The world economy.

Hacche, Graham ; Carreras, Oriol ; Kirby, Simon 等

World Overview

Recent developments and the baseline forecast

The past three months have been marked by significant upturns in global oil prices and financial markets, a decline in financial market volatility, and a downturn in the exchange value of the US dollar. Market sentiment has improved in many respects, thanks partly to the actions of central banks, but global growth has remained mediocre.

Recent data on demand and activity have indicated continuing modest, though steady, growth in the Euro Area, with conditions still varying widely among member countries, but a further slowing in the United States and particularly disappointing performance in Japan, where output fell in the fourth quarter of 2015. Among the major emerging market economies, the slowing of growth in China has continued, with some indicators becoming more positive recently. In Russia, activity has begun to stabilise after a two-year contraction, while in Brazil conditions have deteriorated further amid a political crisis. India remains the fastest growing major economy.

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Taking into account recent developments, our projection for global growth this year has been revised down from the February Review, from 3.2 to 3.0 per cent, marginally below last year's outturn. The expansion this year is therefore now expected to be the slowest since the 2009 recession. A moderate strengthening of growth is projected for 2017 and beyond, supported by accommodative monetary policies; lower oil prices, which are still assumed to remain well below their levels during 2010-14; and the gradual normalisation of conditions in stressed emerging market economies.

Annual core consumer price inflation in the United States has recently been close to the Federal Reserve's 2 per cent objective, but the all-items rate has remained more clearly below target, at about 1 per cent. In the other advanced economies, inflation has remained well below targets, recently fluctuating around zero in the Euro Area. Wage increases have remained notably subdued, even in those advanced economies where unemployment is now quite low--such as the US, Japan and Germany. Above-target inflation rates in Brazil and Russia have moderated, while in China inflation has recently picked up towards official objectives.

Since late January, central banks in Japan and the Euro Area have acted to ease monetary conditions further in pursuit of their inflation objectives. At the end of January, the Bank of Japan announced a reduction in the interest rate on one tier of bank reserves to marginally below zero. In March, the European Central Bank (ECB) announced several measures to increase monetary accommodation further, including another reduction in its deposit rate, already negative since June 2014, and an expansion by one-third of its monthly asset purchases. In the US, the Fed has maintained its target range for the federal funds rate at the level to which it was raised last December, while reducing the gradient of its expected path of future rate increases. Monetary conditions have also been eased since early February in China and several other economies, including Hungary, Indonesia, New Zealand, Norway, Singapore, Sweden and Taiwan.

Partly reflecting adjustments in actual and expected monetary conditions, 10-year sovereign bond yields have generally declined since late January--by about 10-15 basis points in the US and most major economies of the Euro Area and 30 basis points in Japan. In Japan, 10-year sovereign yields have been negative since early March. The notable exception among advanced economy bond markets is Canada, where comparable yields have risen by about 25 basis points, as expectations of a further cut in official rates have receded with the introduction by the new government of an expansionary budget. Government bond yields have also declined in emerging markets, most markedly in Brazil, by about 350 basis points, reportedly reflecting increased expectations of a business-friendly change in government and policy regime.

In foreign exchange markets, the US dollar has depreciated against all other major currencies except sterling since late January. Its trade-weighted value, which in January reached its highest in almost thirteen years, has since fallen by about 7 per cent.1 This is the largest reversal since the dollar's appreciation of recent years began in 2011, although its trade-weighted value in late April was still about 32 per cent above its mid-2011 trough. The reversal seems to be related to downward revisions to expectations about tightening by the Fed and about the associated widening of yield differentials in favour of dollar-denominated assets. Among the currencies of the advanced economies, the strongest in recent months have been the Canadian dollar, which has risen by about 12 per cent against the US currency, and the yen, which has risen by about 7 per cent. The Canadian dollar's rise seems attributable to the shift in interest differentials referred to above. The rise of the yen may reflect a relative decline in expected inflation in Japan, which could have shifted relative real yields in its favour. Major emerging market currencies have also risen against the US dollar in the past three months, most markedly in the cases of the Brazilian real, up by about 15 per cent, apparently mainly on political developments, and the Russian rouble, up by 20 per cent apparently reflecting the recovery in the oil market.

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The US dollar's recent depreciation can account for only a small part of the upturn in the dollar prices of oil since late January. They bottomed out at about $26 a barrel on 11 February and by late April had risen to about $45, the highest levels since last November. An initial trigger for the turnaround seems to have been speculation around an announcement on 16 February that some major oil producers, including Saudi Arabia, might cap production at January 2016 levels, conditional on agreement by other producers. However, a subsequent meeting of oil producing countries, in Doha on 17 April, failed to reach any agreement. A more important factor has been growing evidence that non-OPEC production has been significantly reduced and that the surplus of production over demand is diminishing. In April, the US Energy Information Administration lowered its forecast of US output in 2016-17, with 2017 production now expected to be 15 per cent below its 2015 peak. Also, the International Energy Agency estimated that investment in oil production had been cut by about 40 per cent in the past two years, and forecast that the fall in nonOPEC production this year would be the largest in 25 years; it expects the market to return to balance in 2017. Other commodity prices generally also bottomed out in early February. The Economist all-items index in late April was about 9 per cent higher than in late January --an increase that can be accounted for largely by the dollar's depreciation.

Equity markets, after slumping in January, have generally risen, apparently in association with the rise in oil prices --a correlation discussed in the February 2016 Review, F9-10. Markets have also become less volatile. By late April, benchmark stock market indices (in domestic currency terms) had risen by about 5 per cent in most major European economies, by about 10 per cent in the US, Canada and China, by about 40 per cent in Brazil and about 30 per cent in Russia. One possible explanation is that the partial recovery of oil prices has reduced the financial pressures on oil-producing companies and countries, including indebted ones, and also on their lenders. The recent decline in bond yields has been another factor boosting equity markets. Although equity prices generally have risen, bank stocks have weakened in some countries, reportedly in part because of fears of the effects on banks' interest margins of negative official rates.

Risks to the forecast and implications for policy

A number of the risks discussed in recent issues of the Review have receded with developments over the past three months, but they have not been eliminated.

First, the downward shift in the expected path of US short-term interest rates has helped to reverse capital outflows from emerging market economies and downward pressure on their currencies. In fact, the Institute of International Finance has estimated that portfolio inflows to emerging markets reached a 21-month high in March 2016. Second, the depreciation of the dollar associated with the shift in expectations about US monetary policy has alleviated the debt burdens of dollar borrowers outside the US. Third, the recent upturn in oil and other global commodity prices has reduced the widespread risk of deflation as well as providing limited relief to commodity exporting countries whose terms of trade have deteriorated in recent years. Fourth, the recent data showing improved demand and activity in China have reduced the likelihood of a severe downturn in that economy in the short term.

Yet the risks associated with the prospective normalisation of monetary policy in the advanced economies remain, including the risks arising from the relatively advanced position of the United States in the recovery, with its implications for relative yield differentials and the dollar's exchange rate. Similarly, the stubbornness of below-target inflation and of wage stagnation, even in economies apparently close to full employment, after several years of extraordinary monetary accommodation, is not well understood, and the risk of its continuing persistence, and even deflation, cannot be easily dismissed. Again, recent developments in China may be encouraging in terms of its short-term growth performance, but the authorities' further resort to monetary stimulus and the limited progress in reducing corporate debt, as well as the steady effective depreciation of the renminbi over the past six months made less obvious by its appreciation against the dollar for part of the period (see figure 11)- are less reassuring with regard to progress with the planned and needed restructuring of the economy away from reliance on investment and exports.

Significant risks also remain with regard to oil prices. The recent upturn in prices has been sustained for longer than some analysts expected and, with production continuing to exceed demand this year, a significant reversal remains possible in the short term. Alternatively, the upturn in prices could strengthen if there are further production cutbacks or supply disruptions, or if demand strengthens. But not only is there uncertainty about the future path of prices relative to our baseline assumption: there is also a newer uncertainty about the economic effects of oil price movements. The dramatic fall in prices since mid-2014 has had more obvious negative effects on growth and imbalances in oil-producing countries; on investment, profits and liquid asset holdings in the energy sector; on expectations about the profitability of lenders to oil producers; and also, apparently, on equity markets, than it has had positive effects on global aggregate demand. The positive response of private consumption has generally been less apparent than might have been expected from past experience, perhaps because households have chosen to save their windfalls as they have expected the price fall to be transitory, or perhaps because past evidence was distorted by accompanying reductions in interest rates, which have not occurred this time because rates were already at or close to their zero lower bound. In the former case, maintenance of lower prices could eventually raise demand by more than we are now assuming: this is an upside risk to our growth forecast. But there are also clearly downside risks from oil market developments.

Among political risks, one that has gained prominence in many advanced economies is the pressure for defensive, protectionist policies to address weak income growth and growing income inequality--complex issues that are often attributed simply to features of globalisation, including international trade and migration. Such policy reactions could seriously exacerbate the problems they are meant to address. More constructive would be a strengthening of policies to help those who are the losers from structural economic change, including improved training and re-training programmes and other active labour market policies.

Another set of risks concerns the reliance on increased monetary accommodation in several advanced economies. In an increasing number of cases, central banks have resorted to negative interest rates on at least some bank reserves: in the past three months, Japan has joined this group of countries, which already included Denmark (the pioneer, in July 2012), the Euro Area (since June 2014), Sweden (since July 2014), and Switzerland (December 2014). It is generally acknowledged that the scope for lowering interest rates below zero is limited. Commercial banks have so far been unwilling to pass on negative interest rates to their retail depositors, or are legally prohibited from doing so: to impose charges on retail deposits would be to discourage business and encourage the hoarding of cash. With zero thus being a fairly hard lower bound for banks' retail deposit rates, reducing central bank rates below zero intensifies the compression of banks' interest margins that is associated with low interest rates. This seems to have been reflected in declining prices of bank equity in some countries, including Japan, in recent months.

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However, the effect on interest margins will vary among banks with different business models, and these margins are also subject to other influences. In his April press conference, President Draghi of the ECB noted that aggregate data for the Euro Area showed that banks' net interest income had risen in 2015, the first full year of negative interest rates, but he also acknowledged that the aggregate picture might "conceal different realities", and noted that although the ECB's Governing Council "gives a positive judgment about the past experience, [it] is increasingly aware of the complexities that this measure [negative interest rates] entails". For various legal and institutional reasons, some banks may be severely affected, with adverse implications for financial stability. Reducing interest rates further into negative territory may, therefore, at least in the absence of substantial financial sector reform, have adverse consequences that would need to be weighed against their macroeconomic benefits and the gains for banking business and banks' profitability that such benefits should entail. As Draghi also said, "the issue of negative interest rates is not so much an issue of yes or no; it's an issue of extent".

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This is another indication of the risks that might be involved in proceeding further with negative interest rates and of the consequent constraints. Particularly given the continuing weakness of global growth and the persistence of below-target inflation shown in our forecast, the need for countries to adopt more balanced policy mixes, which has been discussed in earlier issues of the Review, has become even more apparent. As agreed at recent meetings of the IMF and other international bodies, continuing accommodative monetary policies need to be accompanied by structural reforms--particularly reforms that raise confidence and demand--and the use of fiscal space, particularly to increase productive investment expenditure, including in infrastructure. Such investment could be financed by borrowing at historically low interest costs, and it would not only boost demand: it could enhance potential growth, which seems to have suffered globally in the wake of the crisis.

Prospects for individual economies

Euro Area

Output growth has been maintained at moderate rates dose to 1.5 per cent a year, and the slow decline in unemployment has continued. Annual consumer price inflation has recently fallen back to about zero, mainly reflecting the further decline in global energy prices between last November and early February, but core inflation has been steady in recent months, at about 1 per cent. On 10 March, the ECB announced wide-ranging measures to ease monetary conditions further in order to promote the return of inflation towards its medium-term objective of 'below, but close to, 2 per cent a year'. We expect the recovery to proceed at moderate rates, of 1.5 per cent in 2016 and 1.7 per cent in 2017, supported by highly accommodative monetary conditions, the general depreciation of the euro in 2014-15, slightly expansionary fiscal policies, and the decline in energy prices over the past two years.

In the fourth quarter of 2015, GDP grew by 0.3 per cent --the same rate as in the third quarter--to a level 1.6 per cent higher than a year earlier. GDP growth in 2015 as a whole was 1.5 per cent. Growth in the fourth quarter, as in the third, was driven by a broad-based expansion of domestic demand, but with fixed investment performing particularly strongly. Net exports again contributed negatively to GDP growth. The expansion has remained uneven across the Area: in the fourth quarter, GDP rose by 0.3 per cent in both Germany and France, but by only 0.1 per cent in Italy and Greece, by 0.8 per cent in Spain, and by 2.7 per cent in Ireland. Preliminary indicators for the first quarter of 2016 suggest continuing moderate growth in the Area. Industrial production in January and February was 1.0 per cent higher than the fourth quarter average and 1.9 per cent higher than a year earlier. Retail trade volume in the Area in January and February was 0.8 per cent higher than the fourth quarter average and 2.3 per cent higher than a year earlier. Recent PMIs have suggested somewhat weaker private-sector growth than have the data for industrial production and retail sales.

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The growth of bank credit to the private sector has picked up. In the year to March, lending to nonfinancial corporations rose by 1.1 per cent and loans to households by 1.6 per cent--the largest annual increases since late 2011.

Unemployment fell to 10.3 per cent in February 2016, its lowest since August 2011 and 1.8 percentage points below the peak reached in April 2013. There is still a long way to go to reach the March 2008 trough of 7.2 per cent. There also remain wide differences in unemployment among member countries, with rates ranging from 4.3 per cent in Germany to 10.2 per cent in France, 11.7 per cent in Italy, 20.4 per cent in Spain, and 24.0 per cent in Greece. Employment growth in the Area gathered pace during 2015, rising to 1.2 per cent in the year to the fourth quarter from 0.8 per cent in the year to the first.

Consumer price inflation, on a 12-month basis, has fallen back since January, to zero in March, mainly reflecting declines in energy prices. Core inflation in the year to March was 1.0 per cent, little changed from preceding months. There has been little sign of a significant pick-up in wage growth: hourly labour costs in the Area increased by 1.3 per cent in the year to the fourth quarter, close to the average annual increase since 2013. The increase in labour costs in Germany in the year to the fourth quarter, at 2.1 per cent, was above both the Area's average and those in France (1.3 per cent), Italy (-0.8 per cent) and Spain (1.5 per cent), for example, suggesting continuing slow shifts in international competitiveness broadly consistent with warranted adjustments in payments imbalances.

On 10 March, the ECB announced a package of measures "calibrated to further ease financing conditions ... and accelerate the return of inflation to levels below, but close to, 2 per cent". This followed a more limited set of measures last December (see National Institute Economic Review, February 2016, F16-17) and subsequent developments that appeared to have reduced the likelihood of early achievement of the price stability objective.

First, with effect from 16 March, the ECB's benchmark interest rates were lowered further: the deposit rate, negative since June 2014, was reduced by 10 basis points to -0.4 per cent; the refinancing rate was reduced by 5 basis points to zero; and the marginal lending facility rate was also reduced by 5 basis points to 0.25 per cent.

Second, the 'expanded asset purchase programme' (EAPP), announced in January 2015 and begun in the following March, was expanded further. It originally involved combined purchases of assets amounting to 60 billion [euro] a month until at least September 2016, under two programmes introduced in 2014--the asset-backed securities purchase programme (ABSPP) and the covered bond purchase programme (CBPP3). Last December, the EAPP was extended to at least March 2017. In the latest package, it was announced that, beginning in April 2016, monthly purchases would be increased to 80 billion [euro] and again "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 an inflation rate below, but close to, 2 per cent over the medium term". This means that if the programme ends in March 2017, total asset purchases will have amounted to 1.74 trillion [euro] over 25 months (equivalent to about 8 per cent of GDP over a similar period), rather than 1.50 [euro] trillion (about 7 per cent of GDP) under the programme as extended last December.

Third, the issuer and issue-share limits for the purchase of securities issued by international organisations and multilateral development banks were raised from 33 per cent to 50 per cent.

Fourth, the assets eligible for purchase would be expanded in June 2016 to include investment-grade, euro-denominated, non-bank corporate bonds issued in the Euro Area.

Finally, a new series of four-quarterly targeted long-term refinancing operations (TLTRO II), each with a maturity of four years, would be launched, starting in June 2016, with interest rates as low as on the deposit facility. TLTRO II is intended to give banks additional incentives to lend to the private sector: funds made available to banks under the scheme will depend upon eligible lending.

With regard to forward guidance on interest rates, President Draghi stated on 10 March (and reiterated after the ECB's meeting on 21 April) that "the Governing Council expects the key ECB interest rates to remain at present or lower levels for an extended period of time, and well past the horizon of our net asset purchases". In March, he also stated that "From today's perspective ... we don't anticipate that it will be necessary to reduce rates further. Of course, new facts can change the situation and outlook". The ECB's chief economist subsequently confirmed that further cuts in interest rates remained an option.

Germany

GDP grew by 0.3 per cent in the fourth quarter of 2015 and by 1.4 per cent in the year as a whole. GDP growth in the fourth quarter was the same as in the third, but it was driven more by domestic demand. Net exports subtracted from GDP for the second quarter in a row, and to a larger extent, with a slowing down of import growth more than offset by a downturn in exports, which contracted by 0.6 per cent. Domestic demand in the fourth quarter was buoyed mainly by a strong rise in fixed investment, but also by government spending; the growth of private consumption slowed.

More recent indicators suggest that the softening of economic growth between late 2014--when it was 0.6 per cent in the fourth quarter--and late 2015 was transitory; indeed, the latest 'nowcast' by IfW Kiel estimates GDP growth at 0.6 per cent in the first quarter of 2016, the same as the assumption built into our forecast. We project a modest pick-up in growth to 1.7 per cent in both 2016 and 2017, with robust growth in consumption by both households and the State. Buoyant real income growth and low interest rates should continue to stimulate consumer spending, while the additional government expenditures associated with the large influx of refugees has been estimated at 14-17 billion [euro] in 2016, or around 1/2 per cent of GDP. (2) Apart from these domestic factors, we expect a gradual strengthening of demand from German export markets.

The overall government budget was in significant surplus in 2015, amounting to 0.6 per cent of GDP. The additional expenditure associated with refugees will weigh on the fiscal balance in 2016, but perhaps not as much as we had previously assumed. The government has stated that it will aim to fund this expenditure through a reallocation of resources from other parts of the budget, and thus make it fiscally neutral. Our forecast is now for a marginally larger surplus this year than we projected previously--0.5 per cent of GDP compared with 0.3 per cent in February's forecast. We still expect the government to run significant surpluses through the forecast period, with the ratio of debt to GDP falling from just under 70 per cent at end-2015 to just over 50 per cent by end-2022.

As 2016 progresses, refugees will increasingly find their way into the labour market. With unemployment having reached another new post-unification low of 4.3 per cent in January and February, and given the trend decline of the working population, this increased supply of labour will relieve labour market pressures as well as boosting potential output growth and supporting the GDP growth that we are projecting. We expect unemployment to remain broadly unchanged in the coming year but to rise slightly to around 5 per cent by 2022.

Despite low unemployment, wage growth has remained subdued. Thus the four-quarter growth rate of hourly labour costs (as monitored by Eurostat) declined in the second half of last year, from 3.0 to 2.1 per cent. This is likely, at least in part, to reflect low actual and expected inflation. Consumer price inflation, on a 12-month basis, has in recent months remained close to zero: in March it was 0.1 per cent, only marginally above the Euro Area average. Recent work by IfW Kiel suggests that the economy's long-run potential rate of growth is around 1 Vi per cent, and with the economy forecast to grow at a rate slightly above this in 2016-17, we expect inflation to pick up to a rate slightly higher than the Euro Area average but to remain below 2 per cent.

France

GDP grew by 0.3 per cent in the final quarter of 2015 and by 1.2 per cent in the year as a whole, marginally higher than we estimated in February. More recent indicators suggest that growth continued at a similar pace in the first quarter of 2016, and our projection for this year as a whole is unchanged from February, at 1.3 per cent. The expansion is expected to continue to be driven largely by private consumption, supported by the growth of real disposable incomes. Exports in 2016 should maintain their strong fourth quarter performance, despite a slight weakening of global demand, as a result of the delivery of aeronautical and shipping equipment under a number of major contracts. In 2017, a reduction in such exports is expected to be offset by the moderate acceleration of world demand, with trade again contributing positively to growth. GDP growth is thus again expected to pick up in 2017, but by less than we projected in February--to 1.4 per cent rather than 1.8 per cent.

Unemployment, having reached a post-crisis peak of 10.6 per cent last August, fell to 10.2 per cent over the following three months--its lowest level since June 2014 --but between November and February there was no further decline. The pace of economic growth we project seems unlikely to be sufficient to reduce unemployment materially further, even taking into account the special measure to promote employment introduced by the government last January (see February 2016 National Institute Economic Review, F22), in the absence of more substantial labour market reforms.

Although wage growth seems to have picked up slightly in 2015, hourly labour costs (as measured by Eurostat) in the fourth quarter were still only 1.3 per cent higher than a year earlier. The broad stability of prices implies a similar rate of growth of real wages. January's minimum wage increase was marginally smaller than that of 2015 and inflation expectations one year ahead have softened; both of these factors lead us to forecast a slight slowing of nominal wage growth this year. Consumer price inflation remains subdued: in February, the 12-month change in the harmonised index fell back below zero, to -0.1 per cent, from 0.3 per cent in the preceding two months. We expect average inflation to be marginally negative in 2016 before picking up to 1.1 per cent next year.

The fiscal deficit narrowed further in 2015, to 3.7 per cent of GDP. Low inflation and weak growth are among the factors complicating the government's task--agreed with the EU--of reducing the deficit below 3 per cent of GDP by 2017, because they reduce both the tax base and the denominator against which the deficit is judged. Our projections in recent Reviews have fluctuated between the government achieving and missing its target by marginal amounts. In our current central projection they exactly achieve their target in 2017, however as we have highlighted previously there remains a large amount of uncertainty around this central forecast. The pursuit of this target under EU rules is likely to require them to tighten fiscal policy further, which would be likely to have a counterproductive, contractionary effect on economic activity. Otherwise, a further period of leniency may be required.

Italy

Italy's economic recovery slowed further in the fourth quarter of 2015, with GDP growth of 0.1 per cent, its lowest quarterly growth rate of the year. In 2015 as a whole, after three years of contraction, GDP expanded by 0.6 per cent, with the first, albeit modest, increase in fixed investment in six years.

Although quarterly GDP growth weakened in the course of last year, the expansion of final domestic demand was relatively robust; with net exports broadly flat, slowing GDP growth largely reflected the contractionary influence of changes in inventory accumulation. Although this suggests that stockbuilding may provide a short-term boost to GDP growth in 2016, and although economic activity is supported by expansionary monetary conditions, lower oil prices, and the improvement in international competitiveness allowed by the euro's depreciation since 2013, the outlook remains clouded by a number of factors. These include a banking sector struggling under the weight of non-performing loans (NPLs), high unemployment, and a government with very little room for fiscal manoeuvre. Accordingly, our growth forecast has been revised down from the February Review, with GDP now projected to rise by 0.7 per cent in 2016 and 1.0 per cent in 2017.

The large volume of non-performing loans in the banking system, which has risen substantially in the wake of the financial crisis, although it has recently fallen back slightly--see figure 6--remains a significant concern. It disrupts the normal flow of credit, weighs down on private demand, and reduces the chances of vigorous economic recovery. NPLs have also been a concern for investors in Italian banks, as indicated by a substantial decline in their share prices in early 2016. On 12 April, the government announced a new step to help deal with the problem: agreement was reached with domestic banks, insurers, and asset managers that they would contribute to a 5 billion [euro] fund (named 'Atlante') to be set up to 'backstop' capital raisings by weak banks and to buy junior tranches in securitised assets backed by NPLs. The state-owned Cassa Depositi e Prestiti is to have a stake in the fund, but its role will by limited by EU rules on state aid. Establishment of the fund is to be accompanied by changes in bankruptcy rules aimed at accelerating the recovery of loans by creditors. Some analysts have estimated that the fund could be leveraged to allow the purchase of 70 billion [euro] of gross NPLs.

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Unemployment, at 11.7 per cent in February, has remained high; it is broadly unchanged since last July, despite a number of measures introduced by the government, including the Jobs Act of December 2014, which aimed to reduce the duality of the labour market, and tax deductions for hiring. Lack of significant employment growth weighs on prospects for demand growth as well as increasing the risk of labour market hysteresis. The weakness of the labour market has been reflected in declines in wages; hourly labour costs in the fourth quarter of 2015 were 0.8 per cent lower than a year earlier. Annual consumer price inflation also fell back into negative territory in February and March, partly reflecting the recent decline in oil prices: prices in the twelve months to March fell by 0.2 per cent. However, core inflation in the same period remained positive, at 0.6 per cent.

The government budget deficit last year was 2.6 per cent of GDP, 0.4 percentage point smaller than in 2014. The draft budgetary plan sent to the European Commission last October forecast a 2.2 per cent budget deficit for 2016. However, measures approved late last year, such as the Stability Law, which includes reductions in corporate tax rates as well as delays in planned tax rate hikes, will most likely increase the deficit to around 2.5 per cent.

Spain

Spain remained the fastest growing major economy in the Euro Area in the fourth quarter of 2015, with GDP growth of 0.8 per cent, the same as in the third quarter. But despite associated strong growth in employment, unemployment in Spain remains by far the highest in the Area except for Greece. Against this background, political uncertainty has increased with the political parties having failed to agree on forming a government since last November's elections, and with new elections scheduled for late June. We forecast robust, though somewhat slower, GDP growth in 2016 and 2017, at 2.7 and 2.6 per cent, respectively, little changed from our February projection.

Growth in the last quarter of 2015 was driven by domestic demand, particularly private consumption and investment, fuelled by lower oil prices, employment growth, and favourable financial conditions promoted by the ECB's loose monetary policy. The contribution of net exports was neutral, which we assume will continue to be the case in 2016 and 2017.

Unemployment has fallen significantly from its early 2013 peak of 26.3 per cent, to reach 20.4 per cent in March 2016. In the year to this March, the rate fell by 2.8 percentage points. More than half a million jobs were created in the year to the fourth quarter of 2015, representing employment growth of 3.0 per cent. Nonetheless, joblessness remains extremely high, with around 4.8 million people unemployed, and assuming that progress in reducing the unemployment rate continues at the pace of the past three years, it will take another six years to reach the pre-crisis unemployment rate of about 8 per cent. This indicates that there is significant risk of hysteresis, particularly among those unemployed for more than a year, who have recently accounted for 60 per cent of the unemployed, up from a low of 20 per cent in 2008. The risk is even higher for those aged 50 or older. In fact, since unemployment started falling in late 2013,0.8 million people aged 49 or less who were unemployed for more than a year found a job, while for those aged 50 years or more the figure is just 25,000 (figure 7).

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In the twelve months to March 2016, consumer prices fell by 1.0 per cent, dragged down by the decline in oil prices. However, core inflation increased by 0.1 percentage point in March from the previous month, to stand at 1.1 per cent. There have been signs of a pick-up in wage increases, with hourly labour costs, as measured by Eurostat, rising by 1.5 per cent in the year to the fourth quarter of last year. We expect inflation to rise back into positive territory by the end of 2016.

The government's budget deficit in 2015 was initially estimated to be 5.2 per cent of GDP and subsequently revised to 5.1 per cent, a much larger figure than the 4.2 per cent target set by the European Commission. Significant further reductions in the deficit are likely to prove difficult in the short term, given the political situation. In the meantime, the debt-to-GDP ratio has continued to increase, reaching 98 per cent at the beginning of 2015, the highest level shown in data available since 1981.

United States

The expansion of output and employment has weakened in recent months from the average pace of growth in 2014 and 2015. The appreciation of the dollar in recent years has weighed on net exports, fixed investment in the energy sector has been depressed by the decline in oil prices, and an increase in household saving has limited the growth of consumption. Core consumer price inflation has risen close to the Fed's medium-term objective of about 2 per cent, but all-items inflation has recently fallen back to about 1 per cent and increases in labour earnings have remained subdued. The Fed, after raising its target range for the federal funds rate last December from near zero, where it had been maintained for seven years, has left rates unchanged, indicating in March that the path of future increases was likely to be less steep than envisaged three months earlier.

In the fourth quarter of 2015, GDP growth weakened to 1.4 per cent at an annual rate from 2.0 per cent in the third quarter. Growth in the second half of last year was thus significantly weaker than the 2.4 per cent average growth rate of both 2014 and 2015. Growth in the fourth quarter was more than fully accounted for by household consumption; the growth of fixed investment was the slowest for more than three years, and the contributions of both net exports and inventory accumulation were negative. Recent, partial data for the first quarter of 2016 suggest that the expansion weakened further, likely to below 1 per cent at an annual rate. (3) Thus industrial production contracted by 0.6 per cent in the first quarter, with manufacturing output up only slightly. Moreover, the growth of real consumer spending in the first two months of the year was sluggish, with consumers saving a higher proportion of their disposable incomes. Also recent trade data indicate a further negative contribution from net exports.

Taking into account these developments, we have revised down our projection of GDP growth in 2016 as a whole to 2.0 per cent from 2.5 per cent three months ago, with a pick-up to 2.5 per cent growth projected for 2017.

The growth of employment has remained more solid than the growth of output but has also slowed somewhat since 2014. Non-farm payrolls increased by 209,000 a month, on average, in the first quarter, compared with 229,000 in 2015 and 251,250 in 2014. The annual growth rate of non-farm jobs, which peaked at 2.3 per cent early last year, was 1.9 per cent in the first quarter of 2016. The slowing growth of employment has been associated with further declines in unemployment, to 4.9 per cent in January and February, its lowest level since early 2008, although it ticked up to 5.0 per cent in March. This is the top end of the Fed's range estimate of the longer-term unemployment level, which it revised down slightly further in March to 4.7-5.0 per cent. The labour force participation rate has risen from the 38-year low of 62.4 per cent reached last September, to 63.0 per cent in March, but it remains historically low--one indication that labour market slack may be greater than suggested by the unemployment rate. Another indication is the continuing subdued growth of labour earnings. Thus average hourly earnings in the private sector were 2.3 per cent higher in February and March than a year earlier--the smallest 12-month increase since last August. The employment cost index, which takes account of benefits as well as pay, rose by only 2.0 per cent in the year to last December.

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Consumer price inflation, by the Fed's preferred measure --based on the price index for personal consumption expenditure--was 1.0 per cent in the year to February, down from 1.2 per cent in the year to January but higher than the 0.2-0.7 per cent range observed in the second half of last year. The core 12-month rate rose to 1.7 per cent in January and February from the 1.3-1.4 per cent range seen late last year. In terms of the narrower consumer price index, core inflation in the year to March was 2.2 per cent, with the all-items inflation rate at 0.9 per cent. Expected future inflation appears to have rebounded significantly since early February. Thus the five-year breakeven inflation rate, which fell to 0.9 per cent in early February--its lowest level since mid-2009--had risen to 1.5 per cent by late April.

[FIGURE 9 OMITTED]

[FIGURE 10 OMITTED]

At its mid-March meeting, the Federal Open Market Committee (FOMC) decided to maintain its target range for the federal funds rate at 0.25-0.50 per cent, as set last December, when it had indicated that the median expectation of the Committee's participants was that the range would be raised by 1 percentage point in 2016. The March meeting lowered this median to 0.5 percentage point, at the same time as participants lowered slightly their projections for GDP growth in 2016 and 2017, as well as their projection of inflation in 2016. Chairman Yellen indicated that the decision to hold rates unchanged reflected both a downward revision since last December of global economic growth projections and the recent tightening of financial conditions, including a widening of corporate bond spreads. Since the FOMC's March meeting, indicators of demand and activity in the US economy itself have weakened, and many analysts' growth projections have been revised down.

Canada

GDP growth slowed to 0.2 per cent in the fourth quarter of 2015 from 0.6 per cent in the third, depressed both by falling fixed investment in the energy sector and by a switch from positive to negative inventory accumulation. Net exports made a positive contribution to growth in the fourth quarter, thanks to a drop in imports that exceeded a decline in exports. In 2015 as a whole, GDP grew by 1.2 per cent, the weakest performance since 2009 and marginally below our February estimate. More recent data, including a 0.6 per cent increase in monthly GDP in January, have been more positive, but the process of adjustment to an economy that is less dependent on the resource sector, particularly energy production, is expected to continue to weigh on growth over the next few years.

Unemployment fell to 7.1 per cent in March from 7.3 per cent in February but remains above the 6.6 per cent trough reached at the beginning of 2015 as well as the pre-crisis lows of around 6.0 per cent. Lack of wage pressures and the persistence of involuntary part-time employment and long-term unemployment indicate that there is significant slack in the labour market.

Consumer price inflation, on a 12-month basis, slowed to 1.4 per cent in February from a 14-month high of 2.0 per cent in January. Falling gasoline prices dragged inflation down while core inflation was at 1.9 per cent, down from 2.0 per cent in the previous month.

The new government elected last October, reversing the policies of the previous administration, introduced an expansionary budget in March including around C$11 billion of additional spending on infrastructure and C$12 billion worth of measures benefitting households. The budget was designed to raise GDP by 0.5 per cent in 2016 and 1 per cent in each of the next two years. Canada's fiscal position remains healthy: we now forecast a government deficit of 2.0 per cent of GDP in 2016, 0.3 percentage point larger than our February forecast, but our forecast deficit for 2017 is unchanged, also at 2.0 per cent. The government's net debt position, about 27 per cent of GDP at the end of 2015, is the lowest among the major advanced economies.

The Bank of Canada has maintained its key interest rate at 0.5 per cent since lowering it to this level in July last year. Market expectations of a rate cut this year have dropped sharply, partly on account of the expansionary budget, and this has been reflected in a significant rise in longer-term interest rates since mid-January, with 10-year government bond yields up by about 25 basis points--the only significant increase in long rates among the major economies in this period. Combined with positive economic data for the start of the year and the upturn in global oil prices since early February, this has contributed to a 16 per cent appreciation of the Canadian dollar against the US dollar from the 12-year low reached in January.

Taking into account these developments, we have lowered our growth projections for 2016 and 2017 slightly, to 1.7 per cent and 2.1 per cent, respectively. We expect inflation to remain below the Bank of Canada's 2 per cent target until the second half of 2017 as the disinflationary effects of lower energy prices and excess capacity in the economy more than offset exchange rate pass-through effects.

Japan

Economic growth has remained weak and erratic, and inflation has remained well below target despite low unemployment. The Bank of Japan has taken further action to ease monetary conditions, by lowering the interest rate paid on some bank reserves below zero, but its efforts to raise inflation have been complicated by the recent appreciation of the yen. Recent developments have led us to revise our growth forecast down, with a slight contraction in GDP now projected for next year in the wake of the increase in the consumption tax, from 8 to 10 per cent, scheduled for next April.

The economy contracted by 0.3 per cent in the final quarter of 2015, almost entirely on account of a 0.9 per cent drop in private consumption; private fixed investment and net exports both made modest positive contributions to growth. In 2015 as a whole, GDP increased by 0.5 per cent, compared with our February estimate of 0.9 per cent. More recent indicators suggest that if growth returned in the first quarter, it was weak. Consumer spending has remained subdued in recent months, industrial production has been on a declining trend, and PMIs have indicated weak growth at best. The recent appreciation of the yen--by about 8 per cent, in trade-weighted terms (see note 1), between December 2015 and late April, has dented business confidence. The Tankan survey for March reported the weakest levels of business sentiment since mid-2013, suggesting a weaker outlook for investment than in our February forecast. The appreciation of the yen is also likely to weigh down on net exports this year. The earthquake in April in Kyushu is likely to depress growth in the second quarter; a number of factories have had to cease production. Taking into account recent developments, we have revised down our growth projection for 2016 to 0.2 per cent from 1.0 per cent in February, while for 2017, assuming implementation of the planned increase in the consumption tax, we now forecast a marginal decline in GDP.

Inflation remains subdued and significantly below the Bank of Japan's 2 per cent target. Consumer price inflation in the year to February was 0.3 per cent, close to the average for recent months, and the variant that excludes food and energy was also little changed, at 0.8 per cent. The March Tankan survey showed a significant decline since December in producers' inflation expectations. While the labour market remains tight, with unemployment recently stable at 20-year lows of about 3.3 per cent, there is little evidence of any acceleration in wages: in fact, the spring round of wage negotiations seems to be delivering smaller increases than last year, despite government pressure for larger pay rises. Taking into account the recent appreciation of the yen, we expect average inflation to be zero this year before picking up to 1.0 per cent in 2017, largely as a result of the sales tax increase.

The Bank of Japan, in an effort to provide extra stimulus, announced in late January that it would reduce in mid-February the interest rate paid on a portion of banks' reserves to -0.1 per cent from 0.1 per cent. This led to a general decline in Japanese interest rates over the following weeks, with even the 10-year government bond yield below zero from late February. However, the yen, after a short-lived depreciation following the announcement, rose in value over the following weeks. By late April, it was about 7 per cent higher against the US dollar than just before the announcement, and 5 per cent higher in trade-weighted terms. This appreciation may, perhaps, be attributed partly to a relative decline in inflation expectations in Japan, partly to a downward shift in expectations about US monetary tightening, and partly to the substantial easing action by the ECB. In any event, the exchange-rate response that might have been expected did not occur. The negative interest rate has also led to concerns about bank profitability, which is being affected by the narrowing of interest margins and also by a decline in interbank lending, which has fallen to its lowest level since 1988. Concerns have arisen that impairment of this market may mean that when the normalisation of monetary policy occurs, excess market volatility may arise, with banks unable to use this market to smooth funding. Nevertheless, Bank of Japan officials have indicated their readiness to lower interest rates further into negative territory if necessary, and market indications are that further reductions are expected, possibly as early as late April.

Our forecast for 2017 onwards assumes implementation in April 2017 of the previously announced consumption tax increase from 8 to 10 per cent. We expect that the economy's response will be similar to that which followed the April 2014 increase in the tax from 5 to 8 per cent. Households will bring forward consumption expenditures to the first quarter of 2017, with a sharp subsequent contraction in spending followed by a slow recovery. Our forecast for 2017 is therefore a small decline in GDP, with the external sector partly offsetting a larger contraction in domestic demand. While this is our modal forecast, the risks seem tilted to the downside, especially given the limited space for further monetary stimulus and the seemingly limited effectiveness of recent measures. While there remains a valid case for the tax increase to help the government secure fiscal sustainability and achieve its target of primary budget balance by 2020, temporary fiscal measures may be necessary to offset its short-term contractionary effect. Indeed, without an improvement in the economy in the coming year the tax hike could, justifiably, be further postponed.

China

Concerns that were apparent in global financial markets in late 2015 and early this year, about slowing growth in China and a possible resort by the authorities to currency depreciation, have been eased in recent months by stabilisation of the renminbi's exchange rate in terms of the US dollar, expansionary measures taken by the fiscal and monetary authorities, and more positive economic data. GDP growth in the year to the first quarter of 2016 was 6.7 per cent, marginally slower than in the year to the fourth quarter of 2015 and within the target range of 6.5-7.0 per cent set by the government in early March for 2016. Other recent data, for the year ending in March, have shown a resumption of growth in international trade and the fastest expansion in industrial production and fixed-asset investment since mid-2015, as well as a marked upturn in property sales.

[FIGURE 11 OMITTED]

Recent data have, however, shown less progress in the planned transition from an economy based mainly on investment, exports, manufacturing and construction to one based more on household consumption and the production of services, and this rebalancing seems unlikely to be promoted by recent expansionary measures. Our view concerning the challenges facing the economy in the medium- to long-run therefore remains unchanged. We continue to forecast a continuing slowing of output growth next year and in the medium term, Our forecast of output growth in 2016 and 2017 is largely unchanged from our projections three months ago, at 6.5 and 6.2 per cent, respectively.

In February, the People's Bank reduced minimum down payments for home purchases financed by mortgages, and also increased the frequency of its open-market operations, from bi-weekly to daily, to help ensure adequate liquidity in the banking system. Also, on 1 March, it reduced the required reserve ratio for banks by 0.5 percentage point to 17 per cent, the fifth reduction in the past year.

[FIGURE 12 OMITTED]

Recent announcements of expansionary fiscal measures, including spending on infrastructure, signify the government's policy of using fiscal space to support growth while the economy rebalances and investment weakens. The government indicated in early March that it would allow the fiscal deficit to widen to 3.0 per cent of GDP in 2016 from 2.4 per cent last year. However, given that fiscal spending includes significant off-budget items, it is difficult to evaluate precisely the size and stimulative effect of proposed easing measures.

With regard to economic restructuring, the authorities in late February acknowledged the existence of overcapacity in the industrial sector by announcing that 1.8 million workers are expected to be laid off in the steel and coal sectors--a number representing roughly 0.5 per cent of the non-agricultural labour force--and that a fund of $15.3 billion would be set aside to support the affected workers and areas.

House prices for both newly built and second-hand houses in 70 medium-sized and large cities fell between mid-2014 and mid-2015 but have been recovering since last September. In the year to February 2016, they rose by 3.6 and 4.5 per cent respectively, as illustrated in figure 12. The pick-up in house prices has accompanied increased housing sales and faster growth in housing investment and construction. The rise in sales seems to have occurred mainly in large cities, where supply is limited, which points to the difficulty of supporting the housing market in the smaller cities, where there has been an oversupply of housing, without generating excessive price rises in the largest ones.

Consumer price inflation has picked up in recent months, reaching 2.3 per cent in February and March 2016 on a 12-month basis, still below the government's 3 per cent target for the year. Much of the increase is attributed to a jump in food prices. Core inflation has remained at around half the government's target. Meanwhile, the producer price index has continued to decline, but at a slower rate, falling by 4.3 per cent in the year to March 2016. This was the 49th consecutive 12-monthly decline.

One factor putting upward pressure on prices since mid-2015 has been a depreciation of the renminbi, by about 7 per cent in trade-weighted terms. As shown in figure 11, this depreciation has continued since early February even though the currency has appreciated by about 2 per cent in terms of the US dollar in this period.

India

India remains the fastest growing major economy. GDP increased by 7.3 per cent both in the year to the final quarter of 2015 and in 2015 as a whole. The main driver of growth has remained private consumption, which increased by 6.4 per cent in the year to the fourth quarter. GDP growth, measured on a four-quarter basis, softened in the latter part of 2015 largely on account of slowing expansion of fixed investment, which grew by 2.8 per cent in the year to the final quarter. The external sector contributed positively to GDP growth in the same period, despite a 9.4 per cent contraction in exports. Data available for early 2016 suggest, on balance, that GDP growth has remained close to its recent pace. Data for industrial production show growth of only 2.0 per cent in the year to February after three 12-month declines, but recent PMIs have indicated more healthy growth, with the composite index reaching a 37-month high in March. Our growth projections for 2016 and 2017 have been revised slightly upwards, to 7.5 and 8.0 per cent, respectively.

After rising from 3.7 per cent in July 2015 to 5.7 per cent in January this year, consumer price inflation, on a 12-month basis, has more recently fallen back, to 4.8 per cent in March. This partly reflects subdued prices of energy and other commodities, but the core rate has also fallen, to 4.5 per cent. With inflation thus within the Reserve Bank's new target range of 4, plus or minus 2, per cent, for the current fiscal year and beyond, the Bank lowered its benchmark interest rate in early April by a further 25 basis points, to 6.5 per cent, its lowest level since 2011. We expect inflation to average 5.2 and 5.0 per cent, respectively, in 2016 and 2017.

With regard to fiscal policy, the budget announced in February confirmed the deficit targets of 3.5 per cent of GDP for the fiscal year 2016/17 and 3.0 per cent in the following two years, down from 3.9 per cent in 2015/16. There has been little progress with structural reforms.

A key risk to the economy is posed by the increased scale of the non-performing loans of the banks, especially those that are state-owned, where stressed assets accounted for about 17 per cent of total assets last September. A review of asset quality undertaken by the Reserve Bank last year led it both to demand that all banks make full provision for troubled loans by end-March 2017, and to put pressure on corporate debtors to repay overdue loans. The government has meanwhile introduced new bankruptcy legislation in parliament that would strengthen banks' leverage over delinquent borrowers. Also, in the budget for the fiscal year 2016 17 published in February, the government announced that nine of the state-owned banks were not expected to pay dividends to the government. This signalled that the government is taking the issue of non-performing loans seriously; it should make it easier for these banks to repair their balance sheets. It also, however, indicates the risk of strains on the public finances that may arise from the difficulties of the banks and the possibility that the government may be forced to inject capital.

Brazil

Brazil's economic and political difficulties have continued. In the last quarter of 2015, GDP fell by 1.4 per cent, to a level 5.9 per cent lower than a year earlier. In 2015 as a whole, output fell by 3.9 per cent, the worst annual performance since 1991. Inflation remains high and unemployment is rising. Political gridlock continues, with a government unable to enact measures to contain a rising budget deficit, which reached 10.4 per cent of GDP in 2015, with a primary deficit of 1.9 per cent of GDP, the largest in eighteen years. On 17 April, the lower house of Congress voted to open impeachment proceedings against President Rousseff on charges that she obscured the scale of the country's fiscal deficit in the period before the 2014 elections; the motion was thus advanced to the Senate. This process is taking place in the midst of a corruption scandal surrounding the state oil company and involving a wide range of politicians and officials.

Meanwhile financial markets have risen significantly since late January, reportedly driven by growing expectations of the installation of a more business-friendly government. Thus between late January and late April, 10-year government bond yields fell by about 350 basis points, the real appreciated by about 15 per cent against the US dollar--more than any other major currency--to levels last seen in August 2015, and the stock market rose by about 40 per cent in domestic currency terms.

In the fourth quarter of last year, all major components of demand fell, including exports, despite a currency depreciation of more than 40 per cent against the US dollar between mid-2014 and late 2015. With imports falling by more than exports, reflecting the weakness of domestic demand, the trade deficit has narrowed and has recently been close to balance. Household consumption has been depressed by falling real incomes and rising unemployment, which reached 8.2 per cent in February, almost double the low reached in late 2014.

In light of recent developments, and assuming no change in policy regime, we have revised our growth projections downwards. We expect the recession to continue this year with a GDP contraction of 3.4 per cent, and growth to resume in 2017, at a modest rate of 0.9 per cent.

Consumer price inflation, on a 12-month basis, peaked at 10.7 per cent in January 2016 and eased off to 9.4 per cent in March, partly because increases in administered prices implemented early last year dropped out of the 12-month comparison. The recent appreciation of the real has also reduced upward pressure on prices. Nevertheless, inflation remains significantly above both the Central Bank's target of 4.5 per cent and the upper limit of its tolerance range, which has been lowered for 2017 to 6.0 from 6.5 per cent. The Central Bank has maintained its benchmark, Selic, interest rate at 14.25 per cent since July 2015. It forecast in March that inflation will fall to 6.6 per cent by the end of 2016 and meet its 4.5 per cent target in early 2018. We forecast a somewhat slower path of disinflation, with inflation falling to 5.0 per cent, on average, next year.

Russia

The decline in economic activity appears to be moderating. GDP fell by 3.9 per cent in the year to the fourth quarter of 2015, the fourth successive four-quarter contraction. Declining incomes curtailed household spending (which fell by 12.4 per cent in the year to the fourth quarter) while government budget cuts reduced public consumption (-1.7 per cent). Gross fixed capital formation continued to decline (-6.0 per cent) but net exports rose, with exports increasing by 9.8 per cent and imports falling by 25.4 per cent, reflecting both the fall in domestic demand and the improvement in Russia's international competitiveness associated with the large depreciation of the rouble in recent years. In 2015 as a whole, GDP fell by 3.7 per cent, slightly more than estimated in our February Review. Indicators for early 2016 point to a slowing of the contraction, with industrial production in February and March little changed from early 2015, and PMIs for the services sector suggesting a resumption of growth in parts of the economy.

Increases in global oil prices since early February 2016 will promote the stabilisation of activity. On the other hand, international sanctions continue to weigh on the economy. The EU and the US extended their sanctions in March for six months and one year respectively. These sanctions limit access to foreign finance, and also include asset freezes and travel bans, targeting senior Russian officials, businessmen and state-owned companies, and generally adding to the difficulties of doing business in Russia. The duration of sanctions will depend on implementation of the Minsk peace agreements relating to Ukraine.

Unemployment has risen significantly from the 20-year low of 4.8 per cent reached in mid-2014, to 6.0 per cent in March. Real pay fell by 3.0 per cent and real disposable income by 1.8 per cent in the year to March. Another indication of increased economic hardship is the share of the population living under the poverty line, which rose to 13.4 per cent in 2015, the highest level since 2008.

Consumer price inflation, on a 12-month basis, having peaked at 16.9 per cent in March 2015, has slowed significantly in recent months, reaching 7.3 per cent in March 2016, the lowest rate in almost two years. Despite the slowdown of inflation and the appreciation of the rouble in recent months, which has contributed to it, the Central Bank has kept its benchmark rate at 11 per cent since last August, citing in March inflationary risks arising from developments in the oil market, persistently high inflation expectations and budget uncertainties. The Central Bank also indicated that monetary policy might need to remain moderately tight for longer than previously planned to ensure achievement of its inflation target of 4 per cent for 2017 and subsequent years under its new monetary policy regime introduced in 2015.

Taking into account recent developments, we now project a somewhat larger decline in GDP in 2016 than we forecast in February--a fall of 1.9 per cent, rather than 1.1 per cent--followed by a slower recovery in 2017, with growth of 0.5 rather than 2.5 per cent. Our inflation projections have also been lowered, but they still remain somewhat above the Central Bank's target throughout the forecast period.

NOTES

(1) This is in terms of the effective exchange rate index calculated by the Bank of England.

(2) See If W Kiel, DiW and German Economic Council.

(3) After our forecast was finalised, the advance estimate of first-quarter GDP growth was released, as 0.5 per cent, annualised, below our assumption of 0.8 per cent. This is the slowest quarterly growth for two years.

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. The central bank of New Zealand lowered its policy rate again in March 2016 by 25 basis points, after cutting it by 100 basis points in four rounds during 2015. 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 has kept them unchanged since, the Indian central bank lowered its benchmark rate further by 25 basis points in April 2016. 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, for the first time since 2012, Indonesia's central bank has lowered it again in 2016 in three steps, by a total of 75 basis points. 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 a cumulative 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 further by 25 basis points in March 2016, the central bank of Poland has left them unchanged since. Over the course of last year, the Swedish Riksbank cut its policy rate by 35 basis points in three rounds and has lowered it again by 15 basis points this year. At the time of writing, the Riksbank's policy rate stands at -0.5 per cent. 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 has kept its benchmark interest rate unchanged after reducing it, by cumulative 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 cuts in nominal interest rates by the Bank of Canada since April 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. The South African Reserve Bank increased its benchmark rate by 25 basis points in July last year and the Central Bank of Brazil has raised its interest rate by 200 basis points to 14.25 per cent, in a series of steps over the course of 2015. While the Central Bank of Brazil has left its interest rate unchanged since, the South African Reserve Bank increased its rate further by 75 basis points in two rounds this year. To stem downward pressure on the Peso following a rise in the federal funds rate in the US, the central bank of Mexico has increased its interest rate by 75 basis points in three rounds since December 2015. These were the first increases since August 2008.2

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 (FOMC), 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 US 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. This message has been reiterated by the FOMC at subsequent meetings. Indeed the FOMC has judged that further interest rates were not warranted in the first third of this year. At the March meeting median expectation of the Committee's participants of target range for the federal funds rate was lowered by 0.5 percentage point in 2016.

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 first to raise rates towards the end of 2019. We think a much earlier move is more likely. Published market expectations are based on the mean of the distribution. This mean that a skew to the downside, possibly reflecting where the perceived risks are weighted towards, weighs on the arithmetic mean as opposed to 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 reasonable economic performance and consumer price inflation being close to the target rate.

[FIGURE A1 OMITTED]

[FIGURE A2 OMITTED]

The central banks of the Euro Area (ECB) and Japan (BoJ) have continued to expand their balance sheets. On 10 March 2016, the ECB announced a package of measures "calibrated to further ease financing conditions ... and accelerate the return of inflation to levels below, but close to, 2 per cent". This followed a more limited set of measures announced in December 2015. First, with effect from 16 March, the ECB's benchmark interest rates were lowered further. Second, the 'expanded asset purchase programme' which began in March 2015 was expanded further. The original package envisaged combined purchases of assets amounting to 60 billion [euro] a month until at least September 2016. Last December, the programme was extended to at least March 2017. In the latest package, it was announced that, beginning in April 2016, monthly purchases would be increased to 80 billion [euro] and "run until end-March 2017, or beyond". This means that if the programme ends in March 2017, total asset purchases will have amounted to 1.74 trillion [euro] over 25 months, rather than 1.5 [euro] trillion under the programme as extended last December. Third, the issuer and issue-share limits for the purchase of securities issued by international organisations and multilateral development banks were raised from 33 per cent to 50 per cent. Fourth, the assets eligible for purchase by the Eurosystem of central banks under the asset purchase programme would be expanded in June 2016 to include investment-grade, euro-denominated, non-bank corporate bonds issued in the Euro Area.

Finally, a new series of four-quarterly targeted long-term refinancing operations (TLTRO II), each with a maturity of four years, would be launched, starting in June 2016, with interest rates matching those on the deposit facility. TLTRO II is intended to give banks additional incentives to lend to the private sector: funds made available to banks under the scheme will depend upon eligible lending, similar to the Funding for Lending Scheme in the UK.

In October 2014, the Bank of Japan (BoJ) surprised financial markets by announcing that it would expand 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 BoJ announced a further modification of its programme of quantitative and qualitative easing (QQE).This involves lengthening of the average maturity of bonds purchased from the beginning of 2016 to 7-12 from 7-10 years; increasing purchases of Japanese 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. Additionally, at the end of January 2016, the BoJ lowered the interest rate on one tier of bank reserves marginally below zero. The minutes of the January 28-29 policy meeting indicate that more monetary stimulus measures may be introduced throughout the course of the year.

[FIGURE A3 OMITTED]

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 2014. 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 during the summer, but have since reversed some of these gains in yields. Ten-year sovereign bond yields have declined since late January in the US, Euro Area, the UK and Japan--by about 20 basis points in the US and the Euro Area, 25 basis points in the UK and 30 basis points in Japan. Current expectations for bond yields for the end of 2016 are lower, by about 45-50 basis points, compared with expectations formed just three months ago, for the US, Euro Area, the UK, and Japan.

[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. For Greece this reflected initial uncertainty over the fiscal stance and probability of debt repayment following the formation of a government dominated by a political party elected on an 'anti-austerity' manifesto in January 2015. The risk of Greece leaving the Euro Area returned to the fore, as a deal on a third bailout for Greece appeared unlikely. In the summer of 2015 a lack of liquidity led to a three-week closure of the domestic banking system, with withdrawal limits imposed upon on Greeks' bank accounts and the imposition of controls on external payments. The dangers relating to the financial difficulties of Greece and the policy programme being negotiated with its European partners subsequently receded. In mid-August last year, 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). Disbursements (including cash and cashless) totalling 21.4 billion [euro] were made by the ESM between August and December 2015. However, recently, renewed fears of debt sustainability led to an increase in sovereign spreads in Greece to the levels last seen in the first half of last year.

[FIGURE A5 OMITTED]

In Portugal sovereign spreads have started to widen since the end of 2015 and reached highs last seen at the beginning of 2014. A combination of factors, including the 'anti-austerity' stance of the new Socialist government, the surprise decision by the Portuguese central bank to impose losses on bank bonds held by international investors and a risk of a credit-rating downgrade that may result in the exclusion of government bonds from the ECB's asset-buying programme, led to Portuguese bonds being the worst performers in the Euro Area (after Greece). In our forecast, we have assumed spreads over German bond yields continue to narrow in all Euro Area countries. The implicit assumption underlying the forecast is that the current Euro Area membership composition persists.

[FIGURE A6 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 from the second half of 2013 till the second half of 2015, illustrated by the stability of these spreads in the US, Euro Area and the UK. However, since late last year corporate bond spreads have widened, reflecting a tightening of financial conditions. Our forecast assumption for corporate spreads is that they gradually converge towards their long-term equilibrium level.

Nominal exchange rates against the US dollar are generally assumed to remain constant at the rate prevailing on 12 April 2016 until the end of December 2016. After that, they follow a backward-looking uncovered-interest parity condition, based on interest rate differentials relative to the US. The exception is the UK, where we assume a vote to remain a member of the EU leading to an immediate unwinding of the risk premium that appeared in the run-up to the referendum. 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. Since late January 2016, the US dollar has depreciated against all other major currencies except sterling. In trade-weighted terms, this was a reversal of an appreciation trend lasting since 2011. The US dollar's trade-weighted value has fallen by about 3 per cent since the end of the first quarter; nevertheless it was still about 33 per cent above its mid-2011 trough. The dollar's recent reversal may be related partly to downward revisions in expectations about tightening by the Federal Reserve and about the associated widening of interest differentials in favour of dollar-denominated assets. After depreciating significantly between mid-2014 and the first quarter of this year, in effective terms, both the Russian rouble and the Brazilian real have gained, by about 10 and 8 per cent respectively, since the first quarter of 2016. The trade-weighted value of the Canadian dollar has increased by about 7 per cent over the same period after depreciating by about 15 per cent between mid-2014 and the first quarter of 2016.

Our oil price assumptions for the short term are based on those of the US Energy Information Administration (EIA), published on 12 April 2016, and updated with daily spot price data available up to the same date. The EIA use information from forward markets as well as an evaluation of supply conditions, and these are illustrated in figure A5. Global oil prices bottomed out at about $26 a barrel in February 2016 and have since risen to about $40, the highest levels since last November. An initial trigger for the turnaround seems to have been speculation around an announcement in February 2016 that some major oil producers, including Saudi Arabia, might cap production at January 2016 levels, conditional on agreement by other producers. However, a subsequent meeting of oil producing countries, in Doha in April, failed to reach any agreement. Projections from the EIA suggest little further increase 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 8 per cent, compared to the expectations formed just three months ago, which leaves oil prices more than $70 lower than their nominal level in mid-2014. Oil prices are expected to reach $36 and $48 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 have performed well, irrespective of a short-lived drop--a reaction to the QE tapering signals emanating from the Federal Reserve in the summer of 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 2015, especially in the Euro Area economies, partly supported by the wide-scale asset purchase programme introduced by the ECB in March 2015. However, between mid-2015 and the first quarter of 2016, the performance of share prices globally has been disappointing. The triggers for equity price declines seem to have been related to turmoil in the Chinese equity market, with in some cases country-specific issues exacerbating the impact. Since early February 2016 equity markets, generally, have risen. One possible explanation is the partial recovery of oil prices which has reduced the financial pressures on oil-producing companies and countries, including indebted ones, and also on their lenders. The recent decline in bond yields may have been another factor boosting equities.

Fiscal policy assumptions for 2016 follow announced policies as of 8 April 2016. 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. Pressure continues to mount for a loosening of fiscal policy to support demand. Calls for infrastructure investment, which supports demand in the near term and potential growth in the longer term is where these calls are particularly focused (IMF, 2016 and OECD, 2016). 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. (2012).

NOTES

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

(2) Interest rate assumptions are based on information available for the period to 13 April 2016.

REFERENCE

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

IMF World Economic Outlook, April 2016.

OECD Interim Economic Outlook, February 2016.

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           0.54    0.50    -0.12     0.01      0.54
2017           1.53    0.76    -0.37     0.00      1.03
2018-22        3.21    2.72    -0.28     1.18      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   0.30    0.50     0.10     0.05      0.50
2016      Q1   0.50    0.50     0.00     0.04      0.50
2016      Q2   0.50    0.50    -0.10     0.00      0.50
2016      Q3   0.50    0.50    -0.16     0.00      0.50
2016      Q4   0.67    0.50    -0.20     0.00      0.67
2017      Q1   1.01    0.50    -0.29     0.00      0.75
2017      Q2   1.36    0.68    -0.34     0.00      0.94
2017      Q3   1.70    0.85    -0.40     0.00      1.13
2017      Q4   2.04    1.03    -0.46     0.00      1.31

                   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           2.0    1.4      0.0       0.8      1.6
2017           2.7    2.2      0.1       1.4      2.3
2018-22        3.7    3.6      0.5       2.9      3.5
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   1.9    1.2      0.1       0.8      1.5
2016      Q2   1.7    1.2      0.0       0.6      1.4
2016      Q3   2.0    1.5      0.0       0.8      1.6
2016      Q4   2.2    1.7      0.0       1.0      1.8
2017      Q1   2.4    1.9      0.1       1.2      2.0
2017      Q2   2.6    2.2      0.1       1.3      2.2
2017      Q3   2.8    2.3      0.1       1.5      2.4
2017      Q4   2.9    2.5      0.1       1.6      2.5

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      13.8  -10.7    -5.6  -5.6   -3.2     -3.2   -2.1    6.6
2016       3.7    1.3    12.9   4.5    2.5      2.6    3.6   -4.5
2017      -0.8    1.9     1.9   0.7    0.3      0.4    0.6    0.9
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   3.5   -6.1     1.9   2.5    1.8      1.4    2.1    2.3
2015  Q4   2.2   -2.5     2.3   0.4    0.3      0.2    0.6   -0.4
2016  Q1   2.3    0.8     7.0   2.8    1.6      1.6    2.1   -5.3
2016  Q2  -2.7    6.7     4.2   1.1    0.2      0.6    0.5   -3.1
2016  Q3  -0.3    0.1     0.0  -0.6   -0.2     -0.3   -0.2    3.7
2016  Q4   0.0    0.0    -0.1   0.0    0.0      0.0    0.0    0.0
2017  Q1   0.1    0.1     0.3   0.3    0.1      0.1    0.2    0.0
2017  Q2   0.0    0.1     0.4   0.3    0.1      0.2    0.2    0.0
2017  Q3   0.0    0.2     0.5   0.3    0.2      0.2    0.2    0.0
2017  Q4  -0.1    0.2     0.5   0.4    0.2      0.2    0.3   -0.1

               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       1.299    121.1  0.902   0.654
2016       1.301    110.2  0.885   0.688
2017       1.273    107.7  0.873   0.675
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   1.370    121.5  0.914   0.659
2016  Q1   1.372    115.2  0.906   0.698
2016  Q2   1.279    108.7  0.878   0.701
2016  Q3   1.276    108.5  0.878   0.676
2016  Q4   1.276    108.5  0.878   0.676
2017  Q1   1.276    108.3  0.877   0.676
2017  Q2   1.274    108.0  0.875   0.675
2017  Q3   1.272    107.5  0.872   0.675
2017  Q4   1.269    106.9  0.868   0.674

Table A3. Government revenue assumptions

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

             2015  2016  2017  2015  2016  2017  2015  2016  2017

Australia    14.8  14.9  14.9  25.7  25.7  25.7  32.8  32.8  32.8
Austria      32.0  32.6  33.1  21.8  21.8  21.8  42.3  42.5  42.7
Belgium      35.2  35.2  35.2  21.7  21.7  21.7  43.2  42.3  42.2
Canada       20.5  20.6  20.9  20.8  20.8  20.8  35.9  35.9  35.6
Denmark      42.4  38.3  36.5  17.9  17.9  17.9  49.0  49.1  46.8
Finland      33.3  33.3  33.1  23.1  23.1  23.1  46.3  46.5  46.1
France       30.3  29.6  29.7  32.7  32.7  32.7  45.6  45.5  45.8
Germany      29.5  29.6  29.6  19.4  19.4  19.4  41.3  40.8  41.1
Greece       24.2  24.1  24.1  13.5  13.5  13.5  36.9  38.1  37.6
Ireland      26.5  26.5  26.5   9.8   9.8   9.8  26.9  26.3  26.3
Italy        29.5  29.2  29.2  26.5  26.9  26.9  43.1  42.4  41.4
Japan        23.7  23.7  23.7  29.6  29.6  29.6  34.3  34.3  34.7
Netherlands  33.3  33.4  33.4   8.4   8.4   8.4  39.8  39.4  39.3
Portugal     20.6  20.6  20.7  20.1  20.1  20.1  36.2  35.7  35.7
Spain        26.3  27.3  27.2  16.0  16.4  16.4  38.0  37.7  37.6
Sweden       26.5  26.5  26.6  23.1  23.1  23.1  43.5  43.3  43.4
UK           22.7  22.9  22.9  13.3  13.1  12.3  35.6  36.3  36.3
US           19.6  19.6  19.6  29.0  29.0  29.0  30.8  31.0  31.0

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

Table A4. Government spending assumptions)3)

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

Australia     32.9   32.8   32.2   1.8    1.8    1.6        --
Austria       42.9   43.4   43.0   2.2    1.9    1.6        --
Belgium       43.4   42.8   42.4   2.7    2.2    1.9        2015
Canada        34.5   34.9   34.9   3.1    2.9    2.8        --
Denmark       47.9   48.1   47.4   1.4    1.2    1.0        --
Finland       48.7   48.3   47.6   1.1    0.9    0.8        2016
France        47.4   47.3   47.5   1.8    1.5    1.3        2018
Germany       39.2   39.2   39.3   1.5    1.1    0.9        --
Greece        40.0   42.0   41.5   3.1    3.1    2.9        --
Ireland       25.1   24.1   24.3   3.5    3.3    3.1        2015
Italy         41.2   40.8   39.9   4.5    4.1    3.5        2015
Japan         38.7   38.8   39.1   2.1    1.7    1.4        --
Netherlands   40.5   40.0   39.8   1.3    1.0    0.8        --
Portugal      36.5   36.1   35.9   4.2    3.7    3.5        2019
Spain         40.0   39.2   38.6   3.3    2.9    2.4        2018
Sweden        44.8   44.4   44.5   0.7    0.6    0.6        --
UK            36.3   36.0   35.4   1.7    1.8    1.8        2018
US            31.6   31.5   31.1   3.5    3.4    3.3        2020

Notes: (a) Expenditure shares reflect NiGEM aggregates, which may
differ from official government figures, (b) The deficit in
Australia, Austria, Canada, Denmark, Germany, Netherlands and Sweden
is not expected to exceed 3 per cent of GDP within our forecast
horizon. In Greece and 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    2.5    2.4    2.8     3.2
Austria (a)        0.3    0.5    0.8    1.1    1.9     1.7
Belgium (a)        0.0    1.3    1.4    1.2    1.5     1.6
Bulgaria (a)       0.9    1.7    2.8    2.8    2.4     1.7
Brazil             3.0    0.1   -3.9   -3.4    0.9     2.5
China              7.7    7.3    6.9    6.5    6.2     5.9
Canada             2.2    2.5    1.2    1.7    2.1     2.0
Czech Rep.        -0.5    2.0    4.3    2.2    2.4     2.3
Denmark (a)       -0.2    1.3    1.2    1.8    2.3     1.7
Estonia (a)        1.7    2.9    1.2    1.8    3.4     1.8
Finland (a)       -0.8   -0.7    0.4    0.5    1.3     1.3
France (a)         0.7    0.2    1.2    1.3    1.4     1.4
Germany (a)        0.4    1.6    1.4    1.7    1.7     1.1
Greece (a)        -3.1    0.7   -0.3   -0.9    0.2     2.3
Hong Kong          3.1    2.6    2.4    2.3    2.5     2.5
Hungary (a)        2.0    3.6    2.9    2.6    2.3     1.5
India              6.3    7.0    7.3    7.5    8.0     6.8
Indonesia          5.6    5.0    4.8    4.6    4.3     5.5
Ireland (a)        1.4    5.2    7.8    4.5    3.2     3.0
Italy (a)         -1.8   -0.3    0.6    0.7    1.0     1.8
Japan              1.4   -0.1    0.5    0.2   -0.1     0.9
Lithuania (a)      3.4    3.1    1.6    2.2    2.9     2.0
Latvia (a)         3.5    2.5    2.6    2.5    3.7     1.8
Mexico             1.6    2.3    2.5    2.6    3.0     3.5
Netherlands (a)   -0.4    1.0    2.0    1.5    2.1     1.3
New Zealand        1.7    3.0    3.4    2.5    2.3     2.8
Norway             1.1    2.2    1.7    1.5    1.4     1.8
Poland (a)         1.2    3.3    3.6    3.2    3.3     2.6
Portugal (a)      -1.1    0.9    1.5    1.7    1.5     2.2
Romania (a)        3.3    3.1    3.8    3.6    3.7     2.3
Russia             1.3    0.7   -3.7   -1.9    0.5     3.0
Singapore          4.6    3.3    2.0    2.0    4.0     3.2
South Africa       2.2    1.5    1.3    0.7    2.1     3.4
S. Korea           2.9    3.3    2.6    2.4    3.2     4.1
Slovakia (a)       1.4    2.5    3.6    3.3    2.1     1.6
Slovenia (a)      -1.0    2.9    2.6    1.9    2.1     1.3
Spain (a)         -1.7    1.4    3.2    2.7    2.6     2.6
Sweden (a)         1.2    2.4    3.8    3.1    2.4     2.0
Switzerland        1.8    1.9    0.9    1.5    1.8     1.9
Taiwan             2.2    3.9    0.7    1.7    2.5     3.7
Turkey             4.2    3.0    4.0    3.3    3.4     4.0
UK (a)             2.2    2.9    2.3    2.0    2.7     2.3
US                 1.5    2.4    2.4    2.0    2.5     2.6
Vietnam            5.3    5.9    6.6    6.9    5.6     4.4
Euro Area (a)     -0.2    0.9    1.5    1.5    1.7     1.6
EU-27 (a)          0.3    1.4    1.8    1.7    2.0     1.8
OECD               1.2    1.8    2.1    1.8    2.1     2.3
World              3.3    3.4    3.1    3.0    3.5     3.8

                       Annual inflation (a) (per cent)

                  2013   2014   2015   2016   2017   2018-22

Australia          2.4    2.1    1.6    1.5    2.1     2.3
Austria (a)        2.1    1.5    0.8    0.7    1.4     1.8
Belgium (a)        1.2    0.5    0.6    1.2    1.9     1.5
Bulgaria (a)       0.4   -1.6   -1.1    0.5    3.6     3.1
Brazil             6.2    6.3    9.0    7.6    5.0     4.7
China              2.6    2.0    1.5    1.5    1.5     2.5
Canada             1.4    1.9    1.1    1.2    2.0     1.7
Czech Rep.         1.4    0.4    0.3    0.4    1.7     2.3
Denmark (a)        0.5    0.3    0.2    0.7    2.0     1.7
Estonia (a)        3.2    0.5    0.1    1.5    3.0     1.2
Finland (a)        2.2    1.2   -0.2   -0.3    1.3     2.3
France (a)         1.0    0.6    0.1   -0.2    1.1     1.2
Germany (a)        1.6    0.8    0.1    0.2    1.6     1.6
Greece (a)        -0.9   -1.4   -1.1   -0.7   -1.4     2.2
Hong Kong          2.8    2.9    1.1    1.2    1.4     2.5
Hungary (a)        1.7    0.0    0.1    1.2    1.4     1.5
India             10.7    6.6    4.9    5.2    5.0     4.8
Indonesia          6.4    6.4    6.4    4.7    4.9     5.2
Ireland (a)        0.5    0.3    0.0   -0.2    0.7     1.8
Italy (a)          1.3    0.2    0.1    0.2    1.4     1.9
Japan             -0.2    2.0    0.2    0.0    1.0     0.5
Lithuania (a)      1.2    0.2   -0.7    0.3    1.9     1.1
Latvia (a)         0.0    0.7    0.2    0.5    2.1     1.9
Mexico             3.8    4.0    2.7    3.0    3.9     4.1
Netherlands (a)    2.6    0.3    0.2   -0.2    0.8     0.9
New Zealand        0.6    0.9    0.6    0.7    1.5     2.7
Norway             2.0    2.1    2.2    2.4    2.1     2.4
Poland (a)         0.8    0.1   -0.7   -0.7    0.0     1.1
Portugal (a)       0.4   -0.2    0.5    0.4    1.7     1.7
Romania (a)        3.2    1.4   -0.4   -0.5    2.2     1.3
Russia             6.8    7.8   15.5    7.0    5.6     6.5
Singapore          2.3    1.0   -0.5    0.3    1.3     2.1
South Africa       5.5    5.9    4.0    7.7    6.6     5.5
S. Korea           1.3    1.3    0.7    1.1    1.5     1.9
Slovakia (a)       1.5   -0.1   -0.3    0.2    2.5     1.6
Slovenia (a)       1.9    0.4   -0.8   -0.2    2.7     3.1
Spain (a)          1.5   -0.2   -0.6   -0.7    1.2     1.8
Sweden (a)         0.4    0.2    0.7    1.0    1.5     1.7
Switzerland       -0.6   -0.3   -1.1   -0.8    0.4     2.4
Taiwan             0.3    0.7   -0.6    0.0    0.4     1.2
Turkey             7.5    8.9    7.6    7.5    7.0     6.3
UK (a)             2.6    1.4    0.1    0.3    0.9     2.1
US                 1.4    1.4    0.3    0.8    1.8     2.1
Vietnam            6.6    4.1    0.6    2.7    3.0     5.8
Euro Area (a)      1.3    0.4    0.0    0.0    1.3     1.6
EU-27 (a)          1.5    0.5    0.0    0.1    1.2     1.7
OECD               1.5    1.5    0.7    0.9    1.8     2.1
World              4.4    3.8    3.7    3.3    3.5     3.6

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    -1.9    -1.7    -1.1    -1.2
Austria        -1.3   -2.7    -2.8    -2.8    -1.9    -1.6
Belgium        -2.9   -3.1    -2.9    -2.7    -2.1    -1.9
Bulgaria       -0.8   -5.8    -2.8    -2.7    -2.8    -2.4
Canada         -1.9   -0.5    -1.7    -2.0    -2.0    -1.9
Czech Rep.     -1.3   -2.0    -1.1    -1.3    -1.2    -1.6
Denmark        -1.3    1.5    -0.2    -0.3    -1.7    -1.5
Estonia        -0.1    0.7     0.7     0.4     0.0    -1.1
Finland        -2.5   -3.3    -3.4    -2.7    -2.2    -2.1
France         -4.1   -3.9    -3.7    -3.4    -3.0    -2.8
Germany        -0.1    0.3     0.6     0.5     0.9    -0.5
Greece        -12.4   -3.6    -6.1    -7.0    -6.8    -5.0
Hungary        -2.5   -2.5    -2.1    -1.9    -1.3    -1.9
Ireland        -5.7   -3.9    -1.7    -1.0    -1.2     0.0
Italy          -2.9   -3.0    -2.6    -2.5    -2.0    -2.6
Japan          -8.5   -7.7    -6.5    -6.3    -5.7    -4.4
Lithuania      -2.6   -0.7    -0.6    -0.7    -0.8    -1.3
Latvia         -0.9   -1.5    -1.7    -1.8    -1.7    -1.5
Netherlands    -2.4   -2.4    -1.9    -1.6    -1.3    -1.8
Poland         -4.0   -3.3    -3.0    -2.7    -2.6    -3.4
Portugal       -4.8   -7.2    -4.4    -4.0    -3.6    -2.4
Romania        -2.2   -1.4    -1.1    -2.5    -3.3    -2.0
Slovakia       -2.6   -2.8    -2.1    -1.9    -1.5    -0.6
Slovenia      -15.0   -5.0    -2.2    -1.9    -1.8    -1.7
Spain          -6.9   -5.9    -5.2    -4.4    -3.4    -2.4
Sweden         -1.4   -1.7    -2.0    -1.7    -1.7    -1.5
UK             -5.6   -5.6    -4.3    -3.3    -3.0     0.4
US             -5.5   -5.0    -4.3    -3.9    -3.5    -2.7

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

              2013    2014    2015    2016    2017    2022

Australia      37.4    41.9    44.9    45.6    45.3    39.0
Austria        80.8    84.2    85.5    85.3    83.8    76.0
Belgium       105.1   106.7   108.6   104.5   101.4    95.4
Bulgaria       --      --      --      --      --      --
Canada         91.1    93.7    94.7    94.8    92.2    86.1
Czech Rep.     45.2    42.7    40.8    39.5    39.1    36.1
Denmark        45.0    45.1    41.5    40.8    39.7    40.1
Estonia        --      --      --      --      --      --
Finland        55.6    59.3    61.8    63.8    64.3    62.8
France         92.2    95.5    97.3    98.7   100.0   100.9
Germany        77.2    74.7    71.2    67.0    63.7    50.7
Greece        175.1   177.5   172.3   184.8   192.8   180.2
Hungary        76.8    76.2    75.9    74.6    73.5    70.4
Ireland       120.1   107.5    95.4    90.7    88.2    70.9
Italy         128.8   132.3   134.4   136.2   133.1   117.3
Japan         219.8   225.7   230.8   232.2   236.7   238.6
Lithuania      --      --      --      --      --      --
Latvia         --      --      --      --      --      --
Netherlands    67.9    68.2    66.4    65.1    64.1    65.5
Poland         55.9    50.4    50.7    52.5    53.9    59.8
Portugal      129.0   130.2   130.3   131.3   130.5   119.3
Romania        --      --      --      --      --      --
Slovakia       --      --      --      --      --      --
Slovenia       --      --      --      --      --      --
Spain          93.7    99.3    99.2    99.6    97.3    86.6
Sweden         39.8    44.8    42.9    42.5    42.4    41.2
UK             86.2    88.2    89.2    89.6    90.2    72.5
US            109.4   109.9   109.0   109.2   107.9    97.7

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    5.8    5.5     5.6
Austria           5.3    5.6    5.8    5.9    5.2     4.8
Belgium           8.5    8.5    8.5    8.5    8.2     8.0
Bulgaria         12.9   11.4    9.1    7.6    7.7     8.2
Canada            7.1    6.9    6.9    7.2    7.3     7.2
China             --     --     --     --     --      --
Czech Republic    7.0    6.1    5.0    4.7    4.7     4.6
Denmark           7.0    6.5    6.2    5.9    5.8     5.5
Estonia           8.6    7.3    6.2    6.3    5.8     5.9
Finland           8.1    8.7    9.3    9.0    8.7     8.6
France           10.3   10.3   10.4   10.1   10.0     9.9
Germany           5.2    5.0    4.6    4.2    4.3     4.7
Greece           27.5   26.5   25.0   23.2   22.1    21.7
Hungary          10.1    7.7    6.8    6.1    6.4     6.6
Ireland          13.1   11.3    9.5    8.7    8.6     7.3
Italy            12.1   12.6   11.9   11.1   10.0    10.1
Japan             4.0    3.6    3.4    3.2    3.4     4.1
Lithuania        11.8   10.7    9.1    9.0    8.8     9.0
Latvia           11.9   10.8    9.9    9.8    9.2     9.3
Netherlands       7.3    7.4    6.9    6.1    5.5     5.4
Poland           10.4    8.9    7.5    6.4    6.4     7.0
Portugal         16.4   14.1   12.6   11.7   11.3    11.4
Romania           7.1    6.9    6.8    6.7    6.6     6.7
Slovakia         14.3   13.2   11.5   10.2    9.9     9.8
Slovenia         10.1    9.8    9.0    8.2    7.6     8.0
Spain            26.1   24.5   22.1   19.4   16.7    16.3
Sweden            8.0    7.9    7.4    7.0    7.0     7.0
UK                7.6    6.2    5.4    5.2    5.2     5.0
US                7.4    6.2    5.3    5.1    5.1     5.2

                 Current account balance (per cent of GDP)

                 2013   2014   2015   2016   2017   2018-22

Australia        -3.4   -3.1   -4.3   -4.2   -3.3    -1.9
Austria           2.0    1.9    2.5    1.3    0.9     1.8
Belgium          -0.2   -0.2   -0.4    1.5    0.8     1.3
Bulgaria          1.9    1.1   -0.8    0.7    3.2     2.0
Canada           -3.2   -2.3   -3.3   -4.1   -3.6    -2.1
China             1.6    2.7    3.0    1.2    0.0    -0.6
Czech Republic   -0.5    0.6    1.1    1.6    3.5     0.2
Denmark           7.1    6.2    5.6    5.9    7.2     6.6
Estonia          -0.1    1.0    2.4    0.0   -0.5     0.3
Finland          -1.7   -0.9    0.0   -1.3   -2.3    -1.9
France           -0.8   -0.9   -0.2   -0.4   -1.2    -1.5
Germany           6.8    7.4    8.6    8.8    8.1     8.4
Greece           -2.1   -2.2    0.9    0.4    0.5    -0.8
Hungary           3.9    2.2    5.4    4.4    4.4     1.6
Ireland           6.0    3.5    4.1    3.9    0.1     2.6
Italy             0.9    1.9    1.6    0.8    2.1     3.7
Japan             0.9    0.8    3.3    2.3    3.1     4.8
Lithuania         1.5    3.6   -3.2   -1.7   -2.5    -2.6
Latvia           -2.4   -2.0   -1.2   -2.1   -2.6    -1.4
Netherlands      11.0   10.6   10.5   10.0    8.4     6.8
Poland           -1.3   -2.0   -0.5   -0.1   -1.5    -3.1
Portugal          1.4    0.5    1.0    1.4   -0.1    -1.9
Romania          -1.1   -0.5   -1.2   -3.6   -3.8    -3.0
Slovakia          2.0    0.1   -2.0   -2.8   -3.5    -2.0
Slovenia          5.6    7.0    7.4    6.1    9.4     7.4
Spain             1.5    1.0    0.9    1.1    2.1     1.5
Sweden            6.7    5.7    6.3    6.0    4.6     6.0
UK               -4.5   -5.1   -5.2   -6.5   -6.6    -4.2
US               -2.3   -2.2   -2.7   -2.9   -3.7    -4.3

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     8.9
          : business                   9.0     3.0     6.2     2.8
Government: consumption               -0.9    -2.5    -0.5     0.4
          : investment                -5.6    -4.8    -1.1     2.2
Stockbuilding (a)                      0.1     0.0     0.0     0.2
Total domestic demand                  2.1     1.3     2.5     3.0
Export volumes                         3.4     2.8     3.4     1.1
Import volumes                         2.2     1.1     3.8     4.9
Average earnings                       2.2     1.0     2.7     2.2
Private consumption deflator           1.9     1.4     1.4     0.3
RPDI                                   3.3    -1.5     2.7     3.4
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   109.0
Current account as % of GDP           -2.8    -2.3    -2.2    -2.7

                                                     Average
                                     2016    2017    2018-22

GDP                                    2.0     2.5      2.6
Consumption                            2.8     2.9      2.3
Investment: housing                    7.8     7.3      4.5
          : business                   2.4     5.0      3.6
Government: consumption                1.4     1.5      2.0
          : investment                 1.7     1.1      2.0
Stockbuilding (a)                     -0.1     0.0      0.0
Total domestic demand                  2.6     3.1      2.5
Export volumes                         1.0     3.7      4.0
Import volumes                         5.1     6.6      3.2
Average earnings                       2.7     2.9      3.6
Private consumption deflator           0.8     1.8      2.1
RPDI                                   2.9     2.3      2.3
Unemployment, %                        5.1     5.1      5.2
General Govt. balance as % of GDP     -3.9    -3.5     -2.9
General Govt. debt as % of GDP (b)   109.2   107.9    102.0
Current account as % of GDP           -2.9    -3.7     -4.3

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    1.2
Consumption                            1.9    2.4    2.5    1.9
Investment: housing                    5.6   -0.4    2.5    3.9
          : business                   8.1    1.7    0.1   -8.3
Government: consumption                0.7    0.3    0.3    1.4
          : investment                -3.0   -6.3    2.1    2.6
Stockbuilding (a)                     -0.3    0.6   -0.3   -0.3
Total domestic demand                  2.0    1.9    1.5    0.5
Export volumes                         2.6    2.8    5.3    3.0
Import volumes                         3.6    1.5    1.8    0.1
Average earnings                       2.4    3.2    3.2    2.1
Private consumption deflator           1.3    1.4    1.9    1.1
RPDI                                   2.8    2.8    1.3    2.5
Unemployment, %                        7.4    7.1    6.9    6.9
General Govt. balance as % of GDP     -2.5   -1.9   -0.5   -1.7
General Govt. debt as % of GDP (b)    95.4   91.1   93.7   94.7
Current account as % of GDP           -3.6   -3.2   -2.3   -3.3

                                                    Average
                                      2016   2017   2018-22

GDP                                    1.7    2.1     2.0
Consumption                            2.0    1.5     1.1
Investment: housing                    3.0    3.9     2.9
          : business                  -3.5    3.6     1.8
Government: consumption                1.9    2.2     2.2
          : investment                 0.3    2.3     2.3
Stockbuilding (a)                     -0.2    0.0     0.0
Total domestic demand                  1.2    2.1     1.6
Export volumes                         1.1    3.3     3.7
Import volumes                        -0.7    2.9     2.4
Average earnings                       0.6    1.7     3.1
Private consumption deflator           1.2    2.0     1.7
RPDI                                   0.7    0.5     1.2
Unemployment, %                        7.2    7.3     7.2
General Govt. balance as % of GDP     -2.0   -2.0    -1.9
General Govt. debt as % of GDP (b)    94.8   92.2    88.9
Current account as % of GDP           -4.1   -3.6    -2.1

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     0.5
Consumption                       2.3     1.7    -1.0    -1.2
Investment: housing               3.2     8.4    -5.0    -2.7
          : business              3.6    -0.3     2.8     1.5
Government: consumption           1.7     1.9     0.1     1.2
          : investment            2.0     8.0     0.2    -2.0
Stockbuilding (a)                 0.2    -0.2     0.2     0.5
Total domestic demand             2.6     1.6    -0.1     0.0
Export volumes                   -0.2     1.1     8.3     2.7
Import volumes                    5.3     3.0     7.2     0.2
Average earnings                 -0.6     0.8     1.1     1.2
Private consumption deflator     -0.9    -0.2     2.0     0.2
RPDI                              0.7     0.7    -0.3     0.9
Unemployment, %                   4.3     4.0     3.6     3.4
Govt. balance as % of GDP        -8.6    -8.5    -7.7    -6.5
Govt. debt as % of GDP (b)      216.6   219.8   225.7   230.8
Current account as % of GDP       1.0     0.9     0.8     3.3

                                                Average
                                2016    2017    2018-22

GDP                               0.2    -0.1     0.9
Consumption                      -0.3    -0.8     1.4
Investment: housing               2.4     3.2     3.3
          : business              2.3     1.8     1.9
Government: consumption           1.2     0.2     0.2
          : investment           -0.9     2.2     0.8
Stockbuilding (a)                 0.0     0.0     0.0
Total domestic demand             0.3     0.0     1.3
Export volumes                    1.1     6.2     3.7
Import volumes                    2.6     7.9     5.7
Average earnings                  1.7     1.1     1.4
Private consumption deflator      0.0     1.0     0.5
RPDI                              1.0    -0.1     1.2
Unemployment, %                   3.2     3.4     4.1
Govt. balance as % of GDP        -6.3    -5.7    -4.6
Govt. debt as % of GDP (b)      232.2   236.7   236.6
Current account as % of GDP       2.3     3.1     4.8

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   -0.2    0.9    1.5
Consumption                   -1.3   -0.6    0.8    1.7
Private investment            -7.9   -3.1    1.8    3.1
Government: consumption       -0.2    0.2    0.8    1.3
          : investment        -3.6    0.9   -1.4    0.6
Stockbuilding (a)             -0.9    0.1   -0.2   -0.1
Total domestic demand         -3.3   -0.7    0.8    1.7
Export volumes                 2.8    2.2    4.1    4.9
Import volumes                -0.9    1.4    4.5    5.6
Average earnings               1.9    1.9    1.1    1.2
Harmonised consumer prices     2.5    1.3    0.4    0.0
RPDI                          -1.6   -0.7    0.9    1.1
Unemployment, %               11.4   12.0   11.6   10.9
Govt. balance as % of GDP     -3.7   -3.0   -2.6   -2.2
Govt. debt as % of GDP (b)    89.6   91.4   92.4   90.9
Current account as % of GDP    1.3    2.2    2.5    3.2

                                            Average
                              2016   2017   2018-22

GDP                            1.5    1.7     1.6
Consumption                    1.6    1.5     0.8
Private investment             3.1    2.4     2.5
Government: consumption        1.1    0.9     1.3
          : investment         1.8    1.7     1.7
Stockbuilding (a)              0.3    0.0     0.0
Total domestic demand          2.0    1.6     1.3
Export volumes                 4.5    5.4     3.5
Import volumes                 5.3    5.4     3.0
Average earnings               1.7    2.5     2.7
Harmonised consumer prices     0.0    1.3     1.6
RPDI                           2.2    1.5     1.0
Unemployment, %               10.0    9.4     9.4
Govt. balance as % of GDP     -2.0   -1.5    -1.6
Govt. debt as % of GDP (b)    89.8   88.2    82.6
Current account as % of GDP    3.1    2.7     2.8

Note: (a) Change as a percentage of GDP. (b) End
Maastricht definition.

Table B8. Germany

Percentage change

                               2012   2013   2014   2015

GDP                             0.6    0.4    1.6    1.4
Consumption                     0.9    0.8    1.0    1.9
Investment: housing             4.1   -0.7    3.3    1.0
          : business           -1.7   -2.2    4.3    3.1
Government: consumption         1.3    0.8    1.7    2.4
          : investment          0.9    2.2   -0.1   -1.3
Stockbuilding (a)              -1.6    0.5   -0.3   -0.5
Total domestic demand          -0.9    0.9    1.3    1.4
Export volumes                  3.4    1.8    3.9    4.8
Import volumes                  0.1    3.2    3.7    5.4
Average earnings                3.7    2.8    2.2    2.7
Harmonised consumer prices      2.1    1.6    0.8    0.1
RPDI                            0.6    0.5    1.4    1.7
Unemployment, %                 5.4    5.2    5.0    4.6
Govt. balance as % of GDP      -0.1   -0.1    0.3    0.6
Govt. debt as % of GDP (b)     79.6   77.2   74.7   71.2
Current account as % of GDP     7.1    6.8    7.4    8.6

                                             Average
                               2016   2017   2018-22

GDP                             1.7    1.7     1.1
Consumption                     1.7    1.5     0.5
Investment: housing             1.8    0.4    -0.6
          : business            4.2    3.5     0.7
Government: consumption         2.8    0.4     0.6
          : investment          0.7    1.0     0.9
Stockbuilding (a)              -0.1    0.0     0.0
Total domestic demand           2.2    1.5     0.5
Export volumes                  3.7    5.8     3.9
Import volumes                  5.1    5.8     3.2
Average earnings                2.4    3.6     2.9
Harmonised consumer prices      0.2    1.6     1.6
RPDI                            2.3    1.3     0.8
Unemployment, %                 4.2    4.3     4.7
Govt. balance as % of GDP       0.5    0.9     0.3
Govt. debt as % of GDP (b)     67.0   63.7    54.9
Current account as % of GDP     8.8    8.1     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    1.2
Consumption                   -0.2    0.5    0.6    1.4
Investment: housing           -2.1   -1.5   -5.3   -2.8
          : business           0.8   -0.2    2.2    1.8
Government: consumption        1.6    1.7    1.5    1.5
          : investment         1.8    0.2   -6.9   -3.0
Stockbuilding (a)             -0.6    0.2    0.2    0.3
Total domestic demand         -0.3    0.8    0.7    1.4
Export volumes                 2.6    1.8    2.4    6.1
Import volumes                 0.8    1.8    3.9    6.7
Average earnings               2.6    2.7    1.3    0.8
Harmonised consumer prices     2.2    1.0    0.6    0.1
RPDI                           0.5    0.3    1.7    2.0
Unemployment, %                9.8   10.3   10.3   10.4
Govt, balance as % of GDP     -4.8   -4.1   -3.9   -3.7
Govt, debt as % of GDP (b)    89.6   92.2   95.5   97.3
Current account as % of GDP   -1.2   -0.8   -0.9   -0.2

                                             Average
                              2016   2017    2018-22

GDP                            1.3     1.4      1.4
Consumption                    1.2     1.4      0.3
Investment: housing           -1.3     0.5      7.6
          : business           2.8     3.0      1.0
Government: consumption        1.6     1.4      1.5
          : investment         1.7     1.5      1.6
Stockbuilding (a)              0.0    -0.1      0.0
Total domestic demand          1.4     1.5      1.1
Export volumes                 5.2     5.9      4.0
Import volumes                 5.2     5.6      2.9
Average earnings               1.6     1.8      2.2
Harmonised consumer prices    -0.2     1.1      1.2
RPDI                           2.8     0.8      0.5
Unemployment, %               10.1    10.0      9.9
Govt, balance as % of GDP     -3.4    -3.0     -2.8
Govt, debt as % of GDP (b)    98.7   100.0    100.5
Current account as % of GDP   -0.4    -1.2     -1.5

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    -0.3     0.6
Consumption                    -4.0    -2.4     0.6     0.9
Investment: housing            -7.7    -4.4    -2.7    -0.2
          : business          -10.8    -7.2    -3.6     1.4
Government: consumption        -1.4    -0.3    -1.0    -0.7
          : investment         -5.4    -8.5    -3.5    -1.5
Stockbuilding (a)              -1.2     0.1     0.1     0.5
Total domestic demand          -5.6    -2.7    -0.3     1.0
Export volumes                  2.0     0.9     2.9     4.1
Import volumes                 -8.3    -2.2     3.0     5.8
Average earnings                1.1     0.8     0.2     1.1
Harmonised consumer prices      3.3     1.3     0.2     0.1
RPDI                           -5.6    -0.7    -0.1    -0.9
Unemployment, %                10.7    12.1    12.6    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   134.4
Current account as % of GDP    -0.4     0.9     1.9     1.6

                                              Average
                              2016    2017    2018-22

GDP                             0.7     1.0      1.8
Consumption                     1.5     1.1      0.6
Investment: housing             2.2     1.3      6.2
          : business            1.6     0.7      5.8
Government: consumption        -1.2    -0.1      1.3
          : investment          1.3     0.8      1.2
Stockbuilding (a)              -0.2     0.0      0.0
Total domestic demand           0.8     0.8      1.6
Export volumes                  4.5     4.5      3.0
Import volumes                  4.9     4.0      2.7
Average earnings                0.5     1.2      2.2
Harmonised consumer prices      0.2     1.4      1.9
RPDI                            0.5     0.8      0.4
Unemployment, %                11.1    10.0     10.1
Govt. balance as % of GDP      -2.5    -2.0     -2.2
Govt. debt as % of GDP (b)    136.2   133.1    122.4
Current account as % of GDP     0.8     2.1      3.7

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    2.4
          : business           -6.5   -5.4    5.6    8.5
Government: consumption        -4.5   -2.8    0.0    2.7
          : investment        -11.6   14.5    7.6    8.4
Stockbuilding (a)              -0.3   -0.2    0.2    0.1
Total domestic demand          -4.7   -3.1    1.7    3.8
Export volumes                  1.1    4.3    5.1    5.4
Import volumes                 -6.2   -0.3    6.4    7.5
Average earnings               -1.0    1.0   -0.2    1.3
Harmonised consumer prices      2.4    1.5   -0.2   -0.6
RPDI                           -5.5   -1.5    0.8    1.5
Unemployment, %                24.8   26.1   24.5   22.1
Govt. balance as % of GDP     -10.4   -6.9   -5.9   -5.2
Govt. debt as % of GDP (b)     85.4   93.7   99.3   99.2
Current account as % of GDP    -0.2    1.5    1.0    0.9

                                            Average
                              2016   2017   2018-22

GDP                            2.7    2.6     2.6
Consumption                    2.8    2.5     2.1
Investment: housing            1.9    2.1     3.5
          : business           7.3    4.6     5.6
Government: consumption        1.7    2.0     2.5
          : investment         3.4    3.5     2.9
Stockbuilding (a)             -0.1    0.0     0.0
Total domestic demand          2.9    2.6     2.7
Export volumes                 4.7    4.8     3.1
Import volumes                 5.9    5.2     3.4
Average earnings               1.2    1.9     3.6
Harmonised consumer prices    -0.7    1.2     1.8
RPDI                           2.9    3.7     2.4
Unemployment, %               19.4   16.7    16.3
Govt. balance as % of GDP     -4.4   -3.4    -2.6
Govt. debt as % of GDP (b)    99.6   97.3    90.2
Current account as % of GDP    1.1    2.1     1.5

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

Graham Hacche, with Oriol Carreras, Simon Kirby, Iana Liadze, Jack Meaning, Rebecca Piggott and James Warren *

* 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 Jessica Baker for compiling the database underlying the forecast. The forecast was completed on 27 April, 2016. Exchange rate, interest rates and equity price assumptions are based on information available to 13 April 2016. Unless otherwise specified, the source of all data reported in tables and figures is the NiGEM database and NIESR forecast baseline.

Table 1. Forecast summary

Percentage change

                            Real GDPW

            World   OECD   China   EU-27   Euro   USA   Japan
                                           Area

2012         3.5    1.3     7.7    -0.4    -0.8   2.2    1.7
2013         3.3    1.2     7.7     0.3    -0.2   1.5    1.4
2014         3.4    1.8     7.3     1.4     0.9   2.4   -0.1
2015         3.1    2.1     6.9     1.8     1.5   2.4    0.5
2016         3.0    1.8     6.5     1.7     1.5   2.0    0.2
2017         3.5    2.1     6.2     2.0     1.7   2.5   -0.1
2006-2011    4.0    1.3    11.0     1.1     1.0   0.9    0.3
2018-2022    3.8    2.3     5.9     1.8     1.6   2.6    0.9

                           Real GDPW                    World
                                                      trade (b)
            Germany   France   Italy   UK    Canada

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     -0.3    2.9    2.5        3.2
2015          1.4      1.2      0.6    2.3    1.2        2.9
2016          1.7      1.3      0.7    2.0    1.7        4.4
2017          1.7      1.4      1.0    2.7    2.1        6.2
2006-2011     1.7      1.0     -0.1    0.7    1.5        4.7
2018-2022     1.1      1.4      1.8    2.3    2.0        4.6

                           Private consumption deflator

            OECD   Euro   USA   Japan   Germany   France   Italy   UK
                   Area

2012        1.9    1.9    1.9   -0.9      1.6       1.4     2.7    1.8
2013        1.5    1.2    1.4   -0.2      1.3       0.8     1.2    2.3
2014        1.5    0.5    1.4    2.0      0.9       0.0     0.2    1.7
2015        0.7    0.2    0.3    0.2      0.7      -0.1     0.1    0.2
2016        0.9    0.2    0.8    0.0      0.4       0.0     0.2    0.3
2017        1.8    1.3    1.8    1.0      1.6       1.1     1.4    0.9
2006-2011   2.0    1.8    2.0   -1.0      1.3       1.4     2.0    3.3
2018-2022   2.1    1.6    2.1    0.5      1.6       1.2     1.9    2.1

                 Private        Interest rates (c)      Oil
               consumption                             ($ per
                deflator                              barrel)
                                                        (d)
            Canada     USA       Japan       Euro
                                             Area

2012         1.3       0.3         0.1       0.9       110.4
2013         1.4       0.3         0.1       0.6       107.1
2014         1.9       0.3         0.1       0.2        97.8
2015         1.1       0.3         0.1       0.1        51.8
2016         1.2       0.5        -0.1       0.0        35.1
2017         2.0       1.5        -0.4       0.0        41.6
2006-2011    1.3       2.1         0.2       2.3        79.8
2018-2022    1.7       3.2        -0.3       1.2        50.0

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 Jessica Baker for
compiling the database underlying the forecast. The forecast was
completed on 27 April, 2016. Exchange rate, interest rates and equity
price assumptions are based on information available to 13 April
2016. Unless otherwise specified, the source of all data reported in
tables and figures is the NiGEM database and NIESR forecast baseline.