expectations. As such, a skew to the downside, possibly reflecting the perceived weighting risks to the outlook, would give an arithmetic mean significantly lower than other measures of central tendency. Indeed, it is 'our modal view' that we discuss here. Our forecast is for a reasonable pace in the growth of demand, while the rate of CPI inflation is projected to be marginally above target in 2018. These factors suggest to us that a modest increase in the third quarter of 2016 would be consistent with the modal outlook for the UK economy.

[FIGURE A1 OMITTED]

[FIGURE A2 OMITTED]

In contrast, the central banks of the Euro Area and Japan have continued with their programmes of large-scale asset purchases. The ECB and the Bank of Japan (BoJ) have continued to expand their balance sheets. In March 2015, the Euro Area's central banks began the ECB's expanded asset purchase programme, announced in January 2015. (3) The programme involved asset purchases of 60 billion [euro] a month, for at least nineteen months. However, in early December 2015, the ECB announced that, after an assessment of the factors slowing the return of inflation to its target, it was taking further action to increase the degree of monetary accommodation. The ECB lowered the interest rate on its deposit facility (negative since June 2014) by 10 basis points to -0.30 per cent and extended its asset purchase programme (APP) to run "until end-March 2017, or beyond, if necessary, and in any case until the Governing Council sees a sustained adjustment in the path of inflation consistent with its aim of achieving inflation rates below, but close to, 2 per cent over the medium term". If purchases were to end in March 2017, then the programme would have involved asset purchases in total of 1.5 trillion [euro] (equivalent to about 15 per cent of Euro Area nominal GDP), compared with 1.14 trillion [euro] (equivalent to around 11 per cent of Euro Area nominal GDP) if the purchases had ended in September 2016. As we note in the main body of this chapter, the constraints the APP operates under may inhibit the ECB's ability to expand its balance sheet as much as is planned.

In October 2014, the BoJ surprised financial markets with the announcement that it was expanding its asset purchase programme by about 30 per cent. The programme envisaged an increment of about [yen] 80 trillion added to the monetary base annually, up from an existing [yen] 60-70 trillion. In December 2015, the Bank of Japan announced a further modification of its programme of quantitative and qualitative easing (QQE), which involves lengthening of the average maturity of bonds to be purchased from the beginning of 2016 to 7-12 from 7-10 years; increasing purchases of Japan real estate investment trusts and also of exchange-traded funds and loosening collateral constraints by allowing foreign currency bonds and housing loans to be eligible.

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. Convergence in Euro Area bond yields towards those in the US, observed since the start of 2013, reversed at the beginning of last year. Since February 2014, the margin between Euro Area and US bond yields started to widen, reaching a maximum of about 150 basis points (in absolute terms) at the beginning of March 2015. Since then the margin has narrowed, remaining at around 100 basis points. After reaching extremely low levels at the beginning of 2015, government bond yields in the US, UK and the Euro Area picked up in summer, but have since reversed some of these gains in yields. Current expectations for bond yields for the end of 2016 are marginally lower, by about 10-15 basis points, compared with expectations formed just three months ago, for the US, Euro Area, the UK, and Japan.

[FIGURE A3 OMITTED]

[FIGURE A4 OMITTED]

Sovereign risks in the Euro Area have been a major macroeconomic issue for the global economy and financial markets over the past five years. Figure A2 depicts the spread between 10-year government bond yields of Spain, Italy, Portugal, Ireland and Greece over Germany's. The final agreement on Private Sector Involvement in the Greek government debt restructuring in February 2012 and the potential for Outright Money Transactions (OMT) announced by the ECB in August 2012 brought some relief to bond yields in these vulnerable economies. Sovereign spreads have remained stable, in most cases, from late July 2014, the most notable exception being a marked widening of Greek spreads. This reflected initial uncertainty over Greece's fiscal stance and debt repayment since the formation of a government dominated by a political party elected on an 'anti-austerity' manifesto, followed by the heightened risk of Greece leaving the Euro Area and by the accompanying three-week closure of the domestic banking system, the associated withdrawal limits imposed upon on Greeks' bank accounts and the imposition of controls on external payments in summer 2015. The dangers relating to the financial difficulties of Greece and the policy programme being negotiated with its European partners has since receded. In mid-August, it was confirmed that negotiators had reached agreement in principle on a 3-year fiscal and structural reform programme to be supported by 86 billion [euro] of financing from the European Stability Mechanism (ESM). Since then, disbursements of 13 [euro] and 2 billion [euro] were made by the ESM last year on 20 August and 23 November, respectively. In our forecast, we have assumed spreads over German bond yields continue to narrow in all Euro Area countries, and that this process resumes in Greece by the end of this year. The implicit assumption underlying the forecast is that the current composition of Euro Area membership persists.

[FIGURE A5 OMITTED]

Figure A3 reports the spread of corporate bond yields over government bond yields in the US, UK and Euro Area. This acts as a proxy for the margin between private sector and 'risk-free' borrowing costs. Private sector borrowing costs have risen more or less in line with the observed rise in government bond yields since the second half of 2013, illustrated by the stability of these spreads in the US, Euro Area and the UK. Our forecast assumption for corporate spreads is that they gradually converge towards their long-term equilibrium level from 2015.

[FIGURE A6 OMITTED]

Nominal exchange rates against the US dollar are generally assumed to remain constant at the rate prevailing on 13 January 2016 until the end of October 2016. 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 forecast of the effective exchange rate indices for Brazil, Canada, the Euro Area, Japan, UK, Russia and the US. Reflecting relative cyclical positions and associated expectations of monetary policy developments, the US dollar has appreciated by about 10 per cent against most other major currencies in effective terms since the end of the fourth quarter of 2014. However, the rapid appreciation of the US dollar at the beginning of 2015 has eased and the trade-weighted value of the US dollar has risen by about 3.5 per cent between the final quarter of 2015 and January 2016. The appreciation of the US$ has been more pronounced against oil-producing currencies. The rouble's exchange value reached a new low of about 75 roubles to the US$ in January 2016, and has seen a decline of about 15 per cent in its trade-weighted value since the end of 2015. The Brazilian real has depreciated significantly since the end of 2014 and, in effective terms, has declined by about 33 per cent between mid-2014 and January 2016. The trade-weighted value of the Canadian dollar has fallen by more than 5 per cent since the end of 2015. The most notable exceptions to the US dollar's appreciation have been the relative movements of the Japanese Yen, appreciating in effective terms by about 8 per cent since the third quarter of 2015.

Our oil price assumptions for the short term are based on those of the US Energy Information Administration (EIA), published on 12 January 2016, and updated with daily spot price data available up to 15 January 2016. The EIA use information from forward markets as well as an evaluation of supply conditions, and these are illustrated in figure A5. Oil prices declined steeply between mid-2014 and the beginning of 2015. Following a partial recovery between March and mid-June, oil prices resumed a downward trajectory, and by mid-January 2016 reached levels last seen in 2004 (about $30 a barrel). Projections from the EIA suggest little further upside potential in prices in the near term. Overall, current expectations for the position of oil prices at the end of this year have fallen by about 34 per cent, compared to the expectations formed just three months ago, which leaves oil prices around $70 lower than their nominal level in mid-2014. Oil prices are expected to reach $39 and $52 a barrel by the end of 2016 and 2017 respectively.

Our equity price assumptions for the US reflect the expected return on capital. Other equity markets are assumed to move in line with the US market, but are adjusted for different exchange rate movements and shifts in country-specific equity risk premia. Figure A6 illustrates the key equity price assumptions underlying our current forecast. Overall, between 2013 and the second half of 2014, global share prices had performed well, irrespective of a short-lived drop--a reaction to the QE tapering signals emanating from the Federal Reserve in summer 2013. However, concerns about weak growth and low inflation seem to have induced a fall in share prices in many countries in the second half of 2014, with the scale of the drop varying significantly between economies. Share prices in many countries rose again in the first half of this year, especially in the Euro Area economies, partly supported by the wide-scale asset purchase programme introduced by the ECB in March 2015. However, since mid-2015, the performance of share prices globally has been disappointing, most notably in China, where the authorities are attempting to impede the share price correction after encouraging the boom. Equity prices in some countries fell by as much as 24 per cent compared to the second quarter of 2015. Alongside China, the largest drops in equity prices were observed in Greece, Spain and Poland, followed by Canada. While the triggers for the global equity decline seem to have been turmoil in the Chinese equity market, in some cases there are country-specific issues which exacerbate the impact on equity prices.

Fiscal policy assumptions for 2016 follow announced policies as of 8 January 2015. Average personal sector tax rates and effective corporate tax rate assumptions underlying the projections are reported in table A3, while table A4 lists assumptions for government spending. Government spending is expected to decline as a share of GDP between 2015 and 2016 in the majority of Euro Area countries reported in the table. A policy loosening relative to our current assumptions poses an upside risk to the short-term outlook in Europe. For a discussion of fiscal multipliers and the impact of fiscal policy on the macroeconomy based on NiGEM simulations, see Barrell et al. (2013).

NOTES

(1) With the exception of Chile, Iceland and Israel.

(2) Interest rate assumptions are based on information available for the period to 15 January 2016 and do not include the 50 basis point increase by the South African Reserve Bank on 28 January 2016 or the 20 basis point reduction by the Bank of Japan on 29 January 2016.

(3) The public sector purchase programme was added to the asset-backed securities purchase programme (ABSPP) and the covered bond purchase programme (CBPP3), both of which were launched in 2014.

REFERENCE

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

Table A1. Interest rates

Per cent per annum

                Central bank intervention rates

            US    Canada   Japan   Euro Area    UK

2012       0.25    1.00    0.10      0.88      0.50
2013       0.25    1.00    0.10      0.56      0.50
2014       0.25    1.00    0.10      0.16      0.50
2015       0.26    0.65    0.10      0.05      0.50
2016       0.69    0.38    0.10      0.05      0.65
2017       1.71    0.78    0.10      0.12      1.19
2018-22    3.27    2.91    0.57      1.37      2.49

2014 Q1    0.25    1.00    0.10      0.25      0.50
2014 Q2    0.25    1.00    0.10      0.23      0.50
2014 Q3    0.25    1.00    0.10      0.13      0.50
2014 Q4    0.25    1.00    0.10      0.05      0.50

2015 Q1    0.25    0.81    0.10      0.05      0.50
2015 Q2    0.25    0.75    0.10      0.05      0.50
2015 Q3    0.25    0.54    0.10      0.05      0.50
2015 Q4    0.3     0.50    0.10      0.05      0.50

2016 Q1    0.5     0.50    0.10      0.05      0.50
2016 Q2    0.50    0.50    0.10      0.05      0.50
2016 Q3    0.76    0.25    0.10      0.05      0.67
2016 Q4    1.02    0.25    0.10      0.05      0.92

2017 Q1    1.29    0.46    0.10      0.05      1.00
2017 Q2    1.57    0.67    0.10      0.05      1.13
2017 Q3    1.85    0.88    0.10      0.12      1.25
2017 Q4    2.13    1.09    0.10      0.25      1.37

                10-year government bond yields

            US    Canada   Japan   Euro Area   UK

2012       1.8     1.9      0.8       3.2      1.8
2013       2.3     2.3      0.7       2.7      2.4
2014       2.5     2.2      0.6       1.9      2.5
2015       2.1     1.5      0.4       1.0      1.8
2016       2.4     1.7      0.4       1.2      2.1
2017       3.0     2.5      0.7       1.8      2.7
2018-22    3.8     3.7      1.5       3.0      3.6

2014 Q1    2.8     2.5      0.6       2.5      2.8
2014 Q2    2.6     2.4      0.6       2.1      2.7
2014 Q3    2.5     2.2      0.5       1.7      2.6
2014 Q4    2.3     2.0      0.4       1.3      2.1

2015 Q1    2.0     1.4      0.3       0.8      1.6
2015 Q2    2.2     1.6      0.4       1.0      1.9
2015 Q3    2.2     1.5      0.4       1.2      1.9
2015 Q4    2.2     1.5      0.3       1.0      1.9

2016 Q1    2.1     1.3      0.3       1.0      1.8
2016 Q2    2.3     1.6      0.3       1.2      2.0
2016 Q3    2.5     1.8      0.4       1.3      2.2
2016 Q4    2.6     2.0      0.5       1.5      2.3

2017 Q1    2.8     2.2      0.6       1.6      2.5
2017 Q2    2.9     2.4      0.6       1.7      2.6
2017 Q3    3.0     2.6      0.7       1.9      2.7
2017 Q4    3.2     2.7      0.8       2.0      2.8

Table A2. Nominal exchange rates

                               Percentage change in effective rate

           US   Canada  Japan  Euro  Germany  France  Italy   UK
                               Area

2012      3.4     0.9     2.2  -1.9    -2.0    -2.0    -1.6    4.2
2013      2.9    -3.1   -16.7   2.9     2.8     3.0     3.7   -1.2
2014      4.1    -5.4    -5.1   1.9     1.8     1.8     3.2    7.8
2015     13.7   -10.2    -5.6  -5.6    -3.2    -3.2    -2.1    6.6
2016      7.0    -7.7     7.9   2.8     2.0     1.6     2.6   -2.0
2017      0.0     0.6     1.1   1.0     0.5     0.6     0.7   -0.2
2014 Q1   1.6    -3.8    -1.5   0.8     0.9     0.7     1.1    2.6
2014 Q2  -0.9     2.4     0.1  -0.1    -0.2    -0.1     0.2    1.4
2014 Q3   1.5    -1.0    -1.1  -0.8    -0.8    -0.9    -0.8    1.6
2014 Q4   4.8    -3.1    -6.6  -0.4    -0.5    -0.7    -0.3   -0.5
2015 Q1   6.3    -6.9    -0.4  -4.9    -2.5    -2.4    -1.9    2.9
2015 Q2   0.8     2.4    -1.5  -1.8    -1.2    -0.8    -1.1    2.3
2015 Q3   3.6    -6.0     1.9   2.5     1.8     1.5     2.1    2.3
2015 Q4   1.8     0.0     2.2   0.4     0.3     0.2     0.6   -0.5
2016 Q1   3.6    -5.2     5.4   1.6     1.1     0.9     1.3   -3.1
2016 Q2   0.1    -0.1     0.1   0.1     0.0     0.0     0.0   -0.1
2016 Q3   0.0     0.0    -0.1   0.0     0.0     0.0     0.0    0.0
2016 Q4   0.0     0.1     0.2   0.3     0.1     0.1     0.2    0.0
2017 Q1   0.0     0.2     0.3   0.3     0.1     0.2     0.2   -0.1
2017 Q2   0.0     0.2     0.3   0.3     0.2     0.2     0.2    0.0
2017 Q3   0.0     0.2     0.4   0.4     0.2     0.2     0.3    0.0
2017 Q4  -0.1     0.2     0.4   0.4     0.2     0.2     0.3    0.0

                    Bilateral rate per US $

          Canadian   Yen     Euro   Sterling
             $

2012       0.997     79.8   0.778    0.631
2013       1.039     97.6   0.753    0.640
2014       1.112    105.8   0.754    0.607
2015       1.290    121.0   0.902    0.654
2016       1.425    117.6   0.921    0.692
2017       1.417    116.6   0.912    0.691
2014 Q1    1.111    102.7   0.730    0.604
2014 Q2    1.083    102.1   0.729    0.594
2014 Q3    1.100    104.0   0.755    0.599
2014 Q4    1.153    114.6   0.801    0.632
2015 Q1    1.262    119.1   0.888    0.660
2015 Q2    1.237    121.4   0.905    0.652
2015 Q3    1.327    122.2   0.899    0.646
2015 Q4    1.336    121.4   0.913    0.659
2016 Q1    1.424    117.7   0.921    0.691
2016 Q2    1.426    117.6   0.921    0.692
2016 Q3    1.426    117.6   0.921    0.692
2016 Q4    1.424    117.5   0.919    0.692
2017 Q1    1.422    117.2   0.917    0.692
2017 Q2    1.419    116.8   0.914    0.692
2017 Q3    1.416    116.4   0.911    0.691
2017 Q4    1.412    115.9   0.907    0.690

Table A3. Government revenue assumptions

               Average income       Effective
                  tax rate        corporate tax    Gov't revenue
               (per cent)(a)     rate (per cent)    (% of GDP)(b)

              2015  2016  2017  2015  2016  2017  2015  2016  2017
Australia     14.7  14.8  14.8  25.7  25.7  25.7  32.8  32.5  32.4
Austria       32.0  32.6  33.1  21.8  21.8  21.8  42.3  42.4  42.8
Belgium       35.2  35.1  35.0  21.7  21.7  21.7  43.9  42.9  42.4
Canada        20.3  20.3  20.5  20.8  20.8  20.8  35.9  35.9  35.3
Denmark       42.4  38.5  36.7  17.9  17.9  17.9  48.9  48.4  47.1
Finland       33.3  33.3  33.2  23.1  23.1  23.1  46.5  46.5  46.2
France        30.3  29.6  29.7  32.7  32.7  32.7  45.8  45.4  45.5
Germany       29.0  29.2  29.2  19.4  19.4  19.4  41.2  41.2  41.1
Greece        24.2  24.1  24.1  13.5  13.5  13.5  39.8  38.4  37.7
Ireland       26.5  26.3  26.1   9.8   9.8   9.8  27.9  28.2  27.9
Italy         28.7  28.6  28.3  26.5  26.5  26.5  43.7  43.0  42.1
Japan         23.7  23.7  23.7  29.6  29.6  29.6  34.2  34.2  34.5
Netherlands   33.3  32.8  32.1   8.4   8.4   8.4  40.5  40.8  40.4
Portugal      20.6  20.6  20.4  20.1  20.1  20.1  37.4  37.0  36.7
Spain         24.8  24.6  24.3  15.8  15.8  15.8  39.6  39.2  38.8
Sweden        26.5  26.4  26.3  23.1  23.1  23.1  43.6  43.9  43.7
UK            22.7  23.0  23.2  13.3  13.1  12.3  35.3  36.0  36.3
US            19.6  19.6  19.6  29.0  29.0  29.0  30.9  31.2  31.3

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

Table A4. Government spending assumptions(a)

                 Gov't spending        Gov't interest    Deficit
               excluding interest         payments      projected
              payments (% of GDP)         (% of to         fall
                                                         below 3%
               2015   2016   2017   2015   2016   2017   of GDP(b)

Australia      32.8   32.4   32.0   1.8    1.7    1.6       --
Austria        42.9   43.1   43.2   2.2    1.9    1.7       --
Belgium        43.1   42.4   42.0   2.7    2.3    2.0      2015
Canada         34.3   34.7   34.4   3.2    3.0    2.9      2013
Denmark        47.9   47.8   47.4   1.4    1.2    1.1      2013
Finland        48.6   48.2   47.5   1.1    1.0    0.9      2016
France         47.4   47.1   47.1   1.8    1.6    1.4      2018
Germany        38.4   38.9   38.6   2.3    2.0    1.8       --
Greece         38.5   36.7   36.8   3.0    2.7    2.4      2015
Ireland        25.5   24.9   24.8   3.6    3.4    3.2      2015
Italy          41.8   41.2   40.3   4.5    4.1    3.5      2015
Japan          38.6   38.2   38.0   2.0    1.8    1.6       --
Netherlands    40.4   40.4   40.3   1.3    1.0    0.9      2013
Portugal       36.2   36.1   35.4   4.2    3.6    3.3      2016
Spain          40.4   39.4   38.6   3.4    3.0    2.5      2017
Sweden         44.9   44.8   44.6   0.7    0.6    0.6       --
UK             36.2   35.5   34.9   1.7    1.9    1.9      2017
US             31.7   31.4   31.1   3.5    3.6    3.6      2019

Notes: (a) Expenditure shares reflect NiGEM aggregates,
which may differ from official government figures, (b) The
deficit in Australia, Austria, Germany and Sweden is not
expected to exceed 3 per cent of GDP within our forecast
horizon. In Japan the deficit is not expected to fall below
3 per cent of GDP within our forecast horizon.

Appendix B: Forecast detail

[FIGURE B1 OMITTED]

[FIGURE B2 OMITTED]

[FIGURE B3 OMITTED]

[FIGURE B4 OMITTED]

Table B1. Real GDP growth and inflation

                           Real GDP growth (per cent)

                  2013   2014   2015   2016   2017   2018-22

Australia         2.0    2.6    2.4    2.5    2.8      3.0
Austria(a)        0.3    0.5    0.9    1.2    1.4      1.1
Belgium(a)        0.0    1.3    1.4    1.5    2.0      1.6
Bulgaria(a)       0.9    1.7    2.7    2.5    2.0      1.5
Brazil            3.0    0.1   -3.8   -2.5    1.5      2.8
China             7.7    7.3    6.9    6.5    6.3      6.0
Canada            2.2    2.5    1.3    1.8    2.4      1.9
Czech Republic   -0.5    2.0    4.5    1.9    2.3      1.6
Denmark(a)       -0.2    1.3    1.2    1.2    2.2      1.8
Estonia(a)        1.7    2.9    1.0    1.2    3.1      1.6
Finland(a)       -1.1   -0.4    0.1    0.2    1.5      1.2
France(a)         0.7    0.2    1.1    1.3    1.8      1.3
Germany(a)        0.4    1.6    1.5    1.6    2.0      1.3
Greece(a)        -3.1    0.7   -0.3   -1.1    0.2      1.8
Hong Kong         3.1    2.5    2.4    2.5    2.4      2.4
Hungary(a)        2.0    3.6    2.5    2.5    3.0      1.1
India             6.4    7.1    7.7    7.3    7.8      6.1
Indonesia         5.6    5.0    4.7    4.3    4.9      5.4
Ireland(a)        1.4    5.2    6.9    4.2    4.2      3.4
Italy(a)         -1.8   -0.4    0.7    0.9    1.3      1.7
Japan             1.4   -0.1    0.7    1.0    1.2      0.7
Lithuania(a)      3.7    3.0    1.9    2.3    4.0      2.3
Latvia(a)         3.5    2.5    3.0    2.9    3.9      1.8
Mexico            1.6    2.3    2.5    2.8    3.3      3.6
Netherlands(a)   -0.4    1.0    1.9    1.5    1.9      0.8
New Zealand       1.7    3.0    3.2    2.8    2.7      2.4
Norway            1.0    2.2    2.2    1.1    1.8      2.1
Poland(a)         1.2    3.3    3.6    3.2    4.1      2.6
Portugal(a)      -1.1    0.9    1.4    1.5    1.9      2.2
Romania(a)        3.1    2.9    3.6    3.2    3.6      1.8
Russia            1.3    0.5   -3.4   -1.1    2.5      4.0
Singapore         4.4    2.9    2.1    3.2    4.2      2.6
South Africa      2.2    1.5    1.3    0.8    1.5      3.8
S. Korea          2.9    3.3    2.6    3.0    4.2      3.9
Slovakia(a)       1.4    2.5    3.5    2.7    2.2      2.0
Slovenia(a)      -1.0    2.9    2.5    2.2    2.4      1.1
Spain(a)         -1.7    1.4    3.2    2.6    2.8      2.8
Sweden(a)         1.2    2.4    3.4    2.7    2.9      2.0
Switzerland       1.8    1.9    0.9    1.6    1.8      1.9
Taiwan            2.2    3.9    0.7    2.2    3.4      3.7
Turkey            4.2    2.9    4.4    4.1    3.4      4.2
UK(a)             2.2    2.9    2.2    2.3    2.7      2.4
US                1.5    2.4    2.4    2.5    2.7      2.6
Vietnam           5.3    5.9    6.6    6.3    5.5      4.6
Euro Area(a)     -0.3    0.9    1.5    1.5    1.9      1.6
EU-27(a)          0.3    1.4    1.8    1.7    2.2      1.8
OECD              1.2    1.8    2.1    2.1    2.5      2.3
World             3.3    3.4    3.0    3.2    3.8      3.8

                        Annual inflation(a) (per cent)

                  2013   2014   2015   2016   2017   2018-22

Australia         2.4    2.1    1.5    2.2    2.6      2.6
Austria(a)        2.1    1.5    0.8    1.2    1.9      1.9
Belgium(a)        1.2    0.5    0.6    0.9    1.5      1.3
Bulgaria(a)       0.4   -1.6   -0.9    0.2    2.8      2.7
Brazil            6.2    6.3    8.9    7.0    4.2      4.7
China             2.6    2.0    1.4    1.1    1.9      2.6
Canada            1.4    1.9    1.2    1.8    2.4      1.6
Czech Republic    1.4    0.4    0.3    0.7    1.7      2.4
Denmark(a)        0.5    0.3    0.2    1.0    1.8      1.5
Estonia(a)        3.2    0.5    0.1    1.1    3.3      0.6
Finland(a)        2.2    1.2   -0.1    0.4    1.5      2.4
France(a)         1.0    0.6    0.1    0.5    1.1      1.4
Germany(a)        1.6    0.8    0.1    0.5    1.6      1.8
Greece(a)        -0.9   -1.4   -1.1   -0.2   -1.4      2.6
Hong Kong         2.7    2.7    1.4    1.4    1.4      2.3
Hungary(a)        1.7    0.0   -0.1    0.2    1.6      2.1
India            10.7    6.6    4.9    4.9    5.9      5.5
Indonesia         6.4    6.4    6.4    3.4    5.2      5.2
Ireland(a)        0.5    0.3   -0.1   -0.3    0.0      1.0
Italy(a)          1.3    0.2    0.1    0.0    1.9      2.0
Japan            -0.2    2.0    0.3    0.0    0.7      0.6
Lithuania(a)      1.2    0.2   -0.7    1.4    2.4      0.5
Latvia(a)         0.0    0.7    0.2    1.7    1.5      2.2
Mexico            3.8    4.0    2.8    3.4    2.8      3.9
Netherlands(a)    2.6    0.3    0.2    0.6    1.4      1.3
New Zealand       0.6    0.8    0.7    1.3    1.8      2.3
Norway            2.0    2.1    1.9    2.5    2.0      2.3
Poland(a)         0.8    0.1   -0.7    0.0    0.5      1.4
Portugal(a)       0.4   -0.2    0.6    0.4    1.7      1.7
Romania(a)        3.2    1.4   -0.4   -1.0    1.3      0.9
Russia            6.8    7.8   15.5    9.1    7.9      4.9
Singapore         2.3    1.0   -0.5    0.2    1.9      2.6
South Africa      5.5    5.9    4.0    6.2    7.1      4.6
S. Korea          1.3    1.3    0.7    1.3    2.9      2.3
Slovakia(a)       1.5   -0.1   -0.3    1.3    2.6      0.9
Slovenia(a)       1.9    0.4   -0.7    0.2    3.5      2.7
Spain(a)          1.5   -0.2   -0.5   -0.2    1.4      1.8
Sweden(a)         0.4    0.2    0.7    0.8    1.3      1.8
Switzerland      -0.6   -0.3   -1.0   -0.7    0.0      1.5
Taiwan            0.3    0.7   -0.8    0.1    0.5      1.5
Turkey            7.5    8.9    7.7    7.6    7.2      6.3
UK(a)             2.6    1.4    0.1    0.3    1.3      2.1
US                1.4    1.4    0.3    0.7    1.7      2.0
Vietnam           6.6    4.1    0.7    2.7    3.6      6.3
Euro Area(a)      1.3    0.4    0.0    0.3    1.5      1.7
EU-27(a)          1.5    0.6    0.0    0.3    1.4      1.8
OECD              1.5    1.6    0.7    1.0    1.8      2.1
World             4.4    3.8    3.7    3.1    3.5      3.5

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

Table B2. Fiscal balance and government debt

                  Fiscal balance (per cent of GDP)(a)

               2013    2014   2015   2016   2017   2022

Australia      -1.4    -2.1   -1.8   -1.6   -1.2   -1.3
Austria        -1.3    -2.7   -2.8   -2.6   -2.1   -1.7
Belgium        -2.9    -3.1   -2.0   -1.8   -1.5   -1.6
Bulgaria       -0.8    -5.8   -2.8   -2.7   -2.7   -2.3
Canada         -1.9    -0.5   -1.6   -1.7   -2.0   -1.9
Czech Rep.     -1.3    -1.9   -0.4   -0.5   -0.5   -1.5
Denmark        -1.3     1.5   -0.3   -0.6   -1.4   -1.4
Estonia        -0.1     0.7    0.7    0.4    0.0   -1.1
Finland        -2.5    -3.3   -3.3   -2.7   -2.2   -2.1
France         -4.1    -3.9   -3.5   -3.2   -3.0   -2.8
Germany        -0.1     0.3    0.5    0.3    0.7   -0.6
Greece        -12.4    -3.6   -1.7   -1.0   -1.5   -1.9
Hungary        -2.5    -2.5   -2.3   -1.7   -1.0   -1.9
Ireland        -5.7    -3.9   -1.1   -0.2   -0.1    0.8
Italy          -2.9    -3.0   -2.6   -2.2   -1.7   -2.6
Japan          -8.5    -7.7   -6.4   -5.8   -5.1   -4.8
Lithuania      -2.6    -0.7   -0.6   -0.7   -0.8   -1.3
Latvia         -0.9    -1.5   -1.8   -1.8   -1.7   -1.5
Netherlands    -2.4    -2.4   -1.2   -0.7   -0.8   -2.0
Poland         -4.0    -3.3   -3.0   -2.8   -2.4   -3.0
Portugal       -4.8    -7.2   -3.0   -2.6   -2.1   -2.2
Romania        -2.2    -1.4   -1.2   -1.8   -2.1   -1.5
Slovakia       -2.6    -2.8   -2.1   -1.9   -1.5   -0.5
Slovenia      -15.0    -5.0   -2.1   -0.6   -0.6   -1.5
Spain          -6.9    -5.9   -4.2   -3.2   -2.3   -2.0
Sweden         -1.4    -1.7   -2.0   -1.6   -1.5   -1.5
UK             -5.7    -5.7   -4.2   -3.5   -2.5   0.1
US             -5.5    -5.0   -4.3   -3.8   -3.3   -2.6

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

               2013    2014    2015    2016    2017    2022

Australia      37.4    41.9    44.4    44.9    44.2    38.7
Austria        80.8    84.2    86.4    85.4    84.2    79.0
Belgium       105.1   106.7   108.4   104.8   101.4    94.1
Bulgaria         --      --      --      --      --      --
Canada         91.1    93.7    95.0    93.6    90.5    85.4
Czech Rep.     45.2    42.7    40.5    39.3    37.7    34.5
Denmark        45.0    45.1    41.3    40.0    39.6    40.0
Estonia          --      --      --      --      --      --
Finland        55.6    59.3    63.6    65.1    65.3    63.7
France         92.2    95.5    98.1    98.7    99.2    99.5
Germany        77.4    74.9    71.2    68.3    64.6    50.4
Greece        175.1   177.5   167.7   164.0   166.4   141.2
Hungary        76.8    76.2    77.1    73.6    71.1    66.7
Ireland       120.1   107.5    97.7    93.9    89.9    68.2
Italy         128.8   132.3   135.9   135.5   131.7   116.6
Japan         219.9   225.9   225.9   227.2   228.9   234.1
Lithuania        --      --      --      --      --      --
Latvia           --      --      --      --      --      --
Netherlands    67.9    68.2    66.8    66.9    66.2    67.4
Poland         55.9    50.4    51.1    52.3    52.4    55.5
Portugal      129.0   130.2   128.0   127.2   124.3   111.7
Romania          --      --      --      --      --      --
Slovakia         --      --      --      --      --      --
Slovenia         --      --      --      --      --      --
Spain          93.7    99.3    99.0    98.0    94.8    80.5
Sweden         39.8    44.8    44.1    44.3    43.8    42.0
UK             86.2    88.2    89.3    89.2    88.7    71.8
US            109.4   109.9   109.1   108.3   106.8    97.0

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

               2013    2014    2015    2016    2017    2018-22

Australia       5.7     6.1     6.1     5.9     5.7       5.5
Austria         5.3     5.6     5.7     5.5     5.3       4.9
Belgium         8.4     8.5     8.3     7.6     7.3       7.3
Bulgaria       12.9    11.5     9.3     8.4     8.4       8.9
Canada          7.1     6.9     6.9     7.1     7.1       7.0
China            --      --      --      --      --        --
Czech Rep.      7.0     6.1     5.1     4.7     4.2       4.2
Denmark         7.0     6.5     6.1     6.0     5.9       5.6
Estonia         8.6     7.4     6.0     5.9     5.8       6.1
Finland         8.2     8.7     9.3     9.1     8.9       8.7
France         10.3    10.3    10.4    10.0     9.9       9.5
Germany         5.2     5.0     4.7     4.4     4.3       4.6
Greece         27.5    26.5    25.0    23.4    22.7      19.8
Hungary        10.1     7.7     6.8     6.1     5.4       6.2
Ireland        13.1    11.3     9.4     9.0     8.8       7.4
Italy          12.1    12.7    11.9    10.4     9.0       9.5
Japan           4.0     3.6     3.4     3.3     3.4       4.2
Lithuania      11.9    10.7     9.2     8.9     8.5       9.0
Latvia         11.9    10.8     9.8    10.6    10.4      10.6
Netherlands     7.3     7.4     6.9     6.8     6.6       5.3
Poland         10.4     9.0     7.6     7.3     7.0       7.3
Portugal       16.4    14.1    12.7    12.1    10.4      10.6
Romania         7.1     6.8     6.8     6.5     6.4       6.8
Slovakia       14.3    13.2    11.4    11.1    11.3      11.2
Slovenia       10.1     9.7     9.1     8.3     7.7       8.2
Spain          26.1    24.5    22.1    19.7    18.2      17.6
Sweden          8.0     7.9     7.4     6.8     6.5       7.0
UK              7.6     6.2     5.4     5.1     5.1       5.0
US              7.4     6.2     5.3     5.0     5.0       5.3

                 Current account balance (per cent of GDP)

               2013    2014   2015   2016    2017   2018-22

Australia      -3.4   -3.1   -3.5   -3.2    -2.0      -0.9
Austria         2.0    1.9    2.5    3.0     2.8       3.9
Belgium        -0.2    0.1   -0.7    0.5     0.8       2.0
Bulgaria        1.9    1.1   -0.7    2.5     5.0       4.3
Canada         -3.2   -2.3   -3.6   -4.7    -3.4      -1.5
China           1.6    2.1    2.3    0.8     0.0      -0.5
Czech Rep.     -0.5    0.6    2.2    0.8     3.0       0.0
Denmark         7.1    6.2    6.2    7.9     7.7       7.4
Estonia        -0.1    1.0    2.6    1.7     1.8       1.8
Finland        -1.7   -0.9    0.2   -0.3    -1.5      -1.8
France         -0.8   -0.9    0.3    0.8     0.0      -0.1
Germany         6.7    7.8    8.2    8.4     7.9       8.4
Greece         -2.1   -2.2   -1.7    0.5     0.6       0.1
Hungary         3.9    2.2    4.8    5.4     6.0       2.5
Ireland         6.0    3.5    5.4    3.4    -1.4       0.7
Italy           0.9    1.9    1.0    1.5     2.8       4.0
Japan           0.8    0.5    2.9    2.7     2.9       4.2
Lithuania       1.5    3.6   -2.8   -1.3    -1.9      -2.1
Latvia         -2.4   -2.0   -2.5   -3.7    -2.1      -1.4
Netherlands    11.0   10.6   11.7   11.8     9.5       8.2
Poland         -1.3   -2.0   -0.1   -0.2     0.0      -1.5
Portugal        1.4    0.5    0.9    0.8    -0.1      -3.0
Romania        -1.1   -0.5   -1.7   -2.8    -2.9      -3.0
Slovakia        2.0    0.1   -1.0   -0.8    -2.7      -1.8
Slovenia        5.6    7.0    7.9    7.4     9.4       7.0
Spain           1.5    1.0    0.9    2.8     2.6       1.0
Sweden          6.7    6.2    7.3    6.0     4.4       5.8
UK             -4.5   -5.1   -4.1   -4.1    -4.7      -3.6
US             -2.3   -2.2   -2.8   -3.2    -3.7      -4.5

Table B4. United States

Percentage change

                                      2012    2013    2014    2015

GDP                                   2.2      1.5     2.4     2.4
Consumption                           1.5      1.7     2.7     3.1
Investment : housing                 13.5      9.5     1.8     8.6
           : business                 9.0      3.0     6.2     3.2
Government : consumption             -0.9     -2.5    -0.5     0.4
           : investment              -5.6     -4.8    -1.1     2.5
Stockbuilding(a)                      0.1      0.0     0.0     0.2
Total domestic demand                 2.1      1.3     2.5     3.1

Export volumes                        3.4      2.8     3.4     0.8
Import volumes                        2.2      1.1     3.8     5.5

Average earnings                      2.1      1.0     2.5     2.4
Private consumption deflator          1.9      1.4     1.4     0.3
R.PDI                                 3.3     -1.5     2.7     3.5
Unemployment, %                       8.1      7.4     6.2     5.3
General Govt, balance as % of GDP    -9.0     -5.5    -5.0    -4.3
General Govt, debt as % of GDP(b)   110.5    109.4   109.9   109.1

Current account as % of GDP          -2.8     -2.3    -2.2    -2.8

                                                     Average
                                     2016    2017    2018-22

GDP                                   2.5     2.7      2.6
Consumption                           3.0     3.0      2.5
Investment : housing                  7.3     7.2      3.9
           : business                 4.6     5.7      3.4
Government : consumption              1.5     1.4      1.9
           : investment               2.1     0.8      1.9
Stockbuilding(a)                      0.0     0.0      0.0
Total domestic demand                 3.1     3.2      2.6

Export volumes                        2.3     4.2      3.7
Import volumes                        6.6     6.9      3.3

Average earnings                      2.6     3.0      3.5
Private consumption deflator          0.7     1.7      2.0
R.PDI                                 3.4     2.6      2.3
Unemployment, %                       5.0     5.0      5.3
General Govt, balance as % of GDP    -3.8    -3.3     -2.8
General Govt, debt as % of GDP(b)   108.3   106.8    101.1

Current account as % of GDP          -3.2    -3.7     -4.5

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

Table B5. Canada

Percentage change

                                     2012   2013   2014   2015

GDP                                  1.7     2.2    2.5    1.3
Consumption                          1.9     2.4    2.5    1.9
Investment : housing                 5.6    -0.4    2.5    3.8
           : business                8.1     1.7    0.1   -6.5
Government : consumption             0.7     0.3    0.3    1.1
           : investment             -3.0    -6.3    2.1    3.2
Stockbuilding(a)                    -0.3     0.6   -0.3   -0.3
Total domestic demand                2.0     1.9    1.5    0.7

Export volumes                       2.6     2.8    5.3    3.2
Import volumes                       3.6     1.5    1.8    0.6

Average earnings                     2.4     3.1    3.2    1.9
Private consumption                  1.3     1.4    1.9    1.2
  deflator
RPDI                                 2.8     2.8    1.3    2.3
Unemployment, %                      7.4     7.1    6.9    6.9
General Govt, balance as % of GDP   -2.5    -1.9   -0.5   -1.6
General Govt, debt as % of GDP(b)   95.4    91.1   93.7   95.0
Current account as % of GDP         -3.6    -3.2   -2.3   -3.6

                                                    Average
                                     2016    2017   2018-22

GDP                                  1.8     2.4      1.9
Consumption                          1.8     1.1      0.8
Investment : housing                 3.2     4.2      3.1
           : business               -0.6     1.9      0.8
Government : consumption             1.6     2.1      2.1
           : investment             -0.3     0.7      1.8
Stockbuilding(a)                    -0.2     0.0      0.0
Total domestic demand                1.3     1.6      1.3

Export volumes                       3.4     5.7      3.5
Import volumes                       1.4     3.1      1.8

Average earnings                     0.8     2.2      3.1
Private consumption                  1.8     2.4      1.6
  deflator
RPDI                                 0.2     0.8      1.1
Unemployment, %                      7.1     7.1      7.0
General Govt, balance as % of GDP   -1.7    -2.0     -1.9
General Govt, debt as % of GDP(b)   93.6    90.5     87.9
Current account as % of GDP         -4.7    -3.4     -1.5

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

Table B6. Japan

Percentage change

                                2012    2013    2014    2015

GDP                              1.7     1.4    -0.1     0.7
Consumption                      2.3     1.7    -1.0    -0.8
Investment : housing             3.2     8.4    -5.0    -2.0
           : business            3.6    -0.3     2.8     1.1
Government : consumption         1.7     1.9     0.1     1.1
           : investment          2.0     8.0     0.2    -0.5
Stockbuilding(a)                 0.2    -0.2     0.2     0.4
Total domestic demand            2.6     1.6    -0.1     0.2

Export volumes                  -0.2     1.1     8.3     3.7
Import volumes                   5.3     3.0     7.2     1.1

Average earnings                -0.6     0.8     1.0     1.2
Private consumption deflator    -0.9    -0.2     2.0     0.3
RPDI                             0.7     0.7    -0.3     1.1
Unemployment, %                  4.3     4.0     3.6     3.4
Govt, balance as % of GDP       -8.6    -8.5    -7.7    -6.4
Govt, debt as % of GDP(b)      216.6   219.9   225.9   225.9

Current account as % of GDP      1.0     0.8     0.5     2.9

                                                Average
                                2016    2017    2018-22

GDP                              1.0     1.2       0.7
Consumption                      1.4     1.8       0.9
Investment : housing             5.0     3.5       2.4
           : business            2.3     2.6       1.0
Government : consumption         0.7     0.6       0.4
           : investment          1.2     1.1       0.5
Stockbuilding(a)                -0.2     0.0       0.0
Total domestic demand            1.3     1.7       0.8

Export volumes                   5.1     4.8       3.0
Import volumes                   7.5     7.9       4.1

Average earnings                 1.1     0.8       1.5
Private consumption deflator     0.0     0.7       0.6
RPDI                             1.2     0.4       0.6
Unemployment, %                  3.3     3.4       4.2
Govt, balance as % of GDP       -5.8    -5.1      -4.6
Govt, debt as % of GDP(b)       227.2   228.9    230.8

Current account as % of GDP      2.7     2.9       4.2

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

Table B7. Euro Area

Percentage change

                               2012    2013   2014   2015

GDP                            -0.8    -0.3    0.9    1.5
Consumption                    -1.3    -0.6    0.8    1.6
Private investment             -7.8    -3.0    1.7    2.6
Government : consumption       -0.2     0.2    0.8    1.5
           : investment        -4.3     0.9   -0.5    0.7
Stockbuilding(a)               -0.9     0.1   -0.2   -0.1
Total domestic demand          -3.3    -0.7    0.7    1.7

Export volumes                  2.8     2.2    4.1    4.9
Import volumes                 -0.9     1.3    4.5    5.3

Average earnings                1.9     1.9    1.3    0.8
Harmonised consumer prices      2.5     1.3    0.4    0.0
RPDI                           -1.6    -0.7    0.9    2.0
Unemployment, %                11.4    12.0   11.6   10.9
Govt, balance as % of GDP      -3.7    -3.0   -2.6   -1.9
Govt, debt as % of GDP(b)      89.6    91.4   92.4   91.4

Current account as % of GDP     1.3     2.0    2.4    2.8

                                             Average
                               2016   2017   2018-22

GDP                            1.5    1.9      1.6
Consumption                    1.6    1.3      0.8
Private investment             2.1    2.9      3.0
Government : consumption       1.4    1.1      1.3
: investment                   1.8    2.2      1.8
Stockbuilding(a)               0.4    0.0      0.0
Total domestic demand          2.0    1.6      1.4

Export volumes                 4.9    6.3      3.0
Import volumes                 5.9    5.9      2.6

Average earnings               1.3    2.6      2.9
Harmonised consumer prices     0.3    1.5      1.7
RPDI                           1.9    1.4      1.2
Unemployment, %               10.1    9.5      9.3
Govt, balance as % of GDP     -1.6   -1.2     -1.5
Govt, debt as % of GDP(b)     90.1   87.7     81.3

Current account as % of GDP    3.4    2.9      3.0

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

Table B8. Germany

Percentage change

                               2012   2013   2014   2015

GDP                            0.6    0.4    1.6    1.5
Consumption                    0.9    0.8    1.0    1.9
Investment : housing           4.1   -0.7    3.3    1.8
           : business         -1.7   -2.2    4.3    1.9
Government : consumption       1.3    0.8    1.7    2.6
           : investment        0.9    2.2   -0.1   -1.3
Stockholding(a)               -1.6    0.5   -0.3   -0.6
Total domestic demand         -0.9    0.9    1.3    1.4

Export volumes                 3.4    1.8    3.9    5.1
Import volumes                 0.1    3.2    3.7    5.5

Average earnings               3.7    2.7    2.3    2.4
Harmonised consumer prices     2.1    1.6    0.8    0.1
RPDI                           0.6    0.5    1.4    2.2
Unemployment, %                5.4    5.2    5.0    4.7
Govt, balance as % of GDP     -0.1   -0.1    0.3    0.5
Govt, debt as % of GDP(b)     79.7   77.4   74.9   71.2

Current account as % of GDP    7.2    6.7    7.8    8.2

                                             Average
                               2016   2017   2018-22

GDP                            1.6    2.0       1.3
Consumption                    1.4    1.5       0.7
Investment : housing           0.0    0.7      -0.4
           : business          2.1    4.0       1.1
Government : consumption       2.7    0.4       0.6
           : investment        0.8    1.1       0.9
Stockholding(a)                0.0    0.0       0.0
Total domestic demand          1.7    1.5       0.7

Export volumes                 5.2    7.0       3.2
Import volumes                 5.9    6.8       2.2

Average earnings               1.7    3.2       3.1
Harmonised consumer prices     0.5    1.6       1.8
RPDI                           1.5    1.1       1.0
Unemployment, %                4.4    4.3       4.6
Govt, balance as % of GDP      0.3    0.7       0.0
Govt, debt as % of GDP(b)      68.3   64.6     55.1

Current account as % of GDP    8.4    7.9       8.4

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

Table B9. France

Percentage change

                               2012   2013   2014   2015

GDP                            0.2    0.7    0.2    1.1
Consumption                   -0.2    0.5    0.6    1.4
Investment : housing          -2.1   -1.5   -5.3   -3.0
           : business          0.8   -0.2    2.2    1.7
Government : consumption       1.6    1.7    1.5    1.4
           : investment        1.8    0.2   -6.9   -3.6
Stockbuilding(a)              -0.6    0.2    0.2    0.1
Total domestic demand         -0.3    0.8    0.7    1.2

Export volumes                 2.6    1.8    2.4    5.9
Import volumes                 0.8    1.8    3.9    6.0

Average earnings               2.6    2.7    1.3    0.7
Harmonised consumer prices     2.2    1.0    0.6    0.1
RPDI                           0.5    0.3    1.7    1.9
Unemployment, %                9.8   10.3   10.3   10.4
Govt, balance as % of GDP     -4.8   -4.1   -3.9   -3.5
Govt, debt as % of GDP(b)     89.6   92.2   95.5   98.1

Current account as % of GDP   -1.2   -0.8   -0.9   0.3

                                             Average
                               2016   2017   2018-22

GDP                            1.3    1.8       1.3
Consumption                    1.2    1.2       0.3
Investment : housing           -1.5   1.0       6.9
           : business          2.8    2.6       0.8
Government : consumption       1.5    1.5       1.6
           : investment        1.8    2.0       1.7
Stockbuilding(a)               0.2    0.0       0.0
Total domestic demand          1.6    1.5       1.1

Export volumes                 5.1    7.3       3.3
Import volumes                 5.7    5.9       2.4

Average earnings               1.4    2.1       2.5
Harmonised consumer prices     0.5    1.1       1.4
RPDI                           2.5    0.9       0.6
Unemployment, %               10.0    9.9       9.5
Govt, balance as % of GDP     -3.2   -3.0      -2.7
Govt, debt as % of GDP(b)     98.7   99.2      99.3

Current account as % of GDP    0.8    0.0      -0.1

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

Table B10. Italy

Percentage change

                               2012    2013    2014    2015

GDP                            -2.9    -1.8    -0.4     0.7
Consumption                    -4.0    -2.6     0.4     0.9
Investment : housing           -7.7    -4.5    -3.0    -0.5
           : business         -10.4    -7.3    -3.2     2.4
Government : consumption       -1.4    -0.3    -0.7     0.3
           : investment        -8.1    -7.4    -5.5    -1.3
Stockholding(a)                -1.2     0.1     0.0     0.2
Total domestic demand          -5.6    -2.8    -0.5     1.0
Export volumes                  2.0     1.0     2.8     4.3
Import volumes                 -8.3    -2.4     2.7     5.7
Average earnings                1.1     1.0     0.8    -0.7
Harmonised consumer prices      3.3     1.3     0.2     0.1
RPDI                           -5.6    -0.6    -0.2     0.5
Unemployment, %                10.6    12.1    12.7    11.9
Govt, balance as % of GDP      -3.0    -2.9    -3.0    -2.6
Govt, debt as % of GDP(b)     123.2   128.8   132.3   135.9
Current account as % of GDP    -0.4     0.9     1.9     1.0

                                               Average
                               2016    2017    2018-22

GDP                             0.9     1.3       1.7
Consumption                     1.1     0.3       0.2
Investment : housing            0.7     2.4       6.8
           : business           2.5     2.4       6.7
Government : consumption        0.6     1.0       1.2
           : investment         2.0     0.2       1.1
Stockholding(a)                 0.1     0.0       0.0
Total domestic demand           1.2     0.8       1.5
Export volumes                  5.2     5.2       2.7
Import volumes                  6.2     3.9       2.4
Average earnings               -0.1     2.4       2.6
Harmonised consumer prices      0.0     1.9       2.0
RPDI                            0.9     1.2       0.6
Unemployment, %                10.4     9.0       9.5
Govt, balance as % of GDP      -2.2    -1.7      -2.1
Govt, debt as % of GDP(b)     135.5   131.7    120.8
Current account as % of GDP     1.5     2.8       4.0

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

Table B11. Spain

Percentage change

                               2012    2013   2014   2015

GDP                            -2.6    -1.7    1.4    3.2
Consumption                    -3.5    -3.1    1.2    3.1
Investment : housing           -5.4    -7.2   -1.4    2.8
           : business          -5.7    -5.4    1.5    3.7
Government : consumption       -4.5    -2.8    0.0    2.6
           : investment       -13.3    15.1   16.1   10.7
Stockholding(a)                -0.3    -0.2    0.2    0.1
Total domestic demand          -4.7    -3.1    1.7    3.6

Export volumes                  1.1     4.3    5.1    6.2
Import volumes                 -6.2    -0.3    6.4    7.8

Average earnings               -1.0     1.0   -0.2    1.2
Harmonised consumer prices      2.4     1.5   -0.2   -0.5
RPDI                           -5.5    -1.5    0.8    5.8
Unemployment, %                24.8    26.1   24.5   22.1
Govt, balance as % of GDP     -10.4    -6.9   -5.9   -4.2
Govt, debt as % of GDP(b)      85.4    93.7   99.3   99.0

Current account as % of GDP    -0.2     1.5    1.0    0.9

                                             Average
                               2016   2017   2018-22

GDP                            2.6    2.8       2.8
Consumption                    4.1    3.0       2.4
Investment : housing           2.8    5.0       7.5
           : business          2.6    4.5       6.9
Government : consumption       2.1    2.2       2.4
           : investment        2.1    4.1       2.6
Stockholding(a)                0.0    0.0       0.0
Total domestic demand          3.3    3.2       3.3

Export volumes                 5.4    5.5       2.8
Import volumes                 8.1    6.9       4.3

Average earnings               0.5    2.4       3.6
Harmonised consumer prices    -0.2    1.4       1.8
RPDI                           2.5    2.9       2.7
Unemployment, %               19.7   18.2      17.6
Govt, balance as % of GDP     -3.2   -2.3      -2.0
Govt, debt as % of GDP(b)     98.0   94.8      84.9

Current account as % of GDP    2.8    2.6       1.0

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

Table 1. Forecast summary

Percentage change

                                 Real GDP(a)

             World   OECD   China   EU-27   Euro   USA   Japan
                                            Area

2012          3.4    1.3     7.7    -0.4    -0.8   2.2    1.7
2013          3.3    1.2     7.7     0.3    -0.3   1.5    1.4
2014          3.4    1.8     7.3     1.4    0.9    2.4   -0.1
2015          3.0    2.1     6.9     1.8    1.5    2.4    0.7
2016          3.2    2.1     6.5     1.7    1.5    2.5    1.0
2017          3.8    2.5     6.3     2.2    1.9    2.7    1.2
2006-2011     4.0    1.3    11.0     1.1    1.0    0.9    0.3
2018-2022     3.8    2.3     6.0     1.8    1.6    2.6    0.7

                                Real GDP(a)
                                                        World
             Germany   France   Italy   UK    Canada   trade(b)

2012           0.6      0.2     -2.9    1.2    1.7       2.7
2013           0.4      0.7     -1.8    2.2    2.2       2.9
2014           1.6      0.2     -0.4    2.9    2.5       3.2
2015           1.5      1.1      0.7    2.2    1.3       3.4
2016           1.6      1.3      0.9    2.3    1.8       5.3
2017           2.0      1.8      1.3    2.7    2.4       6.3
2006-2011      1.7      1.0     -0.1    0.7    1.5       4.7
2018-2022      1.3      1.3      1.7    2.4    1.9       4.5

                  Private consumption deflator

             OECD    Euro    USA    Japan   Germany
                     Area

2012          1.9    1.9     1.9    -0.9      1.6
2013          1.5    1.1     1.4    -0.2      1.3
2014          1.6    0.5     1.4     2.0      0.9
2015          0.7    0.2     0.3     0.3      0.7
2016          1.0    0.3     0.7     0.0      0.5
2017          1.8    1.5     1.7     0.7      1.6
2006-2011     2.0    1.8     2.0    -1.0      1.3
2018-2022     2.1    1.7     2.0     0.6      1.8

                Private consumption deflator

             France   Italy     UK      Canada

2012          1.4      2.7      1.8      1.3
2013          0.8      1.2      2.3      1.4
2014          0.0      0.3      1.7      1.9
2015          0.0      0.0      0.2      1.2
2016          0.4      0.0      0.6      1.8
2017          1.1      1.9      1.3      2.4
2006-2011     1.4      2.0      3.3      1.3
2018-2022     1.4      2.0      2.1      1.6

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

2012          0.3     0.1     0.9      110.4
2013          0.3     0.1     0.6      107.1
2014          0.3     0.1     0.2       97.8
2015          0.3     0.1     0.1       51.8
2016          0.7     0.1     0.1       36.8
2017          1.7     0.1     0.1       45.8
2006-2011     2.1     0.2     2.3       79.8
2018-2022     3.3     0.6     1.4       54.8

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.

* All questions and comments related to the forecast and its
underlying assumptions should be addressed to Simon Kirby
([email protected]). We would like to thank Jonathan
Portes for helpful comments and discussion. The forecast was
completed on 28 January, 2016. Exchange rate, interest rates
and equity price assumptions are based on information
available to 13 January 2016. Unless otherwise specified,
the source of all data reported in tables and figures is the
NiGEM database and NIESR forecast baseline.