The world economy.

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

World Overview

Developments in the past three months have been dominated by the steep decline in crude oil prices. If the lower prices are sustained, and if the decline is not allowed to exacerbate the threat of deflation, this should provide a significant boost to growth in countries that are net oil importers and for the global economy. At the same time, however, data on economic activity in the latter part of 2014 have generally been weaker than expected, with the particularly notable exception of the United States, and inflation in many cases has fallen further below central banks' targets. These developments have led to additional policy actions in several economies to ease monetary conditions, including a welcome--indeed overdue--major expansion of asset purchases by the European Central Bank (ECB). In financial and foreign exchange markets, there have been further marked declines in government bond yields, to record lows in some cases, and a significant general appreciation of the US dollar against other major currencies.

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Taking into account these and other developments, including the current economic downturn in Russia and its regional repercussions, and also significant data revisions, (1) our estimate of global growth in 2014 has been revised up slightly since the November Review to 3.4 from 3.3 per cent, but our forecast of global growth in 2015 and 2016 has been revised down by 0.2 percentage point in both years, to 3.3 and 3.6 per cent, respectively. Tepid global growth, similar in pace to the past two years, thus seems likely to continue in the short run.

Oil prices (as of late January) have declined by 44 per cent, in US dollar terms, since late October 2014, and by 58 per cent since last June, when prices reached a peak. There is some uncertainty about the causes of the decline. Some considerations suggest that supply factors have predominated. One is the fact that the decline in oil prices far exceeds recent declines in the prices of most other primary commodities (see figure l). (2) US oil production has risen by 80 per cent since 2008--this increase being larger than total production in every OPEC country except Saudi Arabia--and last year supply disruptions which had partly offset the rise in US output were alleviated, including by a recovery in Libyan production. Moreover, the Organization of Petroleum Exporting Countries (OPEC) decided in November to maintain its production ceiling in spite of the price decline, and Saudi Arabia has made clear its intention not to counter the increased supply from non-OPEC producers. On the other hand, however, disappointing global economic growth, and the resulting slower growth of energy demand, has also surely contributed. The International Energy Agency has lowered its projections for global oil demand for 2015 significantly in the past six months, as has the Energy Information Administration (EIA) of the US Department of Energy, whose most recent projections of global oil prices are assumed in our forecast. Indeed, the analysis in the note on Oil Prices and Economic Activity (on pp. 43-8 of this Review) suggests that demand weakness may have become the main factor driving oil prices in late 2014.

For the world as a whole, the decline in oil prices should be beneficial, spreading the benefits of increased supply and mitigating the effects of weaker demand. For users, the price fall is like an indirect tax cut, raising disposable income for consumers and reducing input costs for producers. Countries that are net importers of oil should thus get a growth boost through increased consumer spending and investment--the boost being the greater the higher is the country's energy intensity of consumption and production. Oil exporting countries will suffer adverse effects, including on government budgets, and some could face financial stress. But for the world economy, the net benefit to growth should be significantly positive.

However, the effects of the decline in oil prices in importing countries will depend partly on the extent to which it has a prolonged downward effect on inflation. In normal circumstances, if inflation were initially close to target and stable, the appropriate monetary policy response to an oil price decline would be ambiguous, with the boost to demand suggesting a possible need to tighten but the short-term reduction of inflation suggesting a possible need to loosen in order to support the credibility of the inflation target. In current circumstances, however, the priority for central banks in most advanced economies should be to ensure that the price decline does not exacerbate the problem of below-target inflation, with the associated threat of deflation, and that core inflation does not fall further from official targets through second-round effects on other prices, wages, and inflation expectations. In some cases, this may mean further reductions in official interest rates, which have been seen in several countries in recent months. In other cases, where there is limited scope for further short-term interest rate cuts, there may be a need to strengthen unconventional measures. Thus President Draghi referred to the increased potential for second-round effects of oil price declines as one of the reasons for the recent expansion of the ECB's asset purchases. Strengthened forward guidance may also be needed to bolster the credibility of inflation targets as headline inflation declines further below them.

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Recent price data for the advanced economies show that the oil price decline has already significantly lowered overall, 'headline', consumer price inflation, but effects on core inflation have so far been smaller. Thus in the Euro Area, 12-month headline inflation is provisionally estimated to have fallen sharply to -0.6 per cent in January, while core inflation is estimated at 0.6 per cent, not far below its range of recent fluctuation. In the United States, 12-month consumer price inflation (on the measure preferred by the Federal Reserve) dropped to 0.7 per cent in December, below the core rate of 1.3 per cent, which has fallen only slightly in recent months. Expectations of future inflation, meanwhile, including for the medium term, appear to have declined significantly in recent months: thus the five-year-forward five-year breakeven rate of inflation in the Euro Area implied by financial instruments has recently fallen to about 1.6 per cent. Another worrying development is that recent wage settlements in Germany have been smaller than last year (see figure 5). In any event, with actual inflation, on any definition, already significantly below target in most advanced economies, and negative in many, heightened vigilance by central banks towards core price, and wage, developments, and inflation expectations, will be needed in the coming months.

Recent data on economic activity have generally been weak, the most notable exception being the United States, where the pick-up in growth that occurred after the drop in GDP early last year has been largely maintained. In the Euro Area, growth has remained too weak to make significant further inroads into the high level of unemployment. In Japan, GDP surprisingly declined in the third quarter of last year--the second consecutive quarterly drop. Among emerging market economies, the gradual slowing of growth in China has continued, broadly as expected. In Brazil, there has been little sign of significant economic recovery since the recession in the first half of last year. The Russian economy has been hit hard both by the decline in oil prices and by international sanctions: GDP was virtually flat in the first three quarters of 2014, and more recently a recession seems likely to have begun. Our growth forecast for Russia has been revised down significantly, with an output decline of 3.8 per cent now projected for this year. Only in India, among the major emerging market economies, have there recently been signs of a pick-up in growth.

Several central banks, apart from the ECB, have recently taken action to provide additional monetary stimulus. The Bank of Japan announced in early November an expansion of its programme of asset purchases. Official benchmark interest rates were lowered by 25 basis points in Norway, in December, and in Canada, in January--both advanced economy oil producers--to 1.25 and 0.75 per cent, respectively. Also in January, benchmark rates were lowered in Denmark, in defence of the exchange rate peg to the euro (by 45 basis points, to -0.50 per cent),3 and in Switzerland when the central bank abandoned the cap on the franc's exchange rate against the euro (by 50 basis points to -0.75 per cent). Among emerging market economies, inflation in China fell below 2 per cent late last year, eliciting in November the first reductions in official interest rates (of 25-40 basis points) since 2012. Benchmark rates were also lowered in India in mid-January following the recent decline in inflation. Official interest rates have been raised in the past three months, however, in Brazil, Indonesia, Nigeria, and Russia, in efforts to contain inflationary and exchange rate pressures.

In the United States, the Federal Reserve, having completed in October its programme of asset purchases, is now considering when to start raising short-term interest rates from the near-zero floor where they have stood since December 2008. Recent data, including low inflation and indications of continuing slack in the labour market, still suggest that an early increase in rates would be inappropriate. In our forecast, we have revised our assumption about the timing of the first increase in rates by the Fed, to the third quarter of this year from the second.

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Government bond yields have fallen further in most major markets since late October, in many cases to unprecedented levels--negative in several countries at short maturities--no doubt reflecting the downward pressures on inflation and inflation expectations, as well as the monetary accommodation being provided by major central banks. Declines in 10-year yields have ranged from about 20 basis points in Japan to around 60 basis points in the US, Canada, most of the major economies of the Euro Area, Brazil, and India, to about a full percentage point in Italy and the UK. By late January, 10-year yields had fallen as low as -0.1 per cent in Switzerland, 0.2 per cent in Japan, 0.4 per cent in Germany, 0.6 per cent in France, 1.5 per cent in Italy and Spain, and 1.8 per cent in the US. The negative 10-year yield in Switzerland is unprecedented in recent financial history. The only exception to the decline in yields among the major economies is Russia, where 10-year yields in late January were about 13.5 per cent, up from 10 per cent in late October.

In foreign exchange markets, reflecting relative cyclical positions and associated expectations of monetary policy divergence, the US dollar has appreciated further against most other major currencies since late October, by about 8 per cent in effective terms (by the Bank of England's estimates). In late January the dollar's effective value was about 33 per cent above its low of mid-2011, and at its highest level since 2004. The dollar's recent appreciation has been largest against the Russian rouble, amounting to 65 per cent since late October and 96 per cent since February 2014, before the crisis in Ukraine. Its recent appreciation against the currencies of other major advanced economies has ranged from 6 per cent against the pound sterling to 9 per cent against the yen and 12-13 per cent against the Canadian dollar and the euro. Its rise has been smaller against some major emerging market currencies, including the Chinese yuan (2 per cent) and the Indian rupee (against which it has been flat).

The most notable exception to the US dollar's recent appreciation is the Swiss franc, against which the US dollar has depreciated by about 5 per cent since late October. This reflects the Swiss National Bank (SNB)'s removal, on January 15, of the franc's cap against the euro, which had been introduced in September 2011. The SNB explained that while the cap had been introduced, at SF 1.20 per euro, at a time of exceptional overvaluation of the franc, the overvaluation had since diminished, and the recent and prospective depreciation of the euro against the US dollar would involve, under the cap, an inappropriate weakening of the franc against the US currency. (Since September 2011, under the cap, the franc had depreciated by 17 per cent against the US dollar.) The official intervention required by the cap had led to a substantial increase in the SNB's foreign exchange reserves, to $527 billion by November 2014, from $377 billion in September 2011, with an associated growth in its balance sheet: see figure 3. At the same time as removing the cap, the SNB lowered its benchmark interest rates by 50 basis points, with its sight deposit rate being reduced to -0.75 per cent from -0.25 per cent, "to ensure that the appreciation ... would not lead to an inappropriate tightening of monetary conditions". The removal of the cap shocked markets, and in the hours immediately after the announcement there was a jump of about 40 per cent in the franc's exchange value, before it settled down. By late January, the franc's appreciation since the cap's removal amounted to 16 per cent against the euro and 12 per cent against the US dollar. This appreciation will exert additional deflationary pressure on the Swiss economy, where inflation is already negative (-0.3 per cent in the year to December). Further monetary easing may be needed to avoid a recession.

Our forecast is, as usual, subject to a range of risks, a number of which have been discussed in recent issues of the Review. Thus geopolitical risks remain apparent from continuing conflicts in Ukraine and the Middle East. Risks also continue to surround the assumed normalisation of monetary policy in the United States, among which are the risks associated with possible financial market reactions, including outflows from emerging markets. Surprises in the timing of monetary policy normalisation or, perhaps more likely, surprises in economic data which change expectations about the timing, could trigger instability in financial markets and international financial flows. Also, of course, there is a risk that the timing and pace of normalisation, when it occurs, will be mistaken in relation to the needs of the economy, with potential costs that would be particularly high if the mistake were precipitate action that caused the economic recovery to stall.

There are also the risks relating to the continued weak economic performance of the Euro Area, including the risk of political reactions that may increase uncertainty about policies, hinder progress with desirable fiscal and structural reforms, and damage further the cohesion of the monetary union and the European Union. This risk has been illustrated by the recent election in Greece of a government intending to renegotiate Greece's current arrangement with the 'troika' (the ECB, European Commission, and the IMF) and seek debt reduction. This has clearly added uncertainty, as some Euro Area policymakers have stated that such renegotiation is not acceptable. It is strongly in the interests of both Greece and the Euro Area to reach a mutually acceptable deal. It would be sensible for Euro Area policymakers to recognise that some loosening of fiscal policy in Greece is imperative, economically as well as politically, and that further restructuring of Greece's debt is required, although this could be done by reducing its net present value (for example, by extending maturities) without reducing its face value. Equally, the new Greek government will need to make a credible commitment to fundamental reforms of the functioning of the Greek state; and paradoxically, given that it is not associated with the 'establishment', it may be in a better position to implement such reforms than the parties that have previously been in government. So a constructive resolution should be possible, but it is by no means assured. If such an agreement is not reached, there is clearly a risk of a disorderly Greek exit from the euro. While in itself this would have relatively little effect on the wider Euro Area economy--Greece accounts for only about 2 per cent of the Area's GDP--there would be serious risks of contagion to other, more economically significant countries and hence to the euro itself. The risks illustrated by Greece are likely to become prominent again in other elections in Europe.

Two other sets of risks have been heightened by recent developments. The first relates to the recent steep decline in oil prices. This was not foreseen by any major forecaster or by oil markets, and considerable uncertainty now exists about the future path of prices. Our forecast assumes a gradual and only partial recovery of prices in the next few years from their recent levels, broadly in line with prices in futures markets: the average price assumed for 2016 is roughly half-way between recent levels of around $50 a barrel and the 2013 average of about $100. But an earlier and steeper recovery of prices, generated, for example, by larger than assumed supply reductions in response to the price decline, or by supply shocks, is a possibility, as is a further price decline. These possibilities point to downside and upside risks, respectively, to our growth projections. Even if our assumed path of oil prices broadly materialises, the boost to global demand could be greater than is factored into the forecast; or it could be less, especially if the decline in prices is allowed to exacerbate deflationary forces. The oil price decline will also have financial consequences, increasing external and balance sheet vulnerabilities of oil exporting countries, and damaging the profitability of companies in the energy sector. There will be corresponding benefits for oil-importing countries and energy-using companies, but there is a risk that these gains will be insufficient to offset the economic repercussions of the damage to the losers, for example because of the liquidity constraints they are likely to face.

The second set of heightened risks relates to exchange rates. The recent general appreciation of the U$ dollar may be viewed as helpful in the context of recent international cyclical divergences, because it should boost net exports and aggregate demand in economies like Japan and the Euro Area, where growth has been weak, while damping demand in the United States, where the recovery has recently been stronger. There is a risk, however, especially if these currency movements go significantly further, that the problem of global payments imbalances will re-emerge in the medium term. The current account of the US balance of payments is in moderate deficit, which we forecast, on our assumption of broadly unchanged exchange rates, to grow somewhat from 2.3 per cent of GDP in 2014 to 3.0 per cent in the medium term. Japan's current account is close to balance, but the Euro Area's current account is in moderate surplus, of about 2.6 per cent of GDP, with notably large surpluses in Germany (the largest in the world in US dollar terms) and the Netherlands, which we expect to remain large. Further dollar appreciation against the euro would tend to widen these imbalances, which could eventually pose a threat to the stability of foreign exchange and financial markets. The strength of the dollar also does not augur well for the debt burdens of emerging market economies, many of whose corporate sectors have borrowed heavily abroad in foreign currency in recent years.

With regard to policies, our forecast of continuing tepid expansion in the advanced economies, in spite of the boost provided by the decline in oil prices, together with their substantial degrees of economic slack, and low and declining rates of inflation, point to the continuing importance of promoting growth by boosting demand.

Structural reforms that boost demand as well as supply can play an important role in many countries: these include reforms that remove impediments to investment, business formation, and job creation, and reforms that promote investment by raising expectations of future growth. Such reforms have much unexploited potential, often because of opposition by vested interests.

The unexploited potential of monetary policy now appears much reduced, with official interest rates generally close to, or even below zero, in most countries and with the ECB having followed the lead of other major central banks by embarking upon large-scale asset purchases. Previous issues of this Review have called for such action by the ECB, and we strongly welcome it. Questions remain, however, about how effective it will be, and the ECB should prepare the ground for even stronger action if the announced programme fails to achieve its inflation objective.

An area of much greater unexploited potential is fiscal policy. Previous issues of this Review have argued for increased government investment, financed by borrowing, to boost both demand and potential output. In the November issue we supported the call by President Draghi for fiscal policy to play a larger role in boosting demand in the Euro Area, including through the use of fiscal space by countries that have it, including Germany, which recently announced its achievement of a balanced budget last year. With government 10-year borrowing costs now having fallen below 2 per cent a year in all the major advanced economies, and below 1 per cent in some cases, including Germany, the potential benefits of borrowing to increase productive government spending are even more apparent.

Prospects for individual economies

Euro Area (4)

Economic growth has remained weak, albeit positive, while inflation has remained well below the ECB's medium-term objective of "below, but close to, 2 per cent" a year; indeed, overall consumer price inflation has recently fallen sharply further and turned negative. On 22 January, the ECB announced a major, open-ended expansion of its asset purchase programme, amounting to 'quantitative easing' intended to achieve its inflation objective. This, together with the (partly associated) depreciation of the euro is expected to help growth to strengthen somewhat from 0.9 per cent last year to 1.4 per cent in 2015 and 1.9 per cent in 2016.

In the third quarter, GDP grew by 0.2 per cent, to a level 0.8 per cent higher than a year earlier, but still 2.2 per cent lower than the pre-crisis peak reached in early 2008. More recent indicators suggest continuing weak growth. Thus the composite PMI for the fourth quarter, while indicating positive growth, was the lowest in more than a year. The services sector has been more resilient than manufacturing: industrial production in November was 0.4 per cent lower than a year earlier. Unemployment fell in December, for the first time in six months, to 11.4 per cent, still not much lower than the 12.0 per cent peak that prevailed for much of 2013.

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Consumer price inflation, on a twelve-month basis, fell from 0.3 per cent in November to -0.2 per cent in December, and Eurostat's provisional estimate for January is -0.6 per cent, the lowest rate since July 2009. Twelve-month inflation was negative in December in eleven of the Area's eighteen countries, and even in Austria, where it was highest, it was only 0.8 per cent. Core inflation in the Area in December stood at 0.7 per cent, unchanged from the two preceding months, and it is provisionally estimated to have fallen to 0.6 per cent in January; it has been below 2 per cent in every month for the past three years. In early December, the ECB lowered its inflation projections for 2014-16 to 0.5, 0.7, and 1.3 per cent, respectively, from 0.6,1.1, and 1.6 per cent.

With its benchmark interest rates already close to, or below, zero, the ECB in recent months has proceeded with the implementation of the programmes of financial market operations announced last June and September, designed to provide additional monetary stimulus through expansion of its balance sheet (see Reviews of August and November 2014). And on 22 January it announced a major expansion of the asset purchase programme involved in some of these operations. Before this announcement, it had already used more forceful language to describe its policies. Thus in a speech on November 21, President Draghi made it clear that he viewed the ECB's task as urgent, saying that "We will do what we must to raise inflation and inflation expectations as fast as possible", and that "it is essential to bring back inflation to target and without delay". Also, at his early December press conference, Draghi stated that the ECB "intended" to expand its balance sheet back to its size at the beginning of 2012 (which he had defined in his early-November press conference as March 2012, implying an expansion of close to 1 trillion [euro]), not just that it "expected" to do so, as he had said previously. He made it clear that this change in language was significant: he described the ECB's "intention" as something between an expectation and a target, and explained that the change in wording had not been unanimously supported by the ECB's Governing Council.

With regard to the market operations themselves, the ECB conducted on 11 December the second of its eight planned quarterly targeted long-term refinancing operations (TLTROs), as announced last June. As with the first operation, in early September, the take-up of low-interest loans by banks in December was below most expectations, at 129.8 billion [euro], though this was higher than the 82.6 billion [euro] injected in September. On 22 January, the ECB announced a reduction of 10 basis points in the interest rates applicable to the six remaining TLTROs, to promote demand. The ECB has also, since 20 October, been buying covered bonds, and since 21 November, asset-backed securities, under programmes outlined in September; but the amounts are relatively small--37.2 billion [euro] and 2.3 billion [euro], respectively, as of 23 January. It was clearly questionable whether these programmes would have been sufficient to achieve the ECB's objective for the expansion of its balance sheet.

Under the expanded asset purchase programme announced on 22 January, the Eurosystem--comprising the ECB and the Area's national central banks--will begin in March 2015 to purchase, in the secondary market, euro-denominated investment-grade securities issued by Euro Area governments and government agencies, and by European institutions. The purchases will be coordinated by the ECB. Including the covered bond and asset-backed securities purchase programmes introduced last year, combined monthly purchases will amount to 60 billion [euro]. The expanded purchase programme is open-ended: it will continue until "at least September 2016 and in any case until the Governing Council sees a sustained adjustment in the path of inflation that is consistent with its aim of achieving inflation rates below, but close to, 2 per cent over the medium term". The purchases planned between March 2015 and September 2016 will amount to 1.14 trillion [euro] , equivalent to about 10 per cent of Euro Area annual GDP and somewhat larger than the balance-sheet expansion envisaged last year by Draghi. Purchases of securities issued by European institutions, which will account for 12 per cent of the total and which will all be done by national central banks, will be subject to risk-sharing with regard to potential losses, as will the securities of governments and government agencies purchased by the ECB (accounting for 8 per cent of the total). The rest of the national central banks' purchases, representing 80 per cent of the total, will not be subject to risk-sharing. Purchases of securities of government and government agencies will be distributed among issuing governments according to the shares of the corresponding national central banks in the equity of the ECB, which broadly reflect countries' GDP shares. There will be a 33 per cent limit on the proportion purchased of each issuer's debt, and a 25 per cent limit on the proportion purchased of any security issue.

With regard to fiscal policy, the European Commission, in its annual evaluation (in late November) of Euro Area members' budgets, found that seven countries were at risk of breaking the rules of the Stability and Growth Pact, including France and Italy. The Commission is due to announce in March whether penalties will be imposed. On 13 January, the Commission published new guidance on how it will apply the existing rules, intended partly to encourage the effective implementation of structural reforms and to take better account of cyclical conditions. These may offer greater flexibility in judging violations.

In late November, the European Commission presented to the European Parliament a new 'investment plan for Europe' intended to boost investment in the EU by 315 billion [euro] over three years. This would be a significant boost to demand and activity, equivalent to about 0.8 per cent of GDP a year. However, the scheme involves no additional public expenditure and relies on financial engineering to mobilise private investment. Under the scheme, the existing EU budget will provide 8 billion [euro] as collateral for investment guarantees of 16 billion [euro], to which will be added 5 billion [euro] of guarantees provided by the European Investment Bank (EIB). The total of 21 billion [euro] in guarantees will form the basis of a new European Fund for Strategic Investment, housed at the EIB, which will provide risk protection to the EIB and allow it to raise in private capital markets about 60 billion [euro] in funds which, it is estimated by the European Commission, will be sufficient to co-finance with the private sector projects worth 315 billion [euro], selected by the investment committee of the EFSI. After the necessary legislation, the scheme is planned to start in mid-2015.

Germany

Although the economy's performance overall has remained one of the strongest in the Euro Area, growth has been quite weak in recent quarters. GDP increased by 0.25 per cent in the fourth quarter of 2014 after zero growth, on net, in the preceding six months. But partly thanks to stronger expansion in the first quarter of last year, GDP growth in 2014 as a whole was 1.5 per cent. This was in line with our November forecast. All major expenditure components contributed positively to GDP growth in 2014. Household consumption expanded by 1.1 per cent, partly reflecting real wage gains, with nominal wages up by about 2.5 per cent, ahead of price inflation of 0.8 per cent. Meanwhile fixed investment in 2014 grew by about 3.5 per cent. Net trade contributed 0.4 percentage point to GDP growth in 2014, with the current account surplus widening to 7.8 per cent of GDP from 6.8 per cent in 2013.

Lower oil prices as well as continuing growth in disposable incomes will buoy consumer spending this year. Also, recent improvements in indicators of business confidence augur well for investment spending: the ZEW index of business sentiment rose to an 11-month high in January. The recent depreciation of the euro will further bolster German exports outside the Euro Area, roughly 62 per cent of the total, and tend to expand the current account surplus further, as will the fall in oil prices. The surplus is projected to widen to 9.1 per cent of GDP this year. Taking these considerations into account, we have revised up our GDP growth forecast for 2015 to 1.8 from 1.6 per cent, but our projections for 2016 and the medium term remain unchanged at 2.1 per cent.

Reflecting the decline in oil prices, inflation has recently fallen significantly lower than we expected in November. Consumer prices rose by only 0.1 per cent in the twelve months to December 2014, while core inflation weakened slightly to 1.2 per cent. Preliminary estimates for January 2015 by the German statistical agency are that 12-month inflation (again measured on the EU's harmonised basis) fell to-0.5 per cent. We have revised down our forecast of inflation in 2015 as a whole markedly, to-0.3 per cent from 1.2 per cent. However, we assume in our forecast that inflation expectations remain well-anchored and that inflation returns to its previously forecast path as the impact of the drop in oil prices fades. There is a risk, however, that second round effects of the oil price decline on other prices and wages, and on inflation expectations, will bring a more sustained effect on underlying inflation. There is some worrying evidence of such an effect in data on 2015 wage settlements, which show significantly lower increases than those agreed in 2014: see figure 5.

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Despite lacklustre economic growth, unemployment has recently fallen further, reaching 4.8 per cent in December, its lowest level since 1981. Some have expressed concern that unemployment will be raised by the introduction on 1 January, 2015, of a national minimum wage, set at 8.50 [euro] an hour. This is expected to increase the hourly wage of about 3.7 million people, representing roughly 10 per cent of the labour force. A survey recently conducted by Ifo found that 26 per cent of the employers affected plan to raise their prices; 23 per cent plan to curb employee bonuses; and 22 per cent to cut jobs. However, international research on the effects of minimum wage policies is less than conclusive, and given the level at which the minimum wage is set, a substantial negative effect on employment, at least in the short term, seems unlikely.

Germany's fiscal position remains strong, with the Government running a surplus of 0.4 per cent of GDP in 2014, and further surpluses in prospect for 2015 and 2016, which should reduce government debt below 70 per cent of GDP next year and below 60 per cent of GDP by 2019. Perhaps the main value of this achievement is that it has increased the fiscal space available to Germany to meet its public investment needs by borrowing at the extremely low costs currently available. It could thereby not only raise Germany's future potential output and income, but also boost aggregate demand in the Euro Area, which is chronically below what it needs to be for satisfactory growth and job creation, and which most other member countries lack the fiscal space to address.

France

Growth has remained weak and spasmodic, with output little changed, on net, since mid-2011; and the outlook provides only limited encouragement. GDP grew by 0.3 per cent in the third quarter of 2014--the best quarterly growth rate in more than a year--but, on the basis of recent data, we estimate that it was flat in the fourth quarter. This would mean that in 2014 as a whole growth was only 0.3 per cent, as we forecast in November. A number of factors-including the fall in oil prices, the depreciation of the euro, and tax cuts--suggest that growth should pick up somewhat in 2015, and we have revised our forecast up slightly, from 1.1 to 1.3 per cent, though partly at the expense of growth in 2016, which we have revised down from 2.0 to 1.6 per cent. The depreciation of the euro should support French exports, and we expect a positive contribution from net trade to GDP in 2015 and 2016.

Consumer price inflation has recently fallen to around zero. Consumer prices rose just 0.1 per cent in the twelve months to December, while core inflation in the same period was -0.1 per cent. As the pass-through from oil prices continues, we expect the all-items inflation rate to turn negative, and we forecast that prices will fall by 0.7 per cent this year on an annual average basis. After the temporary oil factor drops out, we expect positive inflation to return in 2016, although, at 0.8 per cent, it is projected to remain well below the ECB's target for the Euro Area.

After falling slightly early last year, unemployment in the second half was stable at about 10.3 per cent, the level at which it plateaued in most of 2013. Job creation remained weak in the second half of 2014 and a large number of the jobs that were created were subsidised through the CICE tax credit scheme. This initiative is due to be expanded this year but its effects are likely to be largely offset by a decline in unsubsidised jobs. Unemployment is thus forecast to remain above 10 per cent over the next two years.

Given the high rate of unemployment and the fact that the increase in the minimum wage in 2015 is less than in previous years, nominal wage growth is forecast to be weak, but real incomes will be supported by negative inflation and a reduction in the tax burden.

Italy

The economy has remained in recession, without positive growth since early 2011, and unemployment has risen to new peaks. The contraction of the economy has, however, abated, and modest growth remains in prospect for this year and next.

GDP fell by 0.1 per cent in the third quarter of 2014 following a contraction of 0.2 per cent in the second. Given recent data, we have slightly increased our estimate of last year's GDP decline, to 0.4 per cent. We have also revised down our projections of output growth in 2015 and 2016, by 0.5 percentage point in each year, to 0.1 and 1.5 per cent respectively.

The largest contributor to the decline in GDP in the third quarter was a 1.0 per cent fall in fixed investment. This, together with a small decline in government consumption, was partly offset by an increase in net exports; household consumption was virtually flat. Within fixed investment, construction fell by 0.9 per cent, and we project that this decline will continue in 2015 despite a limited improvement in credit conditions. This pattern of demand contraction, with fixed investment bearing the brunt, continues that seen throughout the post-crisis recession: in the five years to the third quarter of last year, both household and government consumption fell by about 5 per cent, while fixed investment dropped by more than 15 per cent, with these declines in domestic demand being partly offset by improving net exports. We expect investment to keep falling this year, reflecting uncertainty about demand growth as well as the poor performance of the housing market; the recovery is expected to be driven mainly by net exports, which should benefit from the depreciation of the euro.

Uncertainty over demand has been aggravated by the continued high level of unemployment, which reached a new peak of 13.3 per cent in October and November before falling back to 12.9 per cent in December 2014. A particular source of concern is that unemployment among the young has been bordering 43 per cent.

Consumer price inflation, on a 12-month basis, has been hovering around zero since the middle of last year: in December it stood at-0.1 per cent. Meanwhile, core inflation has fluctuated around 0.5 per cent: in December it was 0.6 per cent. We project a fall in prices of 0.8 per cent in 2015, on an annual average basis, with the drop in oil prices, as well as the economy's spare capacity and weak domestic demand, outweighing the effects of the euro's depreciation.

Spain

Spain's recovery from its severe recession has gathered pace, but unemployment remains very high and deflation has been deepening. GDP grew by 0.5 per cent in the third quarter of 2014, slightly less than our November estimate, reaching a level about 3 per cent below its 2008 peak. The "flash" estimate of growth in the fourth quarter is 0.7 per cent, the highest quarterly growth rate since 2006 and slightly higher than the 0.6 per cent estimate used in our current, 1.4 per cent, estimate of 2014 growth. For 2015 and 2016, we project output growth of 1.6 per cent and 2.7 per cent respectively.

As in the second quarter, output growth in the third quarter of last year was driven by domestic demand, with net exports making a negative contribution of 0.9 percentage points, partly reflecting weak demand from Spain's main trading partners. We expect the contribution of net trade to growth to become broadly neutral following the euro's recent depreciation. Consumer spending and business investment were the main drivers of growth in the third quarter. It appears that the housing sector has reached its trough: housing investment made a slight negative contribution to growth in the third quarter, but with house prices having begun to recover we expect that it will begin to contribute positively this year.

Unemployment has declined but remains a major problem. In December 2014, it stood at 23.7 per cent, not far below the 26.9 per cent peak reached in early 2013. Unemployment thus remains about three times the level of about 8 per cent prevailing before the crisis, in 2007. About 60 per cent of the unemployed have been without jobs for a year or more, which indicates the potential for the problem to become increasingly structural.

Labour market slack is likely to continue bearing down on wages and labour costs, adding to the benefit from the euro's depreciation for Spain's international competitiveness. But the lack of wage growth will restrict the growth of private demand, which may also suffer from deflationary pressures. Consumer price inflation, on a 12-month basis, was negative throughout the second half of 2014, declining to -1.4 per cent in January 2015. The risk of a further deepening of deflation resulting from the drop in oil prices will be limited by the depreciation of the euro.

On the fiscal side, the deficit was reduced further in 2014, and the government's forecast for 2015 implies that it will meet the European Commission's Stability Programme target. We consider this view slightly optimistic, especially given the regional and general elections to be held in the second half of the year.

United States

The pick-up in the growth of output and employment that emerged after the drop in GDP in the first quarter of 2014 has been largely maintained. GDP rose by 5.0 per cent, at an annual rate, in the third quarter, after the 4.6 per cent rise in the second: this was the strongest two-quarter growth performance since 2003. Personal consumption, private fixed non-residential investment, and net exports all contributed significantly to third-quarter growth. The advance estimate for the fourth quarter is that growth moderated to 2.6 per cent as the contribution of net exports turned negative and the growth of fixed investment waned. The recent solid growth of consumer spending has been supported not only by declining fuel prices but also by reduced household indebtedness and rising consumer confidence: household debt at the end of the third quarter represented 108 per cent of disposable income, down from the peak of 135 per cent reached in 2007: see figure 6. Consumer confidence in January, by one estimate, was the highest in eleven years. Our projections for growth in 2015 and 2016 have been revised up, to 3.2 and 2.9 per cent, respectively.

The United States is still a net importer of oil, and the decline in fuel prices is expected to have a positive effect on overall demand. But this will be attenuated by the contractionary effect on investment in oil extraction, the share of which in total nonresidential investment has risen from about 3 per cent in the 1990s to about 12 per cent more recently.

Employment growth has strengthened and unemployment has fallen in recent months, but there remain signs of significant slack in the labour market. Non-farm payrolls rose by 844,000 in the fourth quarter, the largest quarterly increase since early 2006; and the increase of 2.95 million jobs in 2014 as a whole was the largest in any year since 1999. Unemployment fell in December to 5.6 per cent, the lowest since June 2008, and only marginally above the Federal Reserve's range estimate of 5 1/4-5 1/2 per cent for the natural rate. However, labour force participation, at 62.7 per cent in December, was back to its lowest level since 1978, and the employment--population ratio, at 59.2 per cent in December, though above its mid-2011 low of 58.2 per cent, remains far below the levels of 61-64 per cent in which it fluctuated in the two decades before the financial crisis. Moreover, wage growth has remained subdued: average hourly earnings in the private non-farm sector rose by 1.7 per cent in the year to December--the smallest twelve-month increase in more than two years--while the employment cost index (which takes into account benefits) rose by 2.2 per cent in the same period.

[FIGURE 6 OMITTED]

Core consumer price inflation in recent months has fallen somewhat further below the Federal Reserve's longer-term objective of 2 per cent a year, but broader measures that include fuel prices have dropped even more steeply. The 12-month change in the core price index for personal consumption expenditures was 1.3 per cent in December, while the same change for the corresponding all-items index was 0.7 per cent. There are indications from financial markets that in recent months inflation expectations have declined significantly below the Fed's objective: thus in late January the five-year break-even inflation rate implied by the yields on indexed and non-indexed five-year government securities was 1.2 per cent, down from 2.0 per cent in mid-2014.

The Federal Reserve ended its 'QE3' programme of asset purchases in October. The timing of increases in the Fed's short-term interest rates remains uncertain. Recent economic developments have not diminished the case, set out in the November Review, for patience in raising interest rates until there are clear signs that the underlying inflation rate is rising above the 2 per cent objective. In its policy statement of 17 December, the Fed indicated that, based on its current assessment, it could be "patient in beginning to normalize the stance of policy", and that this guidance was consistent with its previous statement that it was likely to be appropriate to maintain the target range for the federal funds rate unchanged "for a considerable time" following the end of QE3 asset purchases. Its 28 January statement reiterated this judgment.

[FIGURE 7 OMITTED]

Canada

Economic growth remained quite strong in the third quarter of 2014, with GDP rising by 2.8 per cent at an annual rate, fuelled mainly, as in the second quarter, by expanding exports, housing investment, and household consumption. Non-residential business investment was again virtually flat. Core consumer price inflation, on a 12-month basis, has remained close to the Bank of Canada's target of 2 per cent: it was 2.2 per cent in December. In terms of the all-items index, however, inflation has drifted down, to 1.5 per cent in December, reflecting the decline in oil prices.

Apart from reducing overall inflation in the short run, the decline in oil prices will have negative effects on economic growth and employment in Canada since it is a net exporter of oil. Crude oil has recently accounted for about 14 per cent of Canada's exports, while oil extraction accounts for about 3 per cent of its GDP. However, the loss in income resulting directly from the price decline, and from such repercussions as reduced investment in the oil sector, will be partly offset by gains from the price fall for Canada's non-oil sector, as well as the boost to exports from gains in growth for the US economy and other oil-importing trade partners. The loss will also be mitigated by the depreciation of the Canadian dollar and its effects on non-energy exports. Indeed, the Canadian dollar has depreciated against the US dollar by about 10 per cent since late October. In response to the drop in oil prices, and noting its negative implications for growth and inflation, the Bank of Canada on 22 January cut its benchmark interest rate by 0.25 percentage point to 0.75 per cent. An immediate effect of the cut was a further depreciation of the currency.

Our projection for GDP growth in 2015, at 2.2 per cent, is 0.3 percentage point lower than our projection in November. Uncertainties relating to the oil price fall are likely to mean that the growth of business investment will remain weak. At 2.6 per cent, our projection for GDP growth in 2016 is unchanged from November, with the effects of lower interest rates and the depreciated currency offsetting lower oil prices. Taking into account not only the fall in oil prices and expected weakening of domestic demand, but also the currency depreciation, we have lowered our inflation forecast for 2015 only slightly to 1.6 per cent, and a rise in inflation is projected for 2016.

One downside risk to Canada's economic outlook is that oil prices may stay at their recent low levels for a considerable time or even fall further. There also remains the long-standing concern that the housing market may suffer a correction.

Japan

The government's aims of strengthening growth and raising inflation have been set back recently, partly by the unexpectedly prolonged effects on domestic demand and activity of last April's increase in the consumption tax and also by the short-term impact on domestic inflation of the decline in oil prices. In response, at the end of October, the Bank of Japan announced an expansion of its programme of asset purchases. Also, in mid-November, the government announced that the further increase in the consumption tax planned for October this year (from 8 to 10 per cent) would be postponed until April 2017--a decision endorsed in a general election held in mid-December.

GDP contracted by 0.5 per cent in the third quarter of 2014, following the 1.7 per cent drop in the second. In contrast with the second quarter, when all major components of final private demand weakened, the third quarter's economic contraction was more than fully accounted for by a drop in private sector stock-building; but private fixed investment also fell, and there were only partly offsetting increases in household consumption, government spending, and net exports. This unexpectedly weak performance of the economy seems to have mainly reflected repercussions of the consumption tax hike rather than systemic structural weaknesses. Although growth is likely to have resumed in the fourth quarter, we now estimate that GDP was flat in 2014 as a whole --a downward revision of 0.6 percentage point from the growth projection in our November Review. Our growth forecast for 2015 and 2016 has also been revised down significantly, to 0.8 and 1.1 per cent respectively, from 1.4 and 1.5 per cent in November.

The fall in oil prices, given Japan's elevated reliance on imported fossil fuels since its nuclear reactors were deactivated, is likely, if sustained, to provide significant support for growth both by raising households' disposable incomes and by reducing production costs. But it will also, in the short run, complicate the achievement of the Bank of Japan's 2 per cent inflation target by depressing consumer prices.

The momentum of slowly rising underlying inflation that was apparent before the consumption tax increase appears to have been lost. Consumer prices (excluding fresh food) rose by 2.5 per cent in the year to December, but after stripping out the effects of the consumption tax increase, the 12-month rise in prices was only 0.5 per cent, down from 1.3 per cent in the months immediately preceding the tax hike. The slowing of underlying inflation, together with the fall in oil prices, prompted the Bank of Japan, at the end of October, albeit by a majority of only 5-4 votes on its Policy Board, to expand asset purchases under its programme of Quantitative and Qualitative Easing (QQE) from [yen] 60-70 trillion a month to [yen] 80 trillion, at the same time extending further the average maturity of asset purchases. This contributed to a further depreciation of the Yen: in late January, its value in terms of the US dollar was 8 per cent lower, and its effective exchange rate 4 per cent lower, than in late October. This depreciation will partly offset the effects on domestic inflation of the falling oil price, and should also boost activity through net exports. Our estimated 7 per cent growth in export volumes in 2014, following the marked depreciation since late 2012, and after several years of export stagnation, is encouraging in this regard. We expect exports to grow moderately over our forecast period.

The labour market appears to have tightened in 2014, with unemployment reaching a 17-year low of 3.5 per cent in the latter part of the year. This has not, however, translated into nominal wage increases sufficient to reverse a 17-month trend of declining real wages. The start of the current spring round of wage negotiations was heralded by further calls from the government for "generous" wage increases, especially by firms benefiting from the policies of the Bank of Japan and the government, including promised reductions in the corporate tax rate. If such wage increases are realised, this should further offset the disinflationary effects of the oil price fall as well as raising consumer demand.

The Bank of Japan has put back its goal of 2 per cent inflation from early 2015 to later this year, but even this seems unrealistic, given the decline in oil prices, despite the Yen's depreciation and the push for higher wages. December's Tankan survey showed that one-year-ahead inflation expectations remained broadly unchanged from September at 1.4 per cent. In our forecast, inflation fails to reach the 2 per cent target, on an annual average basis, even in the medium term.

Following his re-election in December, the Prime Minister re-affirmed the government's commitment to halving the primary budget deficit by the fiscal year (FY) 2015 (beginning on 1 April), from its level of 6.6 per cent of GDP in FY 2010, and eliminating it by FY 2020. The goal for FY 2015 is expected to be met, partly through higher revenues from the consumption tax, but the goal for FY 2020 will require further spending and revenue measures; the government has indicated that a longer-term fiscal consolidation plan will be announced by the summer. The Prime Minister also reaffirmed the government's commitment to the structural reforms referred to as the "third arrow" of his economic policies. Although many of these reforms have been described in general terms, their implementation will require further details to be spelled out and also political capital to be spent by the government.

China

The moderate slowing of economic growth has continued. GDP increased by 7.3 per cent in the year to the fourth quarter of 2014, bringing growth for the year as a whole to 7.4 per cent, the lowest for any year since 1990, though still the highest among the world's major economies. The slowing of GDP growth largely reflects the waning growth of investment, especially construction (down to 10.5 per cent in 2014 from 19.8 per cent in 2013) and exports. With the property market having weakened notably in recent months, declining growth in construction is expected to continue weighing on the economy's expansion this year. We forecast that output will grow by 7.0 and 6.9 per cent this year and next, respectively, marginally lower than our projections in the November Review.

Inflation has recently fallen further below the government's target, eliciting action by the People's Bank. Consumer price inflation, on a twelve-month basis, declined in the second half of 2014 to about 1.5 per cent--its rate in the year to December--from about 2.3 per cent in the first half of the year. In 2014 as a whole, consumer price inflation was 2 per cent, below the government's 3.5 per cent target. Moreover, the producer price index fell by 3.3 per cent in the year to December, the largest fall since September 2012, reflecting reduced demand for basic materials as well as the fall in the price of oil and weakness of other commodity prices. Falling producer prices tend to increase the burden of corporate debt, which has grown significantly through borrowing since the onset of the global crises. Following a number of initiatives to inject liquidity into the banking system and to support the supply of credit to small and medium-sized companies, the People's Bank lowered its benchmark interest rates on 21 November for the first time since 2012--the one-year lending rate to 5.6 per cent from 6.0 per cent, and the one-year deposit rate to 2.75 from 3.0 per cent. Officials indicated that this move was partly in response to an increased risk of deflation.

Fiscal 'mini-stimulus' measures taken in the first half of last year were aimed particularly at stepping up investment in infrastructure and social housing. Since then, fiscal policy has been concerned more with improving budget management. A revision of the Budget Law passed in August 2014, which became effective in January 2015, allows all local governments at provincial level to issue municipal bonds directly, as long as the purpose is to finance public investment and not other forms of expenditure. This will help local governments reduce their financing costs and mitigate the risks involved in local government borrowing though the financing vehicles they previously had to establish to circumvent the prohibition on direct borrowing. The measure thus clearly aims to contain the financial risks that have arisen from the growth of local government debt in recent years.

Since January last year the Shanghai stock market has risen by about 57 per cent--a larger raise than in any other major market--with most of the increase (about 36 per cent) taking place since the reduction of official interest rates on 21 November: see figure 8. Worries about the overheating of the market prompted the securities regulator on 19 January to introduce restrictions on margin trading by the three largest brokerages. This led to the largest daily fall in stock prices since 2008, but prices regained lost ground within a few days.

[FIGURE 8 OMITTED]

There are both downside and upside risks to our growth forecast. Downside risks include a faster than assumed property market correction, with repercussions on the shadow banking sector and local government finances, and a sharper weakening of business investment as a result of industrial overcapacity. On the upside, we may have underestimated the boost to the economy from lower oil prices, including through their effects on household consumption.

India

In contrast to most other major emerging market economies, India's economic growth strengthened somewhat during 2014; at the same time, inflation fell back, which, together with buoyant financial markets, allowed a recent easing of monetary policy. The pick-up in GDP growth in the first half of 2014 continued in the third quarter, with GDP (at market prices) 6.0 per cent higher than a year earlier. (5) Growth is expected to continue strengthening modestly this year, supported by improvements in both domestic demand and net trade, partly owing to the fall in oil prices. Thus GDP growth is forecast to rise from 6.0 per cent on average last year to 6.3 and 6.5 per cent, respectively, in 2015 and 2016.

Consumer price inflation, on a 12-month basis, declined steadily last year from its peak of 11 per cent in late 2013, reaching 5.0 per cent in December, well below not only the 8 per cent target set by the Reserve Bank of India (RBI) for January 2015, but also its target of 6 per cent for January 2016. With the rupee's exchange rate against the appreciating US dollar also stable, this allowed the RBI to cut its benchmark interest rate on 15 January by 0.25 percentage points to 7.75 per cent. This rate cut, and expectations of more cuts to come, prompted a further rise in the stock market, where prices have risen more in the past year than in any other major equity market except Shanghai. Governor Rajan of the RBI warned in January, however, that further monetary easing would depend on "high-quality fiscal consolidation as well as steps to overcome supply constraints".

Business confidence has risen since the election of the new government last May partly because of expectations of greater progress with fiscal and structural reforms. A number of measures already announced, including the cancellation of diesel subsidies in October, and increases in tax rates on petrol and diesel in November, as well as others in the pipeline--for example, the introduction of a uniform goods and services tax, which should help to broaden the tax base and deliver a more steady stream of revenues--should contribute to a needed reduction in the fiscal deficit. Other reforms have been announced, including an easing of restrictions on foreign investment in some sectors, in December, but a broader programme of growth-promoting reforms is still awaited.

Even though India is one of the world's largest net importers of oil, the boost to consumer spending from the oil price decline will be attenuated by the increased excise duties on diesel and petrol. Nevertheless, the price fall will both boost household spending and help to improve the fiscal position.

Despite recent positive developments, risks to the projected strengthening of growth remain, including high corporate leverage, obstacles to the implementation of structural reforms, and the possibility of a recovery in oil prices.

Brazil

Economic activity has been flat, on balance, since the middle of 2013, while above-target inflation has led to a series of increases in official interest rates, which resumed in October after a six-month pause. The formation of a new government at the beginning of this year, with a new economic team, following the reelection of the President last October, has encouraged expectations of a new approach to policy involving stronger fiscal discipline and growth-promoting structural reforms. With such policies not yet having been set out, however, we forecast only a weak recovery in growth this year and next. Since Brazil has only a small trade deficit in oil, of about 1 per cent of GDP, the effect on growth of the fall in oil prices is expected to be limited.

GDP stagnated in the third quarter of 2014 following a recession in the first half of the year. We estimate that growth in 2014 as a whole amounted to just 0.1 per cent, following 2.5 per cent growth in 2013. The virtual absence of growth in 2014 reflected weak domestic demand, in general, and contracting investment expenditure, in particular, which may be attributed partly to low business confidence, weak commodity export prices and, especially during the second half of the year, uncertainties relating to the presidential election.

Consumer price inflation, on a twelve-month basis, eased back in the final quarter of last year, from a peak of 6.8 per cent in September to 6.4 percent in December, just below the upper limit of the Central Bank's target range of 2.5-6.5 per cent. The stubbornness of inflation last year, despite a series of increases in the benchmark 'Selic' interest rate amounting to 3.75 percentage points in the year to April, which left the rate at 11.0 per cent, may be attributed partly to capacity constraints and partly to currency depreciation: the unemployment rate has been on a downward trend over the past decade, reaching 4.8 per cent in the fourth quarter of last year, while the Real's exchange value in terms of the US dollar fell by 13 per cent in the course of 2014. Immediately following the election, at the end of October, the Central Bank raised the Selic rate again, to 11.25 per cent. This was followed by two further increases, on 3 December and 21 January, which took the rate to 12.25 per cent, its highest level since the peak reached in 2011. However, the expected rise of administered prices, the tax rate hikes recently announced by the government, and the impact of the depreciation of the Real, will limit progress in reducing inflation in the short run. In fact, our forecast of inflation, at 6.2 in 2015 and 5.8 in 2016, is little changed from November.

With regard to the outlook for growth, the likely boost to net exports from the depreciated Real is not expected to compensate for the reduction in export earnings from lower commodity prices together with the expected weakness of domestic demand, especially given the fact that Brazil's economy is relatively closed. We assume that domestic demand will be dampened by more stringent monetary and fiscal policies under the new government. Also, notwithstanding the government's pledge to structural reforms, uncertainty remains about the timing of their implementation as well as their breadth and extent. Our GDP growth forecasts for 2015 and 2016 have thus been revised sharply downwards, to 0.8 and 1.7 per cent, from 1.3 and 2.5 per cent, respectively, in the November Review.

Russia

Russia's economic situation has deteriorated markedly in the past three months, with the steep decline in the price of oil--which in 2013 accounted for about 55 per cent of the country's export revenues and about 30 per cent of its fiscal revenues-adding to the difficulties arising from the international economic sanctions imposed last year and the economy's long-standing structural problems. The most striking indicator of this deterioration is a further sharp depreciation of the rouble--by about 40 per cent against the US dollar between late October and late January-despite substantial increases in official interest rates and large-scale intervention in the foreign exchange market by the Central Bank.

GDP was virtually flat in the first three quarters of 2014, but a recession is likely to have begun in the fourth quarter. Reflecting the rouble's depreciation, and probably also shortages of goods arising from the economic sanctions and counter-sanctions-including a ban on certain food imports imposed by Russia last August--consumer price inflation on a 12-month basis rose to 13.1 per cent in January, the highest rate in more than four years and more than double the Central Bank's informal 5 per cent target. Average inflation in 2014 was 7.8 per cent, the highest since 2011.

On 10 November, given the pressure on the rouble, and in an attempt to staunch the drain on its international reserves, the Central Bank announced that it had brought forward from the beginning of January 2015 the planned switch to a floating exchange rate arrangement. Nevertheless, substantial official intervention in the foreign exchange market has continued. Russia's international reserves at the end of December 2014 amounted to $385 billion, $125 billion (25 per cent) lower than a year earlier. The largest monthly decline in reserves last year ($34 billion) occurred in December, after the announcement of the introduction of the floating rouble. The total identified net outflow of private capital in 2014 amounted to $152 billion.

These outflows of private capital and losses of official reserves occurred in spite of increases in official interest rates. The Central Bank raised its benchmark interest rate at the end of October to 9.5 per cent from 8 per cent, and again on 11 December to 10.5 per cent. Five days later, it raised the rate to 17 per cent. Each of these increases was explained as being aimed at limiting risks of further currency depreciation and higher inflation. On 30 January, however, the Central Bank lowered the rate back to 15 per cent, indicating the dilemma it faced between, on the one hand, containing exchange rate and inflationary pressures, and on the other, limiting contractionary pressures on the economy. Immediately following the interest rate cut, the rouble fell by a further 4 per cent against the US dollar; the extent of official intervention to contain the decline is unknown. Ten-year government bond yields in late January, at about 13.5 per cent, were 3.5 percentage points higher than in late October and 5 percentage points higher than a year earlier.

Against this backdrop, a pronounced recession is in prospect for the near term, with private domestic demand hit by both the tightening of financial conditions and the collapse of the rouble. The rouble's depreciation is likely largely to offset the effect of the decline in oil prices on fiscal revenues--crude oil prices in rouble terms declined by only about 8 per cent between end-October 2014 and late January 2015--but it is nevertheless likely to weaken the fiscal position, including through upward pressure on public expenditures, so that budget cuts will be needed. Indeed, in late January, the government confirmed that it aims to cut 10 per cent from most expenditures this year, with only defence spending being ring-fenced. Also, while currency weakness could boost activity in the trade sector, it increases the difficulties of debtors in foreign currency and erodes their borrowing capacity in international capital markets, adding to the effects of sanctions. We are thus projecting a significant decline in GDP this year, of 3.8 per cent, and stagnation for 2016. Meanwhile, inflation seems likely to rise further in the short term, given the fall in the currency. Assuming that the monetary situation stabilises during 2015, we forecast that average inflation will rise to 11.0 per cent this year before easing back to 6.2 per cent in 2016.

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 about 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 at 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 in the Euro Area. Policy rates in the major advanced economies are expected to remain at extremely low levels, at least in the first half of 2015. The Reserve Bank of Australia reduced interest rates by 50 basis points through 2013 and has kept them unchanged since. After lowering its policy rates by 150 basis points in four steps between mid-2013 and June 2014, the Mexican central bank has kept them unchanged. The Bank of Korea and the central bank of Sweden reduced interest rates by 50 and 75 basis points correspondingly in two steps in the second half of last year. The central bank of Turkey has cut its policy rate by 225 basis points over four rounds since April 2014. Both the central banks of Hungary and Romania have lowered their interest rates. Since last summer, the Romanian central bank has reduced theirs by 250 basis points in nine steps. The central bank of Hungary brought them down by 365 basis points in nineteen rounds between the beginning of 2013 and July 2014. The central banks of Norway and Poland lowered their policy interest rates by 25 and 50 basis points, respectively, in the fourth quarter of 2014, the first reductions since 2012 in Norway and summer 2013 in Poland. The central banks of Canada, India and Switzerland lowered their benchmark interest rates by 25 basis points in January 2015, while Denmark's central bank reduced them by 15 basis points to 5 basis points above zero. While for the central banks of India and Denmark it was the first rate cut since May 2013, for the Canadian central bank is was the first since 2009. In contrast, several emerging market economies have tightened monetary policy in response to inflationary and financial market pressures, most notably in Brazil, Indonesia, Russia and South Africa. Since 2013, Brazil and Russia have raised their policy rates in six rounds, by 2.25 and 11.5 percentage points respectively. South Africa and Indonesia increased interest rates in 2014. The central bank of New Zealand has increased its policy rate by a total of 100 basis points in four steps throughout 2014. (2) A reduction in interest rates will mitigate, somewhat, the risk of short real rates turning positive in some of these emerging market countries. However, for the economies that are already experiencing falling price levels, modest cuts in interest rates will probably not be enough to stop a switch to positive real interest rates. This is especially the case for many members of the Euro Area.

Policymakers in the US and UK are expected to begin to raise interest rates in the second half of 2015 and at the beginning of 2016 respectively, pre-empting rate rises in the Euro Area by at least five quarters. For the US, this is broadly consistent with the interest rate path signalled by the Federal Open Market Committee (FOMC). The Federal Reserve ended its 'QE3' programme of asset purchases in October 2014. The timing of increases in the Fed's short-term interest rates remains uncertain. Recent economic developments have not diminished the case, set out in our November Review, for waiting until there are clear signs that the future underlying inflation rate will probably rise above the 2 per cent objective, before embarking on the gradual path to interest rate normalisation. In its policy statement of 28 January 2015, the Fed reiterated its message that, based on its current assessment, it could be "patient in beginning to normalize the stance of policy".

In contrast, the ECB and the central bank of Japan are introducing additional rounds of balance sheet expansion. With its benchmark interest rates already close to, or below, zero, the ECB has proceeded to implement the programmes of financial market operations announced last June and September, designed to provide additional monetary stimulus through the expansion of its balance sheet (see Reviews of August and November 2014). In addition, on 22 January, it announced a major expansion of the asset purchase programme under which the Eurosystem--comprising the ECB and the Area's national central banks--will begin in March 2015 to purchase, in the secondary market, euro-denominated investment-grade securities issued by Euro Area governments and government agencies, and by European institutions. The purchases will be coordinated by the ECB. Including the covered bond and asset-backed securities purchase programmes introduced last year, combined monthly purchases will amount to EUR 60 billion. The expanded purchase programme is open-ended: it will continue until "at least September 2016 and in any case until the Governing Council sees a sustained adjustment in the path of inflation that is consistent with its aim of achieving inflation rates below, but close to, 2 per cent over the medium term". The purchases planned between March 2015 and September 2016 will amount to EUR 1.14 trillion (about 11 per cent of Euro Area GDP).

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. Government bond yields in the US, Euro Area and the UK picked up marginally towards the end of December 2013, but have drifted down since, with the largest reduction in bond yields materialising in the Euro Area. Convergence in Euro Area bond yields towards those in the US, observed since the start of 2013, reversed at the beginning of this year. Since February 2014, the margin between Euro Area and US bond yields started to increase, remaining on average at about 100 basis points (in absolute terms) since August last year. The expectations for bond yields throughout 2015 are lower than expectations formed just three months ago, for the US, Euro Area, UK and Japan. However, while the expectations for yields in Japan are marginally lower, by about 30 basis points, expectations of yields in the US, Euro Area and the UK have fallen by more: by approximately 55 basis points in the Euro Area, between 50-65 basis points in the US and in a range of 65-80 basis points in the UK.

[FIGURE A1 OMITTED]

[FIGURE A2 OMITTED]

Sovereign risks in the Euro Area have been a major macroeconomic issue for the global economy and financial markets over the past three years. Figure A2 depicts the spread between the 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. During the summer of 2013 there was some upward pressure on yields in Portugal, related to uncertainty over its fiscal austerity programme, parts of which were declared unconstitutional by the Portuguese Constitutional Court. However, better than expected GDP figures for the second quarter of 2013 calmed the financial markets somewhat and bond spreads narrowed. In June 2014, as foreshadowed in preceding weeks by its officials, the ECB announced a number of measures aimed at providing additional monetary accommodation and at supporting bank lending to the private sector, with the ultimate aim of increasing aggregate demand and raising inflation nearer to the target of 'below, but close to, 2 per cent'. Sovereign spreads have changed little in most cases from late July 2014, the most notable exception being a marked widening of Greek spreads, reflecting uncertainty over its fiscal stance and debt repayment since the recent formation of a government dominated by a political party elected on an anti-austerity manifesto. (3) In our forecast, we have assumed spreads over German bond yields continue to narrow in all Euro Area countries, and that this process resumes in Greece by the end of this year. The implicit assumption underlying the forecast is that the Euro Area continues to hold together in its current form.

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

[FIGURE A3 OMITTED]

[FIGURE A4 OMITTED]

Nominal exchange rates against the US dollar are generally assumed to remain constant at the rate prevailing on 23 January 2014 until the end of September 2015. After that, they follow a backward-looking uncovered-interest parity condition, based on interest rate differentials relative to the US. We have modified this assumption for China, assuming that the exchange rate target continues to follow a gradual appreciation against the US$, of about 2Vi per cent annually from end-2014 to 2016. Figure A4 plots recent history as well as our forecast of the effective exchange rate indices for Canada, the Euro Area, Japan, Switzerland, the UK and the US. Reflecting relative cyclical positions and associated expectations of monetary policy developments, the US dollar has appreciated by about 9 per cent against most other major currencies in effective terms since the end of the third quarter of 2014. The most notable exception to the US dollar's appreciation is the movement of the Swiss franc, appreciating in effective terms by about 9 per cent since the end of last year. This reflects the Swiss National Bank's removal, on 15 January, of the franc's cap against the euro, which was not anticipated by markets. Partly owing to the appreciation of the dollar and partly to the recent cut in policy rates, Canada's effective exchange rate has depreciated by about 5 per cent since the end of 2014.

Our oil price assumptions for the short term are based on those of the US Energy Information Administration (EIA), who use information from forward markets as well as an evaluation of supply conditions, and are reported in table 1 at the beginning of this chapter. Increases in oil prices due to crises in Iraq and other oil producers as well as in Ukraine were short-lived. Partly reflecting weakness in the global economy and partly due to a glut in supply, the price of oil has fallen sharply since the beginning of September 2014. We assume the price of oil remains relatively stable through to the end of 2015. Overall, oil price expectations for the end of this year have dropped by about 30 per cent, compared with expectations formed just three months ago. EIA projections show an expectation of a 31 per cent increase in oil prices, on average, in 2016. This leaves oil prices around $30 below their nominal level in mid-2014. Beyond this, oil price growth is expected to be restrained, in part, by the rise in new extraction methods for oil and gas, especially in the US (see the discussion in February 2013 National Institute Economic Review and Chojna et al., 2013).

[FIGURE A5 OMITTED]

Our equity price assumptions for the US reflect the expected return on capital. Other equity markets are assumed to move in line with the US market, but are adjusted for different exchange rate movements and shifts in country-specific equity risk premia. Figure A5 illustrates the key equity price assumptions underlying our current forecast. Global share prices performed well throughout 2013, irrespective of a short-lived drop--a reaction to the QE tapering signals emanating from the Federal Reserve in summer 2013--and continued to increase in most countries during the first half of 2014. 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. Recent developments in equity prices have been mixed, with some countries recovering somewhat from a decline experienced in the second half of 2014, while for others prices are still declining. The fall in Greece continues to be particularly sharp. Equity prices there have fallen by about 37 per cent since the beginning of 2014. Among large developed economies the most significant gains have been in Japan (by about 15 per cent), despite falls in the second quarter of 2014.

Fiscal policy assumptions for 2015 follow announced policies as of 1 January 2014. 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, which is expected to decline as a share of GDP between 2014 and 2015 in the majority of Euro Area countries reported in the table. Recent policy announcements in Portugal, Spain, Italy and elsewhere, as well as the election of the anti-austerity government in Greece, suggest that the commitment to fiscal austerity in Europe may be waning. A policy loosening relative to our current assumptions poses an upside risk to the short-term outlook in Europe. For a discussion of fiscal multipliers and the impact of fiscal policy on the macroeconomy based on NiGEM simulations, see Barrell, Holland and Hurst (2013).

REFERENCES

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

Chojna, J., Losoncz, M. and Suni, P. (2013), 'Shale energy shapes global energy markets', National Institute Economic Review, 226, pp. F40-F45.

NOTES

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

(2) Interest rate assumptions are based on information available for the period to 23 January 2015 and do not include the 200 basis point cut by the Central Bank of Russia on 30 January 2015, or the 25 basis point reduction by the Reserve Bank of Australia, on 3 February 2015, which we assumed would happen in the second quarter of this year.

(3) Yields on 10-year Greek bonds rose back to above 10 per cent on several occasions during January 2015. At the time of writing they remain close to 9 per cent.

Table A1. Interest rates

Per cent per annum

                Central bank intervention rates

             US    Canada   Japan   Euro Area    UK

2011        0.25    1.00    0.10      1.25      0.50
2012        0.25    1.00    0.10      0.88      0.50
2013        0.25    1.00    0.10      0.56      0.50
2014        0.25    1.00    0.10      0.16      0.50
2015        0.47    0.83    0.10      0.05      0.50
2016        1.66    1.55    0.10      0.05      0.84
2017-21     3.52    3.32    0.63      1.06      2.19

2013   Q1   0.25    1.00    0.10      0.75      0.50
2013   Q2   0.25    1.00    0.10      0.60      0.50
2013   Q3   0.25    1.00    0.10      0.50      0.50
2013   Q4   0.25    1.00    0.10      0.37      0.50
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    0.83    0.10      0.05      0.50
2015   Q2   0.25    0.75    0.10      0.05      0.50
2015   Q3   0.55    0.75    0.10      0.05      0.50
2015   Q4   0.84    1.00    0.10      0.05      0.50
2016   Q1   1.14    1.25    0.10      0.05      0.67
2016   Q2   1.49    1.45    0.10      0.05      0.75
2016   Q3   1.84    1.64    0.10      0.05      0.92
2016   Q4   2.19    1.84    0.10      0.05      1.00

                 10-year government bond yields

             US    Canada   Japan   Euro Area    UK

2011        2.8     2.8      1.1       3.9      3.1
2012        1.8     1.9      0.8       3.2      1.8
2013        2.3     2.3      0.7       2.7      2.4
2014        2.5     2.2      0.6       1.9      2.5
2015        2.2     1.9      0.4       1.2      1.8
2016        2.9     2.7      0.7       1.7      2.4
2017-21     3.8     3.7      1.5       2.9      3.5

2013   Q1   1.9     1.9      0.7       2.7      2.0
2013   Q2   2.0     2.0      0.7       2.5      1.9
2013   Q3   2.7     2.6      0.8       2.8      2.7
2013   Q4   2.7     2.6      0.6       2.7      2.8
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   1.9     1.6      0.3       0.9      1.6
2015   Q2   2.1     1.8      0.4       1.1      1.8
2015   Q3   2.3     2.1      0.4       1.2      1.9
2015   Q4   2.5     2.3      0.5       1.3      2.1
2016   Q1   2.7     2.5      0.6       1.5      2.2
2016   Q2   2.9     2.6      0.7       1.6      2.4
2016   Q3   3.0     2.8      0.8       1.7      2.5
2016   Q4   3.2     2.9      0.8       1.9      2.6

Table A2. Nominal exchange rates

                     Percentage change in effective rate

            US   Canada  Japan  Euro  Germany  France  Italy   UK
                                Area

2011       -2.9    2.1     6.9   0.9    0.5      1.1    1.4   -0.1
2012        3.4    1.0     2.2  -1.9   -2.0     -2.0   -1.6    4.2
2013        2.9   -3.2   -16.7   2.9    2.9      3.1    3.8   -1.2
2014        4.2   -5.2    -5.1   1.9    1.8      1.9    3.3    7.9
2015        8.8   -7.4    -6.4  -2.8   -3.2     -3.4   -3.0    1.5
2016        0.2   -0.7     0.8   0.2    0.1      0.2    0.4    0.2

2013   Q1   1.2   -3.1   -12.0   1.2    1.3      1.2    1.2   -3.9
2013   Q2   1.4   -0.2    -5.7   0.1    0.2      0.1    0.1    0.3
2013   Q3   2.0    0.3     2.9   2.0    1.7      2.3    3.1    1.9
2013   Q4  -0.1   -3.0    -2.0   0.9    0.9      0.9    1.2    3.0
2014   Q1   1.7   -3.9    -1.5   0.8    0.9      0.7    1.2    2.6
2014   Q2  -0.9    2.4     0.1  -0.1   -0.2      0.0    0.3    1.4
2014   Q3   1.5   -1.0    -1.2  -0.9   -0.9     -0.9   -0.9    1.6
2014   Q4   4.6   -1.7    -6.6  -0.4   -0.4     -0.7   -0.3   -0.4
2015   Q1   4.1   -4.6    -1.1  -1.3   -1.5     -1.6   -1.5    0.5
2015   Q2   0.7   -2.4     0.3  -1.1   -1.3     -1.1   -1.3    0.3
2015   Q3  -0.1    0.0    -0.1   0.0    0.0      0.0    0.0    0.0
2015   Q4   0.1    0.0     0.2   0.1    0.1      0.1    0.2    0.0
2016   Q1   0.0    0.0     0.2   0.1    0.1      0.2    0.2    0.0
2016   Q2   0.0    0.0     0.3   0.2    0.1      0.2    0.2    0.0
2016   Q3   0.0    0.0     0.3   0.2    0.2      0.2    0.3    0.0
2016   Q4  -0.1    0.0     0.4   0.2    0.2      0.2    0.3    0.0

               Bilateral rate per US $

           Canadian   Yen   Euro   Sterling
              $

2011        0.995     79.8  0.719   0.624
2012        0.997     79.8  0.778   0.631
2013        1.039     97.6  0.753   0.640
2014        1.108    105.8  0.754   0.607
2015        1.230    118.5  0.874   0.665
2016        1.239    117.6  0.873   0.664

2013   Q1   1.025     92.3  0.757   0.645
2013   Q2   1.032     98.8  0.765   0.651
2013   Q3   1.035     98.9  0.755   0.645
2013   Q4   1.064    100.4  0.735   0.618
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   1.136    114.5  0.801   0.632
2015   Q1   1.206    118.5  0.859   0.661
2015   Q2   1.238    118.5  0.880   0.666
2015   Q3   1.238    118.5  0.880   0.666
2015   Q4   1.239    118.4  0.879   0.666
2016   Q1   1.239    118.1  0.877   0.666
2016   Q2   1.239    117.8  0.875   0.665
2016   Q3   1.239    117.4  0.871   0.664
2016   Q4   1.239    116.9  0.868   0.662

Table A3. Government revenue assumptions

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

             2014  2015  2016  2014  2015  2016  2014  2015  2016

Australia    14.5  14.6  14.6  25.7  25.7  25.7  30.7  31.0  31.2
Austria      31.3  31.5  31.7  21.8  21.8  21.8  41.1  40.1  40.2
Belgium      35.7  35.8  35.4  21.7  21.7  21.7  44.1  43.6  43.2
Canada       21.7  21.5  21.3  20.3  20.8  20.8  35.4  35.6  34.8
Denmark      38.5  38.1  37.1  32.8  32.8  32.8  48.7  48.1  48.1
Finland      32.8  32.8  32.5  23.1  23.1  23.1  47.4  47.6  47.9
France       30.9  30.9  31.1  32.7  32.7  32.7  46.1  45.4  45.7
Germany      28.7  28.7  28.1  19.4  19.4  19.4  41.2  41.1  40.8
Greece       25.3  24.6  24.5  13.5  13.5  13.5  39.8  38.1  37.9
Ireland      27.3  27.3  27.2   9.8   9.8   9.8  29.8  29.7  29.7
Italy        28.5  28.4  27.9  26.5  26.5  26.5  43.3  43.3  43.1
Japan        22.9  22.9  22.9  29.6  29.6  29.6  33.3  33.4  33.8
Netherlands  32.2  32.0  31.4   8.4   8.4   8.4  41.5  41.0  40.5
Portugal     23.6  23.6  23.6  18.1  18.1  18.1  39.2  39.1  39.5
Spain        25.0  24.7  24.5  15.8  15.8  15.8  35.0  34.7  34.1
Sweden       28.4  27.7  26.6  23.1  23.1  23.1  45.5  44.7  44.1
UK           22.4  22.6  22.9  14.6  13.3  13.1  35.2  35.0  35.4
US           18.7  18.8  18.8  28.8  29.1  29.4  30.5  30.6  30.7

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

Table A4. Government spending assumptions (a)

                Gov't spending       Gov't interest       Deficit
                  excluding             payments        projected to
              interest payments        (% of GDP)        fall below
                  (% of GDP)                                 3%
                                                         of GDP (b)
              2014   2015   2016   2014   2015   2016

Australia     32.6   32.2   32.1   2.0    2.0    1.9        2012
Austria       40.4   39.7   40.1   2.4    2.0    1.7        2011
Belgium       43.8   43.0   42.6   3.0    2.5    2.2        2013
Canada        33.9   33.8   33.3   3.1    2.9    2.7        2013
Denmark       47.6   46.7   46.8   1.5    1.4    1.3        2013
Finland       48.2   46.6   46.1   1.2    1.1    0.9         --
France        48.1   48.0   47.9   2.1    1.9    1.7        2018
Germany       38.7   39.2   39.0   2.0    1.7    1.4        2011
Greece        37.8   36.2   35.0   3.1    2.9    2.7        2014
Ireland       28.7   27.9   27.5   4.5    4.3    4.1        2015
Italy         41.0   40.4   39.9   4.9    4.5    4.1        2014
Japan         39.1   38.6   38.5   1.8    1.5    1.3         --
Netherlands   42.5   42.3   41.9   1.4    1.2    1.0        2013
Portugal      38.5   36.7   36.5   5.1    4.6    3.9        2015
Spain         37.8   37.1   35.6   3.5    3.4    3.0        2020
Sweden        45.2   43.8   43.5   0.9    0.7    0.6         --
UK            36.4   35.2   33.7   2.1    2.1    2.1        2017
US            31.7   31.2   30.7   3.7    3.5    3.3        2017

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

                  2012   2013   2014   2015   2016   2017-21

Australia          3.6    2.1    2.8    2.5   2.3      2.8
Austria (a)        1.0    0.1    0.4    1.4   2.0      2.2
Belgium (a)        0.1    0.3    0.9    1.4   1.5      1.2
Bulgaria (a)       0.4    0.9    1.4    1.8   3.8      3.1
Brazil             1.0    2.5    0.1    0.8   1.7      3.8
China              7.7    7.7    7.4    7.0   6.9      6.2
Canada             1.9    2.0    2.3    2.2   2.6      2.5
Czech Rep.        -0.7   -0.7    2.1    1.7   3.3      3.6
Denmark (a)       -0.7   -0.5    0.9    0.7   1.4      2.0
Estonia (a)        4.7    1.6    1.7    0.9   4.5      2.7
Finland (a)       -1.5   -1.2    0.1    1.2   1.6      1.4
France (a)         0.4    0.4    0.3    1.3   1.6      2.0
Germany (a)        0.6    0.2    1.5    1.8   2.1      1.8
Greece (a)        -6.6   -4.0    1.0    2.0   3.6      3.3
Hong Kong          1.5    2.9    2.3    3.1   3.0      2.7
Hungary (a)       -1.5    1.6    3.3    2.2   2.2      2.3
India              4.9    4.7    6.0    6.3   6.5      6.9
Indonesia          6.3    5.8    5.2    5.6   5.7      5.1
Ireland (a)       -0.3    0.2    4.9    2.5   1.8      2.5
Italy (a)         -2.3   -1.9   -0.4    0.1   1.5      2.3
Japan              1.7    1.6    0.0    0.8   1.1      0.8
Lithuania (a)      3.9    3.2    3.2    2.8   4.2      2.2
Latvia (a)         4.8    4.8    2.5    2.2   2.1      2.3
Mexico             3.8    1.7    2.1    2.7   2.9      3.5
Netherlands (a)   -1.6   -0.7    0.7    1.4   2.2      2.1
New Zealand        2.9    2.5    3.0    2.9   2.6      3.1
Norway             2.5    0.8    2.1    1.3   2.7      2.8
Poland (a)         1.9    1.6    3.4    3.1   3.6      3.7
Portugal (a)      -3.3   -1.4    1.0    1.9   1.5      2.6
Romania (a)        0.6    3.1    2.8    2.6   4.1      3.1
Russia             3.4    1.3   -0.1   -3.8   0.0      4.9
Singapore          2.5    3.8    2.9    3.5   4.4      3.6
South Africa       2.2    2.2    1.3    2.1   3.3      4.1
S. Korea           2.3    3.0    3.4    3.5   4.3      4.5
Slovakia (a)       1.6    1.4    2.1    1.3   0.7      2.0
Slovenia (a)      -2.5   -1.0    2.6    1.6   2.9      1.5
Spain (a)         -2.1   -1.2    1.4    1.6   2.7      2.8
Sweden (a)         0.0    1.3    1.8    2.1   2.9      2.9
Switzerland        1.1    1.9    1.8    0.4   0.6      2.7
Taiwan             2.1    2.2    3.4    3.4   3.1      3.8
Turkey             2.1    4.1    3.0    3.2   3.8      5.0
UK (a)             0.7    1.7    2.6    2.9   2.3      2.5
US                 2.3    2.2    2.5    3.2   2.9      3.0
Vietnam            5.2    5.4    5.7    5.5   5.1      4.8
Euro Area (a)     -0.7   -0.4    0.9    1.4   1.9      2.1
EU-2700           -0.4    0.1    1.3    1.7   2.1      2.3
OECD               1.3    1.4    1.9    2.3   2.5      2.7
World              3.4    3.3    3.4    3.3   3.6      4.1

                       Annual inflation (a) (per cent)

                  2012   2013   2014   2015   2016   2017-21

Australia          2.5    2.7    2.3    1.3    2.7     2.2
Austria (a)        2.6    2.1    1.5    0.2    1.0     1.8
Belgium (a)        2.6    1.2    0.6    1.2    2.6     3.3
Bulgaria (a)       2.4    0.4   -1.3   -0.5    3.9     1.2
Brazil             5.4    6.2    6.3    6.2    5.8     5.3
China              2.7    2.6    2.0    1.4    1.4     2.3
Canada             1.3    1.3    1.9    1.9    2.6     2.3
Czech Rep.         3.5    1.4    0.2    1.8    1.4     1.9
Denmark (a)        2.4    0.5    0.3    1.1    1.9     1.5
Estonia (a)        4.2    3.2    0.7    0.0    1.8     1.7
Finland (a)        3.2    2.2    1.3    0.7    2.5     2.7
France (a)         2.2    1.0    0.6   -0.7    0.8     1.8
Germany (a)        2.1    1.6    0.8   -0.3    1.1     2.3
Greece (a)         1.0   -0.9   -1.4   -3.7   -0.8     3.1
Hong Kong          3.2    2.3    3.0    2.5    2.2     2.3
Hungary (a)        5.7    1.7    0.1    0.6    1.3     1.7
India              9.4   10.9    6.3    4.1    4.8     4.1
Indonesia          4.3    6.4    6.4    5.5    5.5     4.7
Ireland (a)        1.9    0.5    0.5    0.4    0.9     1.5
Italy (a)          3.3    1.3    0.1   -0.8    1.4     2.9
Japan             -0.9   -0.2    2.0    0.8    1.0     1.2
Lithuania (a)      3.2    1.2    0.3   -0.3    3.4     1.8
Latvia (a)         2.3    0.0    0.5    1.7    2.9     2.0
Mexico             4.1    3.8    3.8    2.0    3.3     3.2
Netherlands (a)    2.8    2.6    0.3    0.2    1.5     1.8
New Zealand        0.6    0.6    0.7    0.9    2.2     2.5
Norway             1.2    2.7    2.2    1.1    1.1     2.1
Poland (a)         3.7    0.8    0.1    0.0    1.3     1.8
Portugal (a)       2.8    0.4   -0.2   -0.6    2.3     2.0
Romania (a)        3.4    3.2    1.6    1.0    3.4     1.4
Russia             5.1    6.8    7.8   11.0    6.2     5.4
Singapore          4.6    2.3    1.0    0.8    3.2     3.0
South Africa       6.3    5.5    6.0    3.4    4.7     3.5
S. Korea           2.2    1.3    1.3    0.7    2.7     2.5
Slovakia (a)       3.7    1.5   -0.1    0.4    2.0     2.7
Slovenia (a)       2.8    1.9    0.4    1.0    4.3     3.3
Spain (a)          2.4    1.5   -0.2    0.2    2.8     1.9
Sweden (a)         0.9    0.4    0.2    1.0    2.5     2.5
Switzerland       -0.9   -0.4    0.0   -1.1   -1.5     1.4
Taiwan             1.2    0.3    0.8   -0.6    1.2     1.5
Turkey             8.9    7.5    8.9    6.5    6.3     7.1
UK (a)             2.8    2.6    1.4    0.6    1.6     2.0
US                 1.8    1.2    1.4    0.5    1.7     2.3
Vietnam            9.1    6.6    4.1    2.7    4.9     6.6
Euro Area (a)      2.5    1.3    0.4   -0.4    1.4     2.3
EU-2700            2.6    1.5    0.6   -0.1    1.5     2.1
OECD               1.9    1.4    1.5    0.6    1.9     2.4
World              4.4    4.9    4.4    2.9    3.0     3.3

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)

              2012   2013    2014   2015   2016   2021

Australia     -3.0    -1.3   -3.8   -3.3   -2.9   -2.1
Austria       -2.3    -1.5   -1.6   -1.6   -1.7   -2.2
Belgium       -4.1    -2.9   -2.6   -1.9   -1.6   -2.1
Bulgaria      -0.8    -1.5   -0.3    0.4    0.4   -0.7
Canada        -3.1    -2.7   -1.6   -1.1   -1.1   -1.6
Czech Rep.    -4.0    -1.3    0.1    0.7    0.7   -0.6
Denmark       -3.8    -0.8   -0.4    0.0    0.0   -l.l
Estonia       -0.2    -0.2   -0.6   -0.7   -0.9   -1.4
Finland       -2.1    -2.4   -2.0   -0.1    0.8   -0.3
France        -4.9    -4.3   -4.1   -4.4   -3.9   -2.6
Germany        0.1     0.0    0.4    0.3    0.3   -1.5
Greece        -8.6   -12.2   -1.2   -1.0    0.3   -1.4
Hungary       -2.3    -2.4   -3.0   -1.8   -1.2   -1.6
Ireland       -8.1    -5.7   -3.3   -2.5   -1.9   -0.1
Italy         -3.0    -3.0   -2.5   -1.6   -1.0   -1.3
Japan         -8.7    -9.2   -7.6   -6.7   -6.0   -5.1
Lithuania     -3.2    -2.2   -1.2   -1.3   -1.3   -1.5
Latvia        -1.3    -1.0   -0.7   -0.9   -1.0   -1.3
Netherlands   -4.0    -2.3   -2.4   -2.5   -2.4   -2.2
Poland        -3.9    -4.3   -2.4   -3.3   -3.3   -2.5
Portugal      -5.5    -4.9   -4.3   -2.2   -0.9   -0.5
Romania       -3.0    -2.3   -1.8   -1.7   -1.7   -1.5
Slovakia      -4.5    -2.8   -2.6   -2.4   -2.1   -0.7
Slovenia      -4.0   -14.7   -5.7   -5.2   -4.6   -2.6
Spain         -6.8    -6.6   -6.3   -5.7   -4.5   -2.5
Sweden        -0.6    -1.1   -0.5    0.2    0.0   -0.8
UK            -8.3    -5.7   -5.5   -5.2   -3.2   1.4
US            -9.0    -5.7   -4.9   -4.0   -3.3   -2.4

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

              2012    2013    2014    2015    2016    2021

Australia      31.7    32.5    35.4    37.1    38.0    39.4
Austria        81.8    81.2    82.0    79.2    78.7    72.7
Belgium       104.0   104.6   108.7   105.4   101.8    87.5
Bulgaria       --      --      --      --      --      --
Canada         94.6    91.7    92.1    90.0    86.4    75.3
Czech Rep.     46.2    46.0    43.1    41.8    39.6    30.1
Denmark        45.6    45.0    44.2    42.7    41.8    38.6
Estonia        --      --      --      --      --      --
Finland        53.0    56.0    57.9    55.7    53.0    40.6
France         89.3    92.2    96.5    99.0   101.0    94.4
Germany        79.0    76.9    74.3    72.2    69.7    53.7
Greece        156.8   175.1   174.3   170.3   170.1   123.2
Hungary        79.8    79.2    79.0    78.3    77.3    69.4
Ireland       121.8   123.4   119.0   116.8   114.4    97.0
Italy         122.2   127.9   132.4   132.4   129.9    99.4
Japan         212.6   217.2   219.4   220.5   221.9   222.8
Lithuania      --      --      --      --      --      --
Latvia         --      --      --      --      --      --
Netherlands    66.7    68.9    70.3    70.5    70.7    67.2
Poland         55.6    57.0    47.2    48.0    49.1    48.4
Portugal      120.7   124.8   129.2   127.1   124.4   101.1
Romania        --      --      --      --      --      --
Slovakia       --      --      --      --      --      --
Slovenia       --      --      --      --      --      --
Spain          84.4    92.1    98.7   101.8   100.4    89.5
Sweden         36.9    39.0    38.4    36.3    34.6    28.3
UK             85.8    87.3    89.5    90.1    89.4    67.2
US            109.3   107.2   106.3   106.5   104.4    91.2

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

              2012   2013   2014   2015   2016   2017-21

Australia      5.2    5.7    6.1    6.2    5.7     5.3
Austria        4.4    4.9    5.0    4.9    5.3     4.3
Belgium        7.7    8.4    8.5    8.2    7.6     7.6
Bulgaria      12.3   12.9   11.6   10.4   10.0    10.0
Canada         7.3    7.1    7.0    7.0    7.1     6.7
China          --     --     --     --     --      --
Czech Rep.     7.0    7.0    6.1    6.3    5.8     4.8
Denmark        7.5    7.0    6.6    5.9    5.9     6.0
Estonia       10.0    8.5    7.8    8.2    7.5     7.6
Finland        7.7    8.2    8.7    7.6    7.9     8.3
France         9.8   10.3   10.2   10.2   10.1     8.3
Germany        5.4    5.2    5.0    4.9    4.8     4.4
Greece        24.5   27.5   26.5   24.5   23.8    16.3
Hungary       11.0   10.1    7.7    7.3    7.4     6.8
Ireland       14.8   13.1   11.4    9.5    8.3     8.5
Italy         10.7   12.2   12.6   11.5   10.5    10.1
Japan          4.3    4.0    3.6    3.5    3.6     4.5
Lithuania     13.4   11.8   10.6   10.0   10.2    10.8
Latvia        14.9   11.9   11.2   10.3   10.5    10.5
Netherlands    5.3    6.7    6.8    5.8    5.8     5.0
Poland        10.1   10.3    9.0    8.1    7.4     7.1
Portugal      15.8   16.5   14.1   11.0   10.2    10.2
Romania        6.9    7.1    6.8    6.3    6.2     6.5
Slovakia      14.0   14.2   13.3   12.6   13.4    13.1
Slovenia       8.9   10.1    9.7    7.6    7.3     7.4
Spain         24.8   26.1   24.5   22.3   19.6    16.4
Sweden         8.0    8.0    8.0    6.6    7.5     7.1
UK             8.0    7.6    6.2    5.4    5.3     5.4
US             8.1    7.4    6.2    5.5    5.4     5.6

              Current account balance (per cent of GDP)

              2012   2013   2014   2015   2016   2017-21

Australia     -4.4   -3.3   -2.6   -2.4   -1.4    -2.5
Austria        2.3    1.0    1.1    4.2    2.0     0.5
Belgium       -1.9   -3.5    0.3    0.3    0.2     3.7
Bulgaria      -0.9    1.9    1.9    1.3    1.3     4.5
Canada        -3.3   -3.0   -2.2   -3.5   -2.2     0.3
China          2.6    1.9    1.3    1.3    0.4    -1.0
Czech Rep.    -1.3   -1.4   -1.9   -3.8   -1.3    -3.2
Denmark        5.8    7.1    6.5    8.9    7.1     9.3
Estonia       -1.9   -1.2   -0.3    3.3    4.1     0.4
Finland       -1.2   -0.9   -0.7    1.9   -0.2     0.3
France        -1.5   -1.4   -1.0   -0.2   -0.8    -0.2
Germany        7.2    6.8    7.8    9.1    7.6     8.4
Greece        -2.3    0.6   -0.3    1.6   -2.4    -2.8
Hungary        1.8    4.1    5.4    9.0    7.4     5.6
Ireland        4.1    6.2    7.7    6.0    3.0     4.2
Italy         -0.2    1.0    1.4    2.9    3.3     5.1
Japan          1.1    0.7   -0.1    0.5   -0.2     2.0
Lithuania     -0.2    1.4    0.9    3.2    2.7     4.0
Latvia        -2.5   -0.8    1.9    3.9    3.8     5.3
Netherlands    8.9   10.2   12.0   11.5    8.2     7.6
Poland        -4.1   -1.8   -1.1    2.0    2.3    -0.9
Portugal      -1.9    0.5   -1.0    1.3    0.3    -0.7
Romania       -4.4   -0.9   -0.6   -0.5   -0.8    -0.2
Slovakia       2.2    2.1    1.3    4.3    3.9     4.9
Slovenia       3.2    6.2    5.6    9.1    7.3     5.2
Spain         -1.2    0.8    1.2    2.0    1.9     1.4
Sweden         5.8    6.0    5.1    5.5    3.2     0.5
UK            -3.7   -4.5   -5.5   -3.9   -3.8    -1.5
US            -2.9   -2.4   -2.3   -2.2   -2.5    -3.0

Table B4. United States

Percentage change

                                     2011    2012    2013    2014

GDP                                    1.6     2.3     2.2     2.5

Consumption                            2.3     1.8     2.4     2.5
Investment: housing                    0.5    13.5    11.9     1.9
          : business                   7.7     7.2     3.0     6.8
Government: consumption               -2.7    -0.6    -1.3     0.1
          : investment                -4.5    -4.7    -4.9    -2.8
Stockholding (a)                      -0.1     0.1     0.0     0.0
Total domestic demand                  1.6     2.2     1.9     2.5

Export volumes                         6.9     3.3     3.0     3.3
Import volumes                         5.5     2.3     1.1     3.4

Average earnings                       2.0     2.1     1.1     2.1
Private consumption deflator           2.5     1.8     1.2     1.4
RPDI                                   2.7     3.2    -0.2     2.4
Unemployment, %                        8.9     8.1     7.4     6.2

General Govt, balance as % of GDP    -10.7    -9.0    -5.7    -4.9
General Govt, debt as % of GDP (b)   105.9   109.3   107.2   106.3

Current account as % of GDP           -3.0    -2.9    -2.4    -2.3

                                                     Average
                                     2015    2016    2017-21

GDP                                    3.2     2.9     3.0

Consumption                            2.9     2.9     2.8
Investment: housing                    7.1     8.1     6.1
          : business                   7.9     6.9     4.8
Government: consumption                0.0     1.1     1.7
          : investment                 0.0     1.6     2.2
Stockholding (a)                       0.1     0.0     0.0
Total domestic demand                  3.2     3.3     3.0

Export volumes                         5.1     4.4     5.1
Import volumes                         4.7     6.9     4.9

Average earnings                       1.4     2.6     3.7
Private consumption deflator           0.5     1.7     2.3
RPDI                                   3.0     2.6     2.6
Unemployment, %                        5.5     5.4     5.6

General Govt, balance as % of GDP     -4.0    -3.3    -2.6
General Govt, debt as % of GDP (b)   106.5   104.4    96.6

Current account as % of GDP           -2.2    -2.5    -3.0

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

Table B5. Canada

Percentage change

                                     2011   2012   2013   2014

GDP                                   3.0    1.9    2.0    2.3

Consumption                           2.3    1.9    2.5    2.7
Investment: housing                   1.7    5.7   -0.4    2.3
          : business                 12.4    8.4    2.2   -0.6
Government: consumption               0.8    1.2    0.4    0.1
          : investment               -7.1   -4.8   -1.6   -1.3
Stockholding (a)                      0.7   -0.2    0.3   -0.4
Total domestic demand                 3.2    2.2    1.9    1.2

Export volumes                        4.6    2.6    2.0    5.2
Import volumes                        5.7    3.7    1.3    1.3

Average earnings                      3.7    2.4    2.7    3.2
Private consumption deflator          2.1    1.3    1.3    1.9
RPDI                                  2.1    2.6    2.3    1.4
Unemployment, %                       7.4    7.3    7.1    7.0

General Govt, balance as % of GDP    -3.8   -3.1   -2.7   -1.6
General Govt, debt as % of GDP (b)   91.1   94.6   91.7   92.1

Current account as % of GDP          -2.7   -3.3   -3.0   -2.2

                                                   Average
                                     2015   2016   2017-21

GDP                                   2.2    2.6     2.5

Consumption                           2.5    2.2     1.5
Investment: housing                   2.0    0.8     2.5
          : business                 -0.6   -0.4     0.8
Government: consumption               0.3    0.9     1.9
          : investment                0.8    1.0     2.0
Stockholding (a)                     -0.2    0.0     0.0
Total domestic demand                 1.4    1.5     1.6

Export volumes                        4.4    5.7     4.8
Import volumes                        1.7    2.1     2.2

Average earnings                      1.1    1.9     2.9
Private consumption deflator          1.9    2.6     2.3
RPDI                                  0.6    1.2     1.4
Unemployment, %                       7.0    7.1     6.7

General Govt, balance as % of GDP    -1.1   -1.1    -1.4
General Govt, debt as % of GDP (b)   90.0   86.4    79.0

Current account as % of GDP          -3.5   -2.2     0.3

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

Table B6. Japan

Percentage change

                               2011    2012    2013    2014

GDP                             -0.4     1.7     1.6     0.0

Consumption                      0.3     2.3     2.1    -1.2
Investment: housing              5.1     3.2     8.7    -4.3
          : business             4.1     3.6     0.5     4.0
Government: consumption          1.2     1.7     1.9     0.3
          : investment          -7.7     2.0     7.9     3.1
Stockholding (a)                -0.2     0.2    -0.4     0.2
Total domestic demand            0.5     2.6     1.8     0.1

Export volumes                  -0.4    -0.1     1.5     7.1
Import volumes                   5.9     5.3     3.1     6.8

Average earnings                 0.9    -0.6     0.9     1.1
Private consumption deflator    -0.9    -0.9    -0.2     2.0
RPDI                             0.8     0.7     2.3    -0.3
Unemployment, %                  4.6     4.3     4.0     3.6

Govt, balance as % of GDP       -8.8    -8.7    -9.2    -7.6
Govt, debt as % of GDP (b)     202.4   212.6   217.2   219.4

Current account as % of GDP      2.1     1.1     0.7    -0.1

                                               Average
                               2015    2016    2017-21

GDP                              0.8     1.1      0.8

Consumption                      1.2     1.6      0.3
Investment: housing             -4.8     0.5      0.5
          : business             0.5     1.8      2.2
Government: consumption          0.5     0.2      0.2
          : investment           1.7     0.7      0.4
Stockholding (a)                 0.3     0.0      0.0
Total domestic demand            1.2     1.3      0.6

Export volumes                   2.5     3.1      4.6
Import volumes                   4.7     4.5      3.4

Average earnings                 1.5     1.4      0.8
Private consumption deflator     0.8     1.0      1.2
RPDI                             1.7     0.3      0.1
Unemployment, %                  3.5     3.6      4.5

Govt, balance as % of GDP       -6.7    -6.0     -5.3
Govt, debt as % of GDP (b)     220.5   221.9    221.1

Current account as % of GDP      0.5    -0.2      2.0

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

Table B7. Euro Area

Percentage change

                              2011   2012   2013   2014

GDP                            1.7   -0.7   -0.4    0.9

Consumption                    0.2   -1.3   -0.6    0.9
Private investment             2.8   -2.9   -1.6    1.1
Government : consumption      -0.2   -0.2    0.2    0.9
           : investment       -5.9   -5.0   -4.6    0.2
Stockholding (a)               0.2   -0.4   -0.1    0.4
Total domestic demand          0.6   -1.9   -0.8    1.3

Export volumes                 6.7    2.6    2.1    3.5
Import volumes                 4.5   -1.0    1.2    3.5

Average earnings               1.4    2.1    1.8    1.0
Harmonised consumer prices     2.7    2.5    1.3    0.4
RPDI                          -0.2   -1.5   -0.9    1.1
Unemployment, %               10.1   11.4   12.0   11.6

Govt, balance as % of GDP     -4.1   -3.6   -2.9   -2.4
Govt, debt as % of GDP (b)    87.5   90.8   92.7   94.2

Current account as % of GDP   -0.1    1.5    2.2    2.6

                                            Average
                              2015   2016   2017-21

GDP                            1.4    1.9     2.1

Consumption                    2.0    1.5     1.3
Private investment             1.9    2.7     4.1
Government : consumption       0.4    0.6     1.3
           : investment        0.1    1.8     1.8
Stockholding (a)              -0.1    0.0     0.0
Total domestic demand          1.5    1.6     1.9

Export volumes                 5.7    5.7     4.1
Import volumes                 6.4    5.2     3.9

Average earnings               0.8    2.1     3.4
Harmonised consumer prices    -0.4    1.4     2.3
RPDI                           2.4    1.4     1.8
Unemployment, %               10.8   10.1     8.9

Govt, balance as % of GDP     -2.2   -1.7    -1.6
Govt, debt as % of GDP (b)    94.2   92.2    82.8

Current account as % of GDP    4.5    3.5     4.1

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

Table B8. Germany

Percentage change

                              2011   2012   2013   2014

GDP                            3.7    0.6    0.2    1.5

Consumption                    2.3    0.6    0.9    1.1
Investment: housing           10.3    4.3    0.8    3.0
          : business           7.7   -1.9   -1.0    3.1
Government: consumption        0.7    1.2    0.7    1.0
          : investment         0.6   -0.1   -0.8    3.1
Stockbuilding (a)             -0.3   -0.8    0.1    1.6
Total domestic demand          2.7   -0.2    0.8    3.3

Export volumes                 8.2    3.5    1.7    3.7
Import volumes                 7.3    0.4    3.2    3.1

Average earnings               2.6    3.8    2.7    1.7
Harmonised consumer prices     2.5    2.1    1.6    0.8
RPDI                           1.9    0.5    0.4    1.3
Unemployment, %                5.8    5.4    5.2    5.0

Govt, balance as % of GDP     -0.8    0.1    0.0    0.4
Govt, debt as % of GDP (b)    80.0   79.0   76.9   74.3

Current account as % of GDP    6.0    7.2    6.8    7.8

                                            Average
                              2015   2016   2017-21

GDP                            1.8    2.1     1.8

Consumption                    2.9    2.3     1.2
Investment: housing            1.3    3.7     3.0
          : business           3.9    2.9    -0.4
Government: consumption        1.0    1.1     1.0
          : investment        -0.9    2.2     1.1
Stockbuilding (a)             -0.5    0.0     0.0
Total domestic demand          2.0    2.3     1.1

Export volumes                 7.5    6.4     4.5
Import volumes                 8.0    7.5     3.7

Average earnings               0.5    1.6     3.6
Harmonised consumer prices    -0.3    1.1     2.3
RPDI                           1.6    1.0     1.6
Unemployment, %                4.9    4.8     4.4

Govt, balance as % of GDP      0.3    0.3    -0.8
Govt, debt as % of GDP (b)    72.2   69.7    59.4

Current account as % of GDP    9.1    7.6     8.4

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

Table B9. France

Percentage change

                               2011   2012   2013   2014

GDP                             2.1    0.4    0.4    0.3

Consumption                     0.3   -0.5    0.3    0.6
Investment: housing             1.0   -2.2   -3.1   -6.5
          : business            4.7    1.0   -0.5   -0.3
Government: consumption         1.0    1.7    2.0    1.9
          : investment         -4.4    1.6    1.1   -0.5
Stockholding (a)                0.9   -0.5   -0.2    0.0
Total domestic demand           1.8   -0.2    0.2    0.3

Export volumes                  7.1    1.2    2.4    2.1
Import volumes                  6.5   -1.2    1.9    3.6

Average earnings                2.2    2.3    1.3    1.4
Harmonised consumer prices      2.3    2.2    1.0    0.6
RPDI                            0.5    0.5    0.5    1.0
Unemployment, %                 9.2    9.8   10.3   10.2

Govt, balance as % of GDP      -5.2   -4.9   -4.3   -4.1
Govt, debt as % of GDP (b)     85.0   89.3   92.2   96.5

Current account as % of GDP    -1.7   -1.5   -1.4   -1.0

                                              Average
                               2015   2016    2017-21

GDP                             1.3     1.6     2.0

Consumption                     1.4     0.8     1.3
Investment: housing            -4.5    -0.9     8.2
          : business            2.0     3.3     2.6
Government: consumption         1.2     0.9     1.5
          : investment         -0.6     0.8     1.8
Stockholding (a)                0.0     0.0     0.0
Total domestic demand           1.1     1.1     1.9

Export volumes                  6.5     6.1     4.2
Import volumes                  5.9     4.3     3.8

Average earnings                1.0     2.1     3.2
Harmonised consumer prices     -0.7     0.8     1.8
RPDI                            2.0     0.9     1.4
Unemployment, %                10.2    10.1     8.3

Govt, balance as % of GDP      -4.4    -3.9    -2.8
Govt, debt as % of GDP (b)     99.0   101.0    97.7

Current account as % of GDP    -0.2    -0.8    -0.2

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

Table B10. Italy

Percentage change

                               2011    2012    2013    2014

GDP                              0.7    -2.3    -1.9    -0.4

Consumption                      0.0    -4.1    -2.7     0.3
Investment: housing             -6.1    -6.7    -5.9    -2.7
          : business             1.1    -7.0    -2.5    -2.2
Government: consumption         -1.8    -1.5    -0.7    -0.2
          : investment          -4.5   -12.3   -20.4    -3.6
Stockbuilding (a)                0.3    -0.8    -0.1    -0.5
Total domestic demand           -0.4    -5.0    -2.9    -0.9

Export volumes                   6.1     1.6     0.9     1.7
Import volumes                   1.2    -8.2    -2.6     0.3

Average earnings                 1.1     1.1     1.3     1.3
Harmonised consumer prices       2.9     3.3     1.3     0.1
RPDI                            -0.5    -4.5    -2.0     1.4
Unemployment, %                  8.4    10.7    12.2    12.6

Govt. balance as % of GDP       -3.7    -3.0    -3.0    -2.5
Govt. debt as % of GDP (b)     116.4   122.2   127.9   132.4

Current account as % of GDP     -2.9    -0.2     1.0     1.4

Percentage change

                                               Average
                               2015    2016    2017-21

GDP                              0.1     1.5      2.3

Consumption                      0.9     1.2      1.4
Investment: housing             -1.5     0.6      7.6
          : business            -2.2    -0.7      6.7
Government: consumption         -0.4     0.1      1.0
          : investment          -0.2     0.9      1.3
Stockbuilding (a)                0.0     0.0      0.0
Total domestic demand            0.2     0.7      2.3

Export volumes                   4.0     6.0      4.4
Import volumes                   4.6     3.7      4.5

Average earnings                 2.0     2.9      3.3
Harmonised consumer prices      -0.8     1.4      2.9
RPDI                             3.2     2.5      2.5
Unemployment, %                 11.5    10.5     10.1

Govt. balance as % of GDP       -1.6    -1.0     -0.7
Govt. debt as % of GDP (b)     132.4   129.9    110.2

Current account as % of GDP      2.9     3.3      5.1

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

Table B11. Spain

Percentage change

                               2011    2012    2013    2014

GDP                             -0.6    -2.1    -1.2    1.4

Consumption                     -2.0    -2.9    -2.3    2.3
Investment: housing            -12.5    -8.7    -8.0   -3.7
          : business             3.7    -4.7     3.0   10.0
Government: consumption         -0.3    -3.7    -2.9    0.8
          : investment         -12.8   -16.0   -12.4   -2.1
Stockbuilding (a)                0.0    -0.1     0.0    0.1
Total domestic demand           -2.7    -4.3    -2.7    2.3

Export volumes                   7.4     1.2     4.3    4.3
Import volumes                  -0.8    -6.3    -0.5    7.7

Average earnings                -0.4     0.3     1.4   -0.5
Harmonised consumer prices       3.1     2.4     1.5   -0.2
RPDI                            -2.5    -5.1    -1.3    1.7
Unemployment, %                 21.4    24.8    26.1   24.5

Govt. balance as % of GDP       -8.5    -6.8    -6.6   -6.3
Govt. debt as % of GDP (b)      69.2    84.4    92.1   98.7

Current account as % of GDP     -3.6    -1.2     0.8    1.2

Percentage change

                                               Average
                               2015    2016    2017-21

GDP                              1.6     2.7     2.8

Consumption                      2.6     1.7     1.3
Investment: housing              0.9     2.7     6.2
          : business             8.1     8.6    10.3
Government: consumption         -0.6    -0.1     2.2
          : investment           2.3     3.0     2.8
Stockbuilding (a)                0.0     0.0     0.0
Total domestic demand            2.4     2.2     3.1

Export volumes                   3.2     5.0     3.1
Import volumes                   6.1     3.6     4.2

Average earnings                 0.3     1.3     2.8
Harmonised consumer prices       0.2     2.8     1.9
RPDI                             2.8     1.3     1.3
Unemployment, %                 22.3    19.6    16.4

Govt. balance as % of GDP       -5.7    -4.5    -2.9
Govt. debt as % of GDP (b)     101.8   100.4    93.6

Current account as % of GDP      2.0     1.9     1.4

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

REFERENCE

Mandra, A. (2015), Is low Inflation Translating into Lower Wage Growth in Germany Already?, Brueghel.

NOTES

(1) In particular, we have for this Review adopted the IMF's new 201 I purchasing power parity (PPP) weights for international aggregation, replacing the former 2005 PPP weights. The new weights are larger than the old for relatively fast growing emerging market and developing economies, thus raising global GDP growth rates.

(2) Between the end of 2013 and late January 2015, The Economist index of prices of industrial materials fell by 14 per cent in US dollar terms, which may be accounted for largely by the 16 per cent effective appreciation of the US dollar in this period. By contrast, oil prices fell by 53 per cent. Only the price of iron ore (not included in The Economist index), among the major industrial commodities, has come close to the recent decline in the price of oil, with a fall of 50 per cent in the same period. This has been attributed largely to the slowing of investment activity in China and increased supply from Australia.

(3) Benchmark rates in Denmark were lowered by a further 25 basis points to-0.75 per cent, effective from 6 February.

(4) Lithuania became the 19th member of the Area on I January.

(5) On 30 January 2015, after our analysis and forecast were finalised, the Indian Ministry of Statistics released a set of national accounts data that revised GDP estimates for the financial years 2012-13 and 2013-14.

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

Table 1. Forecast summary

Percentage change

                           Real GDP (a)

          World   OECD   China   EU-27   Euro   USA   Japan
                                         Area

2011       4.1    1.9     9.4     1.8     1.7   1.6   -0.4
2012       3.4    1.3     7.7    -0.4    -0.7   2.3    1.7
2013       3.3    1.4     7.7     0.1    -0.4   2.2    1.6
2014       3.4    1.9     7.4     1.3     0.9   2.5    0.0
2015       3.3    2.3     7.0     1.7     1.4   3.2    0.8
2016       3.6    2.5     6.9     2.1     1.9   2.9    1.1
2005-10    4.1    1.4    11.1     1.1     1.0   1.2    0.5
2017-21    4.1    2.7     6.2     2.3     2.1   3.0    0.8

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

2011        3.7      2.1      0.7    1.6    3.0        6.3
2012        0.6      0.4     -2.3    0.7    1.9        2.7
2013        0.2      0.4     -1.9    1.7    2.0        2.9
2014        1.5      0.3     -0.4    2.6    2.3        2.9
2015        1.8      1.3      0.1    2.9    2.2        5.6
2016        2.1      1.6      1.5    2.3    2.6        5.7
2005-10     1.2      0.9     -0.1    0.9    1.6        4.9
2017-21     1.8      2.0      2.3    2.5    2.5        5.4

                          Private consumption deflator

          OECD  Euro  USA  Japan  Germany  France  Italy  UK   Canada
                Area

2011      2.3    2.3  2.5  -0.9     1.9      1.8    2.9   3.4   2.1
2012      1.9    1.9  1.8  -0.9     1.5      1.4    2.8   2.1   1.3
2013      1.4    1.1  1.2  -0.2     1.3      0.6    1.2   1.9   1.3
2014      1.5    0.5  1.4   2.0     0.9      0.4    0.2   1.5   1.9
2015      0.6   -0.4  0.5   0.8    -0.4     -0.7   -0.7   0.9   1.9
2016      1.9    1.4  1.7   1.0     1.1      0.8    1.4   1.7   2.6
2005-10   2.0    1.7  2.1  -0.9     1.3      1.4    1.9   3.0   1.3
2017-21   2.4    2.3  2.3   1.2     2.3      1.8    2.9   2.1   2.3

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

2011      0.3    0.1    1.2     108.5
2012      0.3    0.1    0.9     110.4
2013      0.3    0.1    0.6     107.1
2014      0.3    0.1    0.2      97.8
2015      0.5    0.1    0.1      56.9
2016      1.7    0.1    0.1      74.6
2005-10   2.6    0.2    2.5      70.4
2017-21   3.5    0.6    1.1      79.0

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 Kanya Paramaguru for
compiling the database underlying the forecast and Jonathan Portes
for helpful comments and discussion. The forecast was completed on 27
January, 2015. Exchange rate, interest rates and equity price
assumptions are based on information available to 23 January 2015.
Unless otherwise specified, the source of all data reported in tables
and figures is the NiGEM database and NIESR forecast baseline.