The world economy.

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

World Overview

After three years of steady, but sluggish and uneven, economic recovery in 2012-14, with world output expansion of 3.4 per cent in each year, we forecast marginally more of a slowing this year than we envisaged in February, to 3.2 per cent growth. But we now expect a pick-up to 3.8 per cent growth in 2016, revised up slightly from our February forecast of 3.6 per cent. This upward revision is accounted for mainly by upgrades for the Euro Area, Japan, and India, partly offset by downward revisions for Canada and China.

Our revised forecast implies the persistence of significant output gaps in many countries, and it is subject to a number of risks. It reflects recent developments in economies, markets, and policies.

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In the past three months, data on economic activity have been mixed--relatively encouraging in the Euro Area and India, but generally disappointing not only in the United States, where there was a slowing of growth in early 2015 that is expected to be transitory, but also in China and a number of other emerging market economies. Oil prices have turned up after their steep decline from mid-2014, but remain significantly below their levels of the previous four years: the oil prices assumed in our forecast for 2015-20 are 6-7 per cent higher than the prices assumed in the February Review. Inflation in the advanced economies has remained below central banks' targets, with headline rates close to zero or even negative in many cases, but there has been little sign of further declines in core inflation or of deflation becoming embedded.

Continuing market expectations of widening divergences in monetary policy among the advanced economies, between those relatively advanced in their economic recoveries and those still needing more support for demand growth, has been reflected in a further widening of international bond spreads and in exchange rate movements. The European Central Bank (ECB) began in early March to implement its programme of increased asset purchases, and this has contributed to further declines in government bond yields in most member countries of the Euro Area. Also in the past three months, some other central banks in Europe have lowered their benchmark interest rates further, as have the central banks of China, India, and Russia. In the United States, by contrast, the focus of markets has been on the prospect of rising policy rates. The slower growth in demand and activity in the US in early 2015 has put back, at least to the latter half of this year, market expectations of the timing of the first increase in short-term interest rates by the Federal Reserve, but longer-term rates in late April were still somewhat higher than three months earlier. Long-term rates have also risen since late January in Canada and the United Kingdom; they are broadly unchanged in Japan. The resulting changes in international yield differentials have contributed to a further depreciation of the euro against the US dollar and most other major currencies, and also to a further effective appreciation of the US dollar, though at a much slower pace than in the preceding six months.

Global growth is thus expected to be supported in the period ahead by oil prices lower than for several years; continuing highly accommodative monetary conditions in the advanced economies; and recent exchange rate movements benefiting, in particular, the international competitiveness of the Euro Area. (The economies experiencing currency appreciation, like the United States, generally have scope to take policy action to offset its contractionary effects, such as by delaying interest rate rises.) Also helping a strengthening of the recovery is a reduced pace of fiscal consolidation in the advanced economies. But economic recovery is still weighed down by legacies of the financial crisis, including, in many cases, high unemployment, high levels of private and public debt, and weak banking systems, and by other structural problems. The remainder of the Overview will discuss some of these factors before turning to some of the risks to the forecast and policies that the forecast suggests would be appropriate.

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Oil prices bottomed out in late January, and by late April the Brent benchmark, in US dollar terms, had risen by about 30 per cent to $65 a barrel, while the West Texas benchmark had risen by about 24 per cent to $57 a barrel. Given the 2 per cent effective appreciation of the US dollar in this period, these changes only slightly understate the oil market's recovery. Compared with their peak in June last year, however, oil prices in US dollar terms in late April were still about 45 per cent lower; a large part of this decline may be attributed to the roughly 18 per cent effective appreciation of the US currency over this period. The upturn in oil prices from the lows reached in January seems partly attributable to reports of a significant decline in drilling and investment activity in the United States: the number of rigs drilling is reported to have halved between October and April. There have also been new supply disruptions in some oil-producing countries. There may, as well, have been a strengthening of global demand. These factors have outweighed developments that might have been expected to exert further downward pressure on prices, including resilient US production (despite reduced drilling), increased US stocks, increased Saudi production, and the framework agreement reached in early April between the P5+1 countries and Iran over Iran's nuclear programme, which could lead to a substantial rise in Iranian exports in the medium term.

The decline in oil prices since mid-2014 has been reflected in recent 'headline' consumer price inflation data--with inflation often falling further below central banks' objectives, in some cases to negative levels, including in the Euro Area--but its effects do not seem to have extended to core inflation or wage increases. There has therefore been little sign that the threat of deepening deflation is materialising. Expansionary effects on demand and activity of the oil price decline have begun to be seen in some oil-importing countries, including in the Euro Area.

Market expectations of widening divergences in monetary policy among the advanced economies, between those relatively advanced in their economic recoveries (such as the United States and the United Kingdom) and those still needing faster demand growth (particularly the Euro Area), have, as indicated above, been reflected in a further widening of bond spreads and in exchange rate movements. As widely anticipated, the Federal Reserve confirmed in mid-March that it was open to the possibility of beginning to raise short-term interest rates as early as June. By contrast, the central banks of the Euro Area began on March 9 to implement the 19-month programme of increased asset purchases announced by the ECB in January.! Partly reflecting these policy developments, since late January government bond yields have risen by about 20 basis points in the United States and Canada (and by a little more in the United Kingdom) while falling further in most countries of the Euro Area, with ten-year bond yields in Germany, which stood at 0.35 per cent in late January, reaching historic lows below 0.1 per cent in mid-April before turning up to about 0.15 per cent. The notable exception to the decline in yields in the Euro Area is Greece, where 10-year yields have risen by about 2.5 percentage points since late January, on increasing concerns about the lack of progress towards an agreement between the government elected in January and its partners, in the Euro Area and the IMF, on renewed financial support. Also among the advanced economies, long-term interest rates in Japan in late April were little changed from late January.

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Among the major emerging market economies, official benchmark interest rates have been lowered since late January by 25 basis points in both China and India, in response to declining inflation, and by a full percentage point in Russia to support demand and activity as downward pressure on the exchange rate eased. In Brazil, however, official rates have been raised by a further 100 basis points to support the exchange rate and to counter inflationary pressure. Partly reflecting these movements in policy rates, ten-year bond yields in late April were little changed from late January in China and India, but about 3 percentage points lower in Russia and 70 basis points higher in Brazil.

In foreign exchange markets, the general appreciation of the US dollar has slowed markedly in recent months as indications of slower growth in the US economy have put back expectations of increases in the Fed's key interest rates. In late April, the US currency was about 3.5 per cent higher against the euro than three months earlier, but only about 1 per cent higher in terms of the Japanese yen, and 1 per cent lower against sterling. Against the currencies of the major emerging market countries, the US dollar rose by 13 per cent in terms of the Brazilian real in this period, but by only 3 per cent against the Indian rupee, and it depreciated by 23 per cent in terms of the Russian rouble; it is virtually unchanged against the Chinese renminbi. In effective terms, the US dollar appreciated by about 2 per cent in the three months to late April--about one quarter of the rate of appreciation in the preceding three months. The dollar's effective value in late April was about 35 per cent above its mid-2011 low, while the euro's effective value was about 14 per cent below its peaks of spring 2011 and 2014.

Declines in Chinese and Russian foreign exchange reserves in recent months indicate substantial official intervention in support of the renminbi and the rouble. China's foreign exchange reserves peaked in mid-2014 at just below $3,993 trillion, and fell by $260 billion in the following nine months, as the renminbi was held to its peg against the dollar in the face of net capital outflows. Russia's foreign exchange reserves, having fallen from $510 billion to $385 billion during 2014, when the rouble depreciated by 45 per cent against the U$ dollar, fell by a further $30 billion in the first three months of 2015, assisting the rouble's partial recovery.

Our forecast is, as usual, subject to a number of risks, including geopolitical risks and uncertainties apparent from continuing conflicts in the Middle East and Africa, and the unstable situation in Ukraine with the associated international sanctions on Russia. These developments have so far had limited systemic economic impact, but such geopolitical instability carries risks to the prices of oil and other internationally traded commodities, and to international trade itself, which are difficult to assess. Risks to our assumed path of oil prices, which is broadly in line with recent prices in futures markets, seem evenly balanced, between the risk of a faster rebound in prices--owing, for example, to a larger supply response to lower prices, or new conflict-related supply disruptions--and the risk of a renewed decline, stemming, for instance, from a run-down of inventories or unexpected weakness in economic growth in such oil-importing emerging market economies as China.

One risk that seems to have diminished since the February Review is the possibility of deflation becoming entrenched, particularly in the Euro Area. The decline in oil prices has had a marked impact on headline inflation rates in many countries, reducing them to negative levels in many cases, but rates of core inflation seem to have been largely impervious to its effects. Also, while wage increases have generally remained subdued, there has been little sign that they have been brought down further by reduced headline inflation rates. The same seems true of medium-term inflation expectations. Thus in the United States, the '5-year breakeven inflation rate'--a measure of expected average inflation over the next five years derived from yields on conventional and index-linked government bonds--has risen from about 1.2 per cent in mid-January to 1.7 per cent in late April. Also, in the Euro Area, indicators of inflation expectations have risen closer to the ECB's target for longer-term inflation, particularly in the period since the announcement of its expanded programme of asset purchases. These developments may in part be attributed to central banks' policies oriented towards medium-term inflation targets, and their associated communication strategies. Moreover, with oil prices having turned up in recent months, the impact of their decline between June 2014 and January 2015 will begin to drop out of 12-month inflation rates during this summer.

The possibility of renewed recession in the Euro Area is another risk that appears to have diminished. The ECB's monetary policy, the euro's depreciation, and lower oil prices are all expected to support demand and activity in the period ahead, while fiscal policies are expected to be broadly neutral. Taking into account recent data, our growth projections for the Area have been revised up. Yet economic conditions remain very weak in much of the Area, with unemployment extremely high and expected to decline only slowly. The risks associated with these conditions therefore remain--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 Euro Area and the European Union.

The most immediate such risks relate to Greece, and these have not diminished. Greece has undertaken an extraordinary adjustment since the crisis: between 2009 and 2014, the government's primary fiscal balance was tightened by 11.7 percentage points of GDP; its structural primary balance (as estimated by the IMF) was tightened by 18.5 per cent of GDP; and its external current account balance was turned from a deficit equivalent to 11 per cent of GDP into a surplus of 1 per cent of GDP. Associated with this adjustment were a collapse in output of about 25 per cent and an increase in unemployment to 26 per cent by early 2015. Yet given Greece's continuing debt burden, which has increased as a result of the fall in national income, a sustainable economic recovery is impossible without further international financial support and further reform of the economy.

Progress in negotiations between the government elected in late January and its partners in the Euro Area and the IMF have been disappointing. In the February issue of this Review, we argued that a constructive resolution should be possible, based on some loosening of fiscal policy, a further restructuring of public sector debt (not necessarily reducing its face value), and credible commitments to fundamental reforms of the public sector. These could still form the key elements of an agreement that would secure Greece's short-term financial situation and provide a basis for its return to high levels of employment and sustainable growth. But if such an agreement is not reached in the next few weeks, there is a significant risk of a Greek default and a disorderly exit from the monetary union. Greece accounts for only about 2 per cent of Euro Area GDP, but there would be risks of contagion damaging to other, economically larger, members of the Area, and hence to the euro itself. Although, except for Greece, there has been only limited widening of yield spreads among government bonds in the Area in recent weeks, these risks should not be dismissed. The risks relating to Greece are illustrative of risks that may become prominent when elections occur in other Euro Area countries in the period ahead.

A number of financial risks may also be noted. First, there are the familiar risks of overvaluation in asset markets associated with an extended period of highly accommodative monetary policy in the advanced economies. Related to these are the risks that continue to surround the expected rise in US short-term interest rates from the near-zero floor where they have sat since December 2008. Our forecast assumes, broadly in line with recent market expectations, that the first increase in the target federal funds rate will occur in the third quarter of this year, and that the rate will rise to about 2 per cent by the end of 2016. But surprises in the timing of rate increases, and also surprises in economic data that advance expectations about the timing, could cause instability in financial markets and international financial flows. In any event, the prospect of an uncertain path of increases in US interest rates carries risks for financial markets--including recently buoyant equity and real estate markets--and for dollar borrowers, including emerging market economies highly dependent on foreign financing.

Second, recent large movements in oil prices and exchange rates will have financial consequences. The drop in oil prices since mid-2014 has increased the external and balance-sheet vulnerabilities of oil-exporting countries, and damaged the profitability of companies in the energy sector, with possible repercussions for banking sectors. There will be corresponding gains for oil-importing countries and energy-using companies, but these gains may be insufficient to offset the economic consequences of the damage to the losers, particularly because of the liquidity constraints they are likely to face. Similarly, non-US borrowers in dollars will face increased costs and risks as a result of the significant appreciation of the dollar since last summer. Foreign currency borrowing by emerging market governments, which played a prominent role in the emerging market crisis of the 1990s, has declined significantly in recent decades, but such borrowing by the private sector has grown in many countries: data from the Bank for International Settlements show that the foreign currency debt of households and nonfinancial firms exceeded 20 per cent of GDP in 2014 in a number of emerging market countries, including Chile, Poland, Russia and Turkey. Unless it is hedged--and there is little information on the extent of hedging--the associated exchange rate risk could carry damaging implications for the debt burdens of some emerging market economies, especially if the dollar rises further.

Finally, recent exchange rate changes also carry implications for international payments imbalances. Global payments imbalances, which were a major policy concern in the years before the crisis, have generally narrowed substantially in its aftermath. The surpluses of China, Japan, and the oil-producing countries, and the deficit of the United States have all narrowed substantially, and our forecast shows continuing moderate imbalances in most major economies in the years ahead. The striking exception is Germany, whose current account surplus is expected to widen to almost 9 per cent of GDP this year. Further euro depreciation would tend to widen this surplus even further, while further dollar appreciation could tend to widen the US deficit to levels close to those seen before the crisis. Such a widening of global imbalances could again pose a threat to the stability of foreign exchange and financial markets.

Even though our global growth forecast for 2016 has been revised up slightly since three months ago, the outlook is still one of only tepid expansion in most advanced economies, both by historical standards and in relation to the continuing substantial degrees of economic slack that remain in most cases. There are also signs in many economies of reduced underlying growth in productivity, partly the result of several years of reduced investment stemming from the financial crisis and its aftermath of sluggish growth. The main policy priorities are therefore still to promote growth both by boosting demand and by supporting improvements in productive efficiency.

With regard to monetary policy, scope for further easing action in the advanced economies is now very limited. The ECB's expanded programme of asset purchases seems already to have had significant effects on long-term interest rates and other asset markets, which augur well for its impact on demand, activity, and inflation. But these are early days, and it remains possible that the ECB may have to take even stronger action to achieve its inflation objective. The same is true of the Bank of Japan, in spite of the expansion last October of its asset purchase programme. In the United States, data still fail to point towards a need for an early increase in interest rates. Also in the monetary field, further action is needed, especially in the Euro Area, to strengthen banks' balance sheets, including through more effective supervisory treatment of non-performing loans, to improve credit market conditions and the transmission of monetary policy.

Structural policies can play an important role in many countries in improving efficiency and boosting productive potential. Reforms that boost demand as well as supply are particularly desirable, especially reforms that promote investment, such as by raising expectations of future growth or removing impediments to land acquisition, job creation, or business formation.

In the area of fiscal policy, the case for increased government investment in infrastructure and other productive assets, financed by borrowing, both to boost demand and to raise potential output--a case that has been argued in earlier issues of this Review--remains widely valid. Indeed, with government borrowing costs having fallen even further in recent months in many European countries--to negative levels even beyond short maturities in some cases, including Germany--the case for such action has become even stronger.

Prospects for individual economies

Euro Area

The slight improvement in economic growth that occurred in late 2014 seems to have gained momentum in the early months of this year, and our growth projections have been revised up for both 2015 and 2016, to 1.5 and 2.2 per cent, respectively. Lower oil prices, highly accommodative monetary policy (including the launch, in March, of the ECB's expanded asset purchase programme), the depreciation of the euro against other major currencies, and the easing of fiscal consolidation have all contributed to more favourable demand conditions. But unemployment, at 11.3 per cent, is still much closer to its 2013 peaks than to its pre-crisis levels. Inflation has remained slightly negative, with no sign of deepening deflation.

GDP in the fourth quarter of 2014 was 0.3 per cent higher than in the third quarter and 0.9 per cent higher than a year earlier, but still 1.9 per cent below the pre-crisis peak of early 2008. Indicators for early 2015 have been moderately positive. Retail sales volume in February was 3.0 per cent higher than a year earlier, and consumer confidence indices have risen to pre-crisis levels. However, industrial production--up by only 1.6 per cent in the year to February--has remained sluggish, and although both PMIs and the European Commission's economic sentiment indicator have risen in recent months they were still no higher in March than in mid-2014. Unemployment has retreated further from its 2013 peak of 12.0 per cent. It fell to 11.3 per cent in February, down from the 11.5 per cent plateau of June-November last year and its lowest level since mid-2012.

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Consumer price inflation in the year to March was -0.1 per cent, up from -0.6 per cent in the twelve months to December. Inflation was negative in the year to March in nine of the Euro Area's nineteen member countries; even in Austria, where it was highest, at 0.9 per cent, it was well below the ECB's medium-term objective of "below, but close to, 2 per cent". Core inflation in the Area in the year to March was 0.6 per cent, little changed from the preceding months.

On March 9, the Area's central banks started implementing the ECB's expanded asset purchase programme announced on 22 January. The programme will involve asset purchases of 60 billion [euro] a month, for at least nineteen months, which in aggregate is equivalent to at least 10 per cent of annual GDP. The ECB announced that its purchases would be limited to bonds yielding at least -0.2 per cent a year. The purchases seem to have had a marked effect on longer-term interest rates: since the purchases began, sovereign bond yields, which were already lower in early March than in late January, have declined further in most Euro Area countries. By late April, 10-year yields were about 0.2 per cent in Germany, 0.4 per cent in France, and 1.4 per cent in both Italy and Spain. The main exception is Greece, where sovereign spreads relative to Germany have widened by about 3 percentage points since the elections in late January. Since 11 March, negotiations have been underway between the Greek authorities and the European Union, the ECB, and IMF on the conditions for an extension of the country's financial assistance agreement with Euro Area countries and on the associated sixth review of Greece's performance under the economic programme supported by its arrangement with the IMF. In late April, the participants were reporting slow progress.

The ECB's asset purchases also seem to have helped to lower the private sector's borrowing costs, and the decline in bank lending in the Area seems to be coming to an end: in February, loans to households were 1.0 per cent higher than a year earlier, while loans to nonfinancial companies were 0.4 per cent lower.

In March, the ECB forecast that inflation in the Area would rise from 1.0 per cent in 2015 to 1.5 per cent in 2016 and 1.8 per cent in 2017, indicating that with its current asset purchase programme it considers that it has done enough to raise inflation to its medium-term objective.

Germany

The economy expanded by 0.7 per cent--more strongly than expected--in the final quarter of 2014, bringing GDP growth for the year as a whole up to 1.6 per cent. Growth in the fourth quarter, as for the year, was driven predominantly by household consumption, but with fixed investment and net exports also making positive contributions. This pattern seems likely to continue in 2015, and taking into account recent developments we have revised our growth forecast for this year up slightly to 1.9 per cent, and our forecast for 2016 to 2.4 per cent.

The growth of household consumption this year is forecast at 2.3 per cent, the strongest for fifteen years--a result of growth in real incomes boosted by increased wage gains and low price inflation. The Harmonised Consumer Price Index (HCPI) rose by only 0.1 per cent in the twelve months to March 2015 and we expect average inflation in 2015 as a whole to be similar. Core inflation in the year to March was 1.2 per cent. HCPI inflation is forecast to rise to 1.3 per cent, on average, next year, reflecting the stabilisation of oil prices, the depreciation of the euro, and increased demand pressures in the domestic economy.

Concerns that wage settlements might fall with headline inflation have been assuaged by some high-profile pay agreements reached in recent months, including a 3.4 per cent increase for metal workers, the largest for them since 2007: figure 5. Indications from such settlements, coupled with the impact of the newly introduced national minimum wage, suggest that average nominal wage growth will be at least 3 per cent this year, while consumer prices are expected to be flat.

An important factor behind stronger wage growth is the increased tightness of the labour market. Unemployment reached a post-reunification low of 4.8 per cent in January and February 2015, close to estimates of Germany's full employment rate. With the economy forecast to expand robustly in the period ahead, labour shortages are likely to worsen. For output growth to be maintained, Germany will need to contain the projected decline in the labour force, either by increasing participation rates or by attracting more immigrant workers, or raise productivity growth through higher investment and structural reforms.

The growth of export volumes is forecast to pick up this year to a little over 5 per cent, spurred by the depreciation of the euro as well as the strengthening economic recovery among trading partners. Import volumes should also increase by more in 2015 than they did last year, reflecting the stronger growth of domestic demand. This should reduce the positive contribution to GDP growth from net trade in 2015, although the current account surplus is still projected to widen further, to 8.7 per cent of GDP. The surplus is projected to narrow somewhat in 2016.

A risk to our forecast arises from the emergence of elevated asset prices generated partly by low interest rates. An example is the housing market, where prices rose by 6.2 per cent in the year to March. Pressures in the housing market have also been seen in increases in rents, which led the Bundesrat in April to approve a law capping rent increases. Germany's equity market has also risen rapidly: the DAX has increased by about 25 per cent since the start of 2015, similar to increases in stock markets in France and Italy; only part of this rise can be accounted for by the depreciation of the euro, by about 9 per cent in effective terms. These asset price gains are likely to further buoy demand and activity, but the risk of a correction when monetary conditions are expected to become less accommodating is clear.

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In 2014 the government ran a balanced budget, not increasing its debt for the first time since 1969. In our forecast, budget surpluses cause the government's debt-to-GDP ratio to fall to below 70 per cent by the end of this year and to about 67 per cent by the end of 2016. This would still be above the 60 per cent ceiling prescribed by the Growth and Stability Pact. On the other hand, given the government's current extremely low, or even negative, borrowing costs, the government is forgoing through its fiscal policy opportunities to undertake not only productive but profitable investment projects.

France

Developments in the past three months have been broadly in line with our expectations set out in the February issue of the Review, and the outlook remains one of tepid, though slowly strengthening, growth with little decline in unemployment. GDP growth, having turned positive in the third quarter of last year, was only 0.1 per cent in the fourth quarter, but recent indicators suggest slightly stronger expansion in the first quarter of 2015. Our forecast of GDP growth in 2015 is unchanged at 1.3 per cent, but it has been revised up slightly, to 1.7 per cent, for 2016.

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Growth is expected to be driven mainly by private consumption, with low price inflation boosting households' spending power. The HCPI was flat in the year to March, with core inflation at only 0.2 per cent. We forecast minimal deflation of 0.1 per cent on average this year, but after the impact of the drop in oil prices wanes, and taking into account the depreciation of the euro, weak inflation, of 0.5 per cent on average, is expected to return in 2016.

Exports increased significantly in the final quarter of 2014, but this was largely the result of a surge in exports of aeronautical products. The depreciation of the euro has benefited France's international competitiveness outside the Euro Area, but within the Area, which accounts for a large part of France's trade, it seems unlikely that France's competitiveness has improved significantly, given that domestic price inflation has been close to the Area average, while the growth of wages and unit labour costs has been relatively high.

Employment growth has remained weak and heavily supported by government-subsidised programmes, while unemployment has risen further, reaching 10.6 per cent in the first two months of this year. We forecast that this rate will prevail, on average, for 2015 as a whole, but that unemployment will fall to 10.2 per cent in 2016.

France's fiscal deficit for 2014 was 4.0 per cent of GDP, in line with our February estimate and lower than the government's revised estimate of 4.4 per cent made last December. For 2015, under a 2013 agreement with the European Commission, the deficit was meant to fall within the ceiling of 3 per cent of GDP under the Stability and Growth Pact; this agreement had allowed a two-year extension from an earlier commitment to observe the ceiling in 2013. Last October, however, in its budget for 2015, the government projected a deficit of 4.3 per cent of GDP for 2015, and announced a revised plan to reduce the deficit below the 3 per cent ceiling by 2017. (In December, the government lowered its projection for the 2015 deficit to 4.1 per cent of GDP.) In March, the EU Commission accepted this plan, thus granting France a second extension of two years to achieve the 3 per cent target, while announcing that it would heighten its scrutiny of the broader French economy. In our central forecast we expect this deadline to be met in 2017, but by a fine margin. Given the uncertainties inherent in our forecast and the possibility of negative shocks, attainment of the target even by 2017 is clearly far from assured: figure 6.

With regard to structural reforms, the government in mid-February used a constitutional provision to enact legislation without a parliamentary vote to implement a number of business-friendly deregulatory measures, including the extension of Sunday trading hours and the shortening of labour arbitration procedures. The government has announced plans to make further progress with labour market reforms later this year.

Italy

After declining over most of the previous three years, GDP was flat in the fourth quarter of 2014. But final domestic demand increased for the first time since late 2010, albeit mainly on account of a rise in government consumption: without a large drop in inventories, GDP would have risen by 0.6 per cent. In light of these and other recent data, we have raised our forecast for GDP growth in 2015 from 0.1 to 0.6 per cent, but our forecast of 1.5 per cent growth in 2016 is unchanged.

Net exports were the main positive contributor to GDP growth in the fourth quarter, and we expect this to remain the case in 2015, given the depreciation of the euro and the improved growth prospects of many of Italy's main trading partners. Inflation has recently been close to the Euro Area average: the HCPI inflation rate in 2014 as a whole was 0.2 per cent, compared with the Area average of 0.4 per cent, but the 12-month inflation rate for March 2015 was zero, compared with the Area average of -0.1 per cent. Core inflation has remained positive, at around 0.4 per cent on a 12-month basis in the first quarter of 2015.

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Private consumption grew only modestly in 2014 and government consumption declined in the year as a whole. Fixed investment has been falling since 2010 --one of the main contributors to the country's weak growth performance (see figure 7). From this perspective, the modest increase of 0.2 per cent in fixed investment in the fourth quarter may be considered somewhat encouraging.

Unemployment was broadly unchanged between December 2014 and February 2015 at about 12.7 per cent, after falling sharply from its November peak of 13.2 per cent. We expect unemployment to decline further this year as economic growth resumes, and we forecast an average for the year of 12.0 per cent. The government has enacted a new labour market reform law (the Jobs Act), which aims to increase the flexibility of the market. The reform seeks to reduce the duality of the market by introducing a new form of labour contract with dismissal costs that increase over time, and restricting the use of temporary contracts.

The government recorded a budget deficit of 3 per cent of GDP in 2014, up from 2.8 per cent in 2013. For 2015 the government targets a deficit of 2.6 per cent, to be achieved through a decrease in interest payments on debt; the spread of Italian over German government bonds has narrowed to about 140 basis points, from 500 basis points during the peak of the Euro Area crisis.

Spain

Spain's economic recovery has gathered further momentum, with 0.7 per cent GDP growth in the last quarter of 2014, the highest quarterly growth rate since 2007. The central bank has estimated that growth rose slightly further in the first quarter of 2015, to 0.8 per cent. High unemployment, negative inflation, and the weak economic performance of key Euro Area partners still pose significant risks to the economy, but improved growth seems likely to continue, and we have revised our growth forecast for 2015 and 2016 up to 2.5 and 3.1 per cent, respectively, from 1.6 and 2.7 per cent in February.

As in the three previous quarters, GDP growth in the fourth quarter was generated by increases in all of the major components of domestic demand. As forecast in the February issue of the Review, housing investment made the first positive contribution to GDP growth--of 0.2 percentage points--since the beginning of the crisis. Net exports again made a negative contribution to GDP growth, of 0.7 percentage points, somewhat smaller than in the previous quarter. We expect net exports to contribute positively to growth in the period ahead, reflecting both the depreciation of the euro and the recovery of demand in Spain's main trading partners.

Unemployment is still exceptionally high, but it has continued to decline slowly. In February 2015 it stood at 23.2 per cent, lower than the peak of 26.9 per cent reached two years earlier but still far above pre-crisis levels of about 8 per cent. Given the large amount of slack in the labour market we expect wage increases and unit labour costs to remain subdued. Our growth forecast implies that unemployment will continue falling, with private consumption benefiting from it. Labour incomes will also benefit from the recent partial restoration by the government of bonus payments to public sector workers that were eliminated in 2012 as part of its austerity measures.

HCPI inflation on a twelve-month basis has been negative since mid-2014, but it has diminished since January, reaching -0.8 per cent in March. Core inflation on a 12-month basis was marginally negative for part of last year, but it has recently been increasingly positive, at 0.2 per cent in March. Strengthening economic growth, the stabilisation of oil prices, and the recent depreciation of the euro will tend to raise inflation somewhat further in the period ahead, and for 2016 we forecast that prices will rise on average by 2.3 per cent.

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The fiscal deficit fell to 5.6 per cent of GDP in 2014, down from 6.6 per cent in 2013, and the government's aim for 2015 is 4.2 per cent, in line with the EU's Stability Programme target. In recent months Spain's 10-year government bond spreads relative to Germany have been broadly stable, at around 1.4 percentage points, as German yields have declined, and the associated fall in debt service costs should help achievement of the target. However, regional and general elections due later this year may be preceded by increases in spending, and they will be followed by market reactions which are uncertain.

Greece

At the start of 2014, the economy began to expand again, for the first time since early 2008, but growth appears to have stalled in recent months. In 2014 as a whole, real GDP rose by 0.7 per cent, but nominal GDP again declined, owing to a larger fall in prices. Negotiations began in early March between the new government elected on January 25 and the European institutions and the IMF on policies to be supported by further disbursements of financial assistance. But slow progress in the negotiations has damaged confidence--as indicated in a widening of Greece's bonds spreads--and this seems likely to have contributed to an additional fall in output in the first quarter of this year. As noted in the Overview, an agreement between the government and its international partners should be possible. At the time of writing the government has been able to meet its obligations. But, it appears to be approaching its budget constraint as it attempts to ensure that it meets its obligations to its citizens and its, increasingly foreign, creditors. The depletion of reserves across all parts of the public sector offers only a temporary solution to its financing issues. Without the early release of disbursements from its negotiating partners, Greece's government will have no option but to default. The timing of such a scenario is uncertain, but as figure 8 shows the repayment schedule for the remainder of 2015 is demanding. In May and June alone, debt equivalent to 5 per cent of annual GDP will mature. Such repayments, together with the payment of public sector wage and pensions bills, will not be possible without disbursements.

The Greek banking sector is currently reliant on funding from ECB assistance programmes, given the decline in private sector deposits in recent months. If the ECB were to deny Greek banks access to liquidity support that they need to continue operating, then Greece's exit from the euro would appear inevitable.

In our forecast, we assume that there is an agreement that ensures the release of the remaining disbursements, while the ECB provides the liquidity support the Greek banks desperately need. On this basis, we expect the Greek economy to start expanding again towards the end of this year. But even with robust rates of growth from 2016 onwards, per capita GDP is expected still to be more than 10 per cent below pre-crisis levels in 2020.

However, the risk of departure from this baseline, involving default and exit from the Euro Area, seems considerable. Because of the uncertainties associated with such an eventuality, constructing meaningful scenarios to quantify likely outcomes is near impossible. Any view of the consequences of an exit is unavoidably dominated by one's priors (see for example, Holland et al. 2011 and Holland and Kirby, 2011).

United States

After growing vigorously in much of 2014, the economy has slowed in recent months. The appreciation of the dollar since last summer has created headwinds for net exports, but the growth of domestic demand has also slowed, apparently owing in part to unusually severe winter weather in some regions. Although the recent slowing is expected to be transitory, our projection for GDP growth in 2015 as a whole has been revised down to 2.8 per cent from 3.2 per cent in February. Our forecast of growth in 2016 is unchanged.

Unemployment has recently fallen to a nine-year low, but some other key indicators, including the historically low participation rate and stagnant wages, have continued to suggest significant slack in the labour market. With annual consumer price inflation still below 2 per cent and the dollar's appreciation bearing down on activity and prices, there remains no clear case for an early increase in interest rates by the Federal Reserve.

Output and demand growth has weakened significantly in recent months, partly, it seems, because of transitory factors related to the particularly severe winter in some regions. GDP growth, which reached 4.8 per cent at an annual rate in the second and third quarters of 2014, moderated to 2.2 per cent, annualised, in the fourth quarter, and weakened further, to 0.2 per cent in the first quarter of this year. In the fourth quarter, private domestic demand remained buoyant--consumer spending grew at its fastest rate since 2006--but government expenditure declined and the contribution of net trade also turned negative on account of a surge in imports. In the first quarter of this year, both domestic demand and net exports contributed to the further slowing of growth. We forecast a renewed, albeit moderate, strengthening of the expansion, beginning in the current quarter, driven mainly by domestic demand, reflecting the continuing accommodative stance of monetary policy and a continued easing of the pace of fiscal consolidation.

Employment growth also weakened in the first quarter, but unemployment fell slightly further. The rise in employment (non-farm payrolls) in 2014, at 3.1 million, was the largest annual increase since 1999, but in the first quarter the number of jobs increased by 0.6 million, a significantly lower rate. Unemployment fell to 5.5 per cent in February and March, its lowest level since May 2008. In March, the Federal Reserve in effect announced a more ambitious target for unemployment by declaring that it had lowered its range-estimate of the longer-run, normal unemployment rate from 5.2-5.5 per cent to 5.0-5.2 per cent. Other indicators suggest that there remains significant slack in the labour market. The labour force participation rate fell back in March to its 36-year low of 62.7 per cent, and the employment-population ratio, at 59.3 per cent in the first quarter, was higher than its mid-2011 low of 58.2 per cent but far below the range of 61-64 per cent in which it fluctuated in the two decades before the financial crisis. Moreover, the increase in average hourly earnings in the year to March was only 2.1 per cent, too low to be consistent with the Fed's 2 per cent objective for price inflation even on pessimistic assumptions about labour productivity growth. The increase in the employment cost index (which takes account of benefits) in the year to December was 2.2 per cent.

Consumer price inflation in the year to February was 0.3 per cent (in terms of the price index for personal consumption expenditures), down from 1.6 per cent in mid-2014, largely reflecting the decline in oil prices but also the appreciation of the dollar. Core inflation in the twelve months to February was 1.4 per cent, down only slightly from six months earlier.

In its policy statement of 18 March, the Fed indicated that it was unlikely that it would begin to raise its target for the federal funds rate from the current 0-1/4 per cent range, where it has stood since December 2008, at its April meeting. But it dropped its previous assessment (in its statements of December 2014 and January 2015) that it could be "patient in beginning to normalise the stance of policy", meaning that it did not expect to begin to raise rates for at least two meetings. It thereby opened up the possibility of raising the target rate in June, while also stating that it had not yet decided on the timing of the move, and promising, as in the past, that the timing would be data-dependent: that it would consider it "appropriate to raise the target rate when it has seen further improvement in the labour market and is reasonably confident that inflation will move back to its 2 per cent objective over the medium term". Chair Yellen stated that even after the initial increase in the target funds rate, Fed policy was "likely to remain highly accommodative to support continued progress toward our objectives of maximum employment and 2 per cent inflation". Our forecast assumes that the first increase in the Fed funds target, of 25 basis points, will occur in September.

[FIGURE 9 OMITTED]

With regard to fiscal policy, the February 2014 agreement by Congress to suspend the national debt ceiling for thirteen months expired on March 15. The need to either raise, or again suspend, the ceiling in the next few months threatens a return to the 'fiscal cliff' of last year.

Canada

Canada's terms of trade have deteriorated significantly as a result of the drop in oil prices. The price of gas--another Canadian export--has also fallen since November, partly owing to an increase in US production. These developments have led to a sharp decline in business investment in the energy sector and to negative effects on incomes and household spending. The January cut in the Bank of Canada's target overnight rate by 25 basis points, the partly associated depreciation of the Canadian dollar, and increasing demand from the growing US economy should mitigate these effects somewhat.

The sharp depreciation of the Canadian dollar that occurred in January, reflecting the cut in official interest rates and the general strength of the US currency, was only partly reversed in April. The depreciation, combined with easing credit conditions (as recently reported in the Bank of Canada's Spring 2015 Business Outlook Survey) is expected to boost net exports and investment in the non-energy sector. Overall we forecast business investment to fall by 1.8 per cent in 2015, followed by a gradual pick-up in 2016 before gaining further momentum in 2017-21.

GDP seems likely to have been roughly flat in the first quarter of this year, but growth is expected to recover as the effect of the fall in oil price peters out. We forecast GDP growth of 2.0 per cent in 2015, rising to 2.3 per cent in 2016 and 2.4 per cent, on average, between 2017 and 2021.

Consumer price inflation, on a 12-month basis, has been around 1 per cent in recent months, reflecting declines in the prices of energy and other commodities, and increased slack in the Canadian economy. Inflation is expected to pick up as economic growth recovers and the output gap narrows. We expect inflation, in terms of the private consumption deflator, to average 1.1 per cent in 2015 before rising to 2.0 per cent in 2016 and 2.2 per cent in 2017-21, slightly above the Bank of Canada's 2 per cent target.

There are signs of a softening in the housing market, particularly in oil producing regions, with falling incomes leading to a slowing of house price increases, and we expect the growth of housing investment to weaken from 3.0 per cent in 2015 to 1.9 per cent in 2016, remaining at around this level in the medium term. A soft landing in the housing market now looks more likely than three months ago, when we viewed a housing market correction as a significant downside risk to our forecast.

Reflecting the slowing of growth, unemployment has increased somewhat in recent months, to 6.8 per cent in February and March from 6.6 per cent in January. We expect it to average 6.8 per cent this year, before falling to 6.5 per cent in 2016 and stabilising at around 6.7 per cent in the medium term.

Japan

After two quarters of negative growth following the increase in the consumption tax last April, GDP rose by 0.4 per cent in the fourth quarter of last year. In 2014 as a whole, output was flat after two years of positive growth. We expect the recovery that began late last year to continue, with moderate GDP growth of 1.0 per cent this year and 1.2 per cent in 2016, supported by the Bank of Japan's policy of quantitative and qualitative easing (QQE) and by the substantial depreciation of the yen in recent years. This depreciation has gone slightly further in recent months with the general strengthening of the US dollar: in effective terms, the yen's value in late April was about 30 per cent lower than 2 1/2 years earlier. Our new GDP growth forecast for 2015 and 2016 represents a slight upward revision from last February's Review.

One risk to the forecast is that inflation may remain too low to encourage domestic demand. In April 2013, when the Bank of Japan launched its QQE programme, Governor Kuroda declared the aim of reaching the Bank's 2 per cent inflation target "at the earliest possible time, with a time horizon of about two years". In February 2015, the 12-month increase in the CPI was 2.2 per cent, but excluding the direct impact of the increase in the consumption tax, the 12-month inflation rate was only 0.2 per cent. Excluding also the prices of seasonal foods, the 12-month core inflation rate was zero, whether energy prices are included or not. It thus seems clear that the 2 per cent inflation objective will not be met within Governor Kuroda's time horizon. In fact, inflation excluding the consumption tax has declined steadily to about zero from about 1 1/2 per cent in the months immediately before the tax was increased. Weak domestic demand and slow wage growth have been important factors weighing on prices.

Our forecast is that inflation will remain below target, at 0.5 per cent in 2015-16, rising to 1.0 per cent in the medium term. Wage growth has recently remained subdued: the most recent data show that basic wages increased by only 0.3 per cent in the year to March. Wages may accelerate, given not only recent exhortations from the government to employers but also the tightness of the labour market: unemployment in recent months has been about 3.5 per cent, well below the levels of about 5.5 per cent reached in 2009, and labour shortages remain a problem in key industries. If the apparent tightness of the labour market leads to real as well as nominal wage increases, this should help to support domestic demand, providing additional inflationary stimulus. Surveys of inflation expectations are also encouraging. The Bank of Japan's March Tankan survey of businesses shows that average inflation expected in the year ahead was 1.4 per cent, rising to 1.6 per cent at the 3- and 5-year horizons. (A recent survey of the general public's expectations indicated that expected inflation in 2015 was close to 5 per cent, and that perceptions of actual recent inflation were even higher. Some have argued that such perceptions are not invalid--that underlying inflation in Japan is higher than official statistics record: see Abe et al., 2015.)

If inflation fails to pick up, the Bank of Japan may need to expand its QQE programme for a second time, following the increase to [yen] 80 trillion of asset purchases a month announced last October. However, a further expansion of the programme might carry risks. The current rate of purchases of Japanese Government Bonds (JGBs) is already greater than their rate of issuance. The policy is being facilitated by a move out of JGBs into equities by the Government Pension Fund, but this has a limit. Another concern is the effect on share prices, and the possible creation of an equity market bubble.

We expect private consumption--a negative contributor to growth in 2014--to be the main driver of GDP growth this year, reflecting the expected pick-up in real wages. Business investment is expected to continue its gradual recovery. While we expect moderate export growth, the recovery in domestic demand is expected to lead to a larger increase in imports so that net trade is expected to contribute negatively to GDP. In the medium term we expect the Japanese economy to grow by about 1.1 per cent a year: faster growth would seem to require more substantial reforms than have been announced thus far, including in the labour market to increase both efficiency and participation.

China

China's GDP grew by 7.0 per cent in the year to the first quarter of 2015, the slowest four-quarter expansion in six years, with growth in the construction and manufacturing sectors continuing to weaken. The latest figure is in line with the official GDP growth target for 2015 of "around 7 per cent" announced at the annual National People's Congress in March (down from last year's target for 2014 of "around 7 1/2 per cent"). This coincidence led some observers to question again the reliability of the GDP statistics and their consistency with other indicators suggesting a more marked slowing. Thus a number of private sector estimates of growth in the year to the first quarter have been in the 4-6 per cent range.

The Chinese authorities have expected output growth to slow gradually as they aim to rebalance the economy from growth led by investment and exports to growth driven more by private consumption: the share of gross fixed capital formation in GDP (at current market prices) has been extraordinarily high, 47.3 of GDP in 2013. Our forecast for output growth is broadly unchanged from the February Review, reflecting expectations of slower growth of investment, including in real estate. GDP growth is forecast at 6.8 per cent this year, slightly below the official target, and it is projected to weaken slightly further, to 6.7 per cent, next year before slowing again to about 6.1 per cent in the medium term.

[FIGURE 10 OMITTED]

With the renminbi tied to the US dollar--a policy that involved a significant decline (of about $260 billion) in China's official foreign exchange reserves between mid-2014 and the end of March, reflecting net capital outflows--consumer price inflation has fallen further over the past year, partly reflecting the drop in oil prices. The 12-month CPI inflation rate has been below 2 per cent since last September: it fell to 1.4 per cent in February and March.

The authorities have continued to announce monetary and fiscal measures when they have considered them necessary to avoid an excessive economic slowdown that could lead to a significant increase in unemployment and a surge in corporate defaults that might threaten financial stability. The People's Bank of China (PBC) reduced the banks' reserve requirement ratio in early February from 20 to 19.5 per cent, and again in late April to 18.5 per cent. They also lowered benchmark interest rates on March 1 by 25 basis points, the second reduction since November, again referring to real interest rates having been raised by the decline of inflation.

Particular attention is being paid to the continuing slowdown in the real estate and construction sector, which even on a narrow definition accounts for as much as 16 per cent of GDP. The four-quarter growth rate of investment in real estate development in the first quarter of 2015, at 8.5 per cent, was half the growth rate of a year earlier, and house prices have been falling since last July, at an increasing pace: in March 2015 they were 6.1 per cent and 4.9 per cent lower than a year earlier, for newly built and second-hand houses respectively (figure 10). Recently the authorities introduced measures specifically to support the property sector, including a reduction of minimum down payments for the buyers of second homes.

Concerned with the increasing indebtedness of local governments, the central government in March tripled the quota for bond sales by them, to encourage them to move some of their off-balance-sheet debt back onto their balance sheets at lower interest rates. There have also been other regulatory changes aimed at reducing risky off-balance-sheet financing, including a broadening of the definition of deposits used to calculate banks' loan-to-deposit ratios.

India

Recent revisions to India's national accounts have led to significant upward revisions to GDP data. Thus GDP growth in 2013 and 2014 has been revised from 4.7 and 6.0 per cent, respectively, to 6.4 and 7.2 per cent. The revised statistics are purportedly based on the current best practice methodology--the System of National Accounts 08--and extend the production boundary of the economy by including the 'unorganised' economy. They also involve improvements and updating of data sources and measurement, and a shift to a more recent base-year for price deflation. Although questions have been raised about the reliability of the new statistics and their consistency with other data, our analysis is based largely on them.

The growth of activity has picked up since 2012 and we expect the economy to grow robustly in the forecast period, led primarily by domestic demand. Structural reforms introduced over the past year--such as allowing the privatisation of mining activities and opening the insurance sector to more foreign investment--should stimulate investment, while lower oil prices will both boost domestic consumption growth and help improve the government's finances. In addition, the government's budget unveiled in early March slowed the planned pace of fiscal consolidation by postponing for one year (to 2017/18) the deficit target of 3 per cent of GDP, and announced both reductions in the corporation tax rate and substantial increases in infrastructure investment, to be financed partly by savings in subsidy spending allowed by declines in the prices of oil and other commodities.

[FIGURE 11 OMITTED]

The budget's measures will provide a further boost for growth. We forecast GDP growth of 7.5 per cent in 2015 and 7.4 per cent in 2016, with a further slight slowing to 7.1 per cent average growth between 2017 and 2021. India thus seems likely to be the world's fastest growing major economy in the period ahead.

Consumer price inflation, on a 12-month basis, has stabilised at about 5 per cent in recent months after falling sharply last year: in March it was 5.2 per cent. Early that month, outside its normal schedule of policy decisions, the Reserve Bank lowered its benchmark interest rate by 25 basis points, to 7.5 per cent--the second such cut since January. This was shortly after the budget, and came with the announcement of an agreement between the Reserve Bank and the government on a new monetary policy framework, which defines the Bank's price stability objective as annual CPI inflation below 6 per cent by January 2016 and at 4 per cent, +/-2 per cent, for the financial year 2016/17 and all subsequent years. In the near term we expect inflation to remain at around its recent level, but for 2016 we forecast a moderate rise to 6.3 per cent as the effect of the oil price drop washes out and buoyant demand puts pressure on prices. This suggests that the Reserve Bank may need to take tightening action next year to defend its target.

Our forecast of growth in the medium term would be higher if the government enacted more wide-ranging structural reforms, including badly needed measures to address obstacles to growth and efficiency in the energy sector and the lack of flexibility in the labour market. The economy's short-term prospect of buoyant growth suggests that the present would be a good time to tackle such problems.

Brazil

The economy is currently facing many challenges: economic stagnation; rising unemployment; weak prices of export commodities; rising inflation following a sharp depreciation of the real; and political resistance, amid corruption investigations, to fiscal austerity measures introduced, by the government formed in January, to address the country's first primary fiscal deficit in many years.

Following a sharp contraction in the second quarter of 2014, GDP grew only modestly in the second half of last year, with increases in output of 0.2 and 0.3 per cent, respectively, in the third and fourth quarters. Growth in the fourth quarter was driven by private consumption, with the other major components of domestic demand falling and net exports deducting 0.6 percentage points from growth. Falling commodity prices have led to a pronounced contraction of both export revenues and the import bill in domestic currency terms, in spite of the sharp depreciation of the real, which has fallen by more than 20 per cent, against the US dollar, in the year ended in late April, and by about 13 per cent in the past three months alone. The fall in exports deducted 1.3 percentage points from growth in the last quarter of 2014.

Consumer price inflation, on a 12-month basis, after fluctuating around 6.5 per cent in most of 2014--the top of the central bank's inflation target band--rose in the early months of this year, reaching 8.1 per cent in March. This is the highest inflation rate since 2005. The increase is partly a reflection of the depreciation of the currency, but it also stems from sharp rises in the prices of energy, resulting from taxes introduced by the government as part of its austerity package, and food. The behaviour of inflation prompted the Central Bank to increase its benchmark Selic interest rate from 12.25 to 12.75 per cent in early March and again, to 13.25 per cent in late April. This followed four increases between last October and January, which together amounted to 125 basis points. We expect inflation will remain high during 2015, averaging 7.9 per cent, before declining to 4.9 next year and reaching the Central Banks's target, on average, in the medium term.

Tighter monetary policy, the fiscal austerity measures being implemented by the government, and weak commodity prices seem likely to continue weighing on economic activity in the short term. Given recent developments, our forecast of growth has been revised down. We now project a contraction in GDP of 0.1 per cent this year, followed by weak growth of 1.4 per cent in 2016 and a further moderate recovery in the medium term.

Russia

With the upturn in global oil prices, the rouble's exchange rate has rebounded in the past three months. In terms of the US dollar, it has appreciated by about 30 per cent since late January, but it is still about 30 per cent below its value before the conflict in Ukraine. The rouble's partial recovery has occurred despite--indeed may to some extent have allowed--reductions in the Central Bank's benchmark interest rate, from 17 to 15 per cent at the end of January and then to 14 per cent in mid-March. There has been an associated decline in longer-term interest rates, with ten-year government bond yields in late April at about 11 per cent, 2.5 percentage points lower than three months earlier. The decline in official foreign exchange reserves, however, has continued, albeit at a slower pace than in 2014, when net capital outflows reached a record $152 billion. At end-March, official reserves stood at to $356 billion, $154 billion lower than at the end of 2013.

Consumer price inflation on a twelve-month basis rose to a 13-year high of 16.9 per cent in March, largely on account of rising food and non-alcoholic beverage prices but also reflecting the depreciation of the rouble. Economic sanctions and counter-sanctions--including an embargo on food imports imposed by Russia last August--are assumed to continue in the forecast period, contributing to continued shortages of some goods. There have been signs, however, that price increases have recently started to slow, perhaps partly owing to the weakening of economic activity: thus consumer price inflation on a monthly basis slowed to 1.2 per cent in March, the smallest increase since last October. We forecast consumer price inflation on an annual average basis to be 16.9 per cent in 2015, falling to 9.3 per cent in 2016 and 5.3 per cent on average in 2017-21. The Central Bank's main monetary policy objective is to lower annual inflation to 4 per cent a year by 2017; this seems unlikely to be attained.

When the Central Bank lowered its benchmark rate at the end of January and again in mid-March, it cited the weakening economy. GDP was flat in the last quarter of 2014, and only 0.4 per cent higher than a year earlier. Available data for the first quarter of 2015 point towards recession: in particular, in March, the volume of retail sales was 8.7 per cent lower, and corporate investment 5.3 per cent lower, than a year earlier. According to government sources, GDP fell by 2.0 per cent in the year to the first quarter. Inflation and economic uncertainty have curtailed business investment and consumer spending, and are likely to continue doing so as long as the conflict in Ukraine continues and international sanctions remain in place. Assuming a gradual recovery in global oil prices but continuing sanctions, our forecast is for GDP growth of-3.8 per cent in 2015, 0.1 per cent in 2016 and 4.5 per cent a year on average between 2017 and 2021.

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 on http://nimodel.mesr.ac.uk/.

The key interest rate and exchange rate assumptions underlying our current forecast are shown in tables A1-A2. Our short-term interest rate assumptions are generally based on current financial market expectations, as implied by the rates of return on treasury bills and government bonds of different maturities. Long-term interest rate assumptions are consistent with forward estimates of short-term interest rates, allowing for a country-specific term premium 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. In the first quarter of this year the Reserve Bank of Australia and People's Bank of China reduced benchmark interest rates by 25 basis points, while the Indian central bank cut its policy rate by 50 basis points in two steps. The Bank of Korea has lowered its interest rates by 75 basis points in three steps since the beginning of last year. The Central Bank of Turkey has cut its policy rate by 250 basis points over five rounds since May 2014. The Bank of Canada lowered its benchmark interest rate by 25 basis points in January 2015, for the first time

since 2009. Since the end of 2014, the Romanian Central Bank has reduced interest rates by 75 basis points in three steps, while the National Bank of Hungary has brought them down in two rounds by 30 basis points. The central banks of Norway and Poland lowered their policy rates by 25 and 50 basis points respectively in the fourth quarter of 2014. While Norway has kept its rate unchanged since then, Poland has cut its rate further by 50 basis points in March 2015. Switzerland lowered its benchmark interest rate by 25 basis points to -0.75 per cent in January 2015, while Denmark's central bank reduced theirs by 15 basis points to just 5 basis points above zero. In order to support demand as downward pressure on the exchange rates eased, Russian and Indonesian central banks reduced interest rates by 100 and 25 basis points correspondingly in the first quarter of 2015. In contrast, Brazil and South Africa have tightened monetary policy in response to inflationary and financial market pressures. While South Africa increased interest rates by 75 basis points in two rounds in 2014 and has since left them unchanged, Brazil raised interest rates further by 100 basis points in two steps in 2015. (2)

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 six quarters. For the US, this is broadly consistent with the interest rate path signalled by the Federal Open Market Committee (FOMC). The Federal Reserve (Fed) ended its 'QE3' programme of asset purchases in October 2014. The timing of increases in the Fed's short-term interest rates remains uncertain. In its policy statement of 18 March, the Fed indicated that it was unlikely that it would begin to raise its target for the federal funds rate from the current 0-14 per cent range, where it has stood since December 2008, at its April meeting. But it dropped its previous assessment (in its statements of December 2014 and January 2015) that it could be "patient in beginning to normalise the stance of policy", thereby opening up the possibility of raising the target rate in June. However, at the same time, it also stated that it had not yet decided on the timing of the move, and promised, as in the past, that the timing would be data-dependent: that it would consider it "appropriate to raise the target rate when it has seen further improvement in the labour market and is reasonably confident that inflation will move back to its 2 per cent objective over the medium term".

In contrast, the ECB and the Bank of Japan (Boj) continued expansion of their balance sheets. On 9 March, the Euro Area's central banks started the ECB's expanded asset purchase programme, announced on 22 January 2015. The programme involves asset purchases of 60 billion [euro] a month, for at least nineteen months, which in aggregate is equivalent to at least 10 per cent of Euro Area nominal GDP. The ECB announced that its purchases would be limited to bonds yielding at least -0.2 per cent a year. The purchases seem to have had a marked effect on longer-term interest rates: since they began, sovereign bond yields, which were already lower in early March than in late January, have declined further in most Euro Area countries.

In October last year, the Boj surprised the financial markets by unexpectedly expanding its asset purchase programme by about 30 per cent. The programme envisaged an annual increment of about [yen] 80 trillion to the monetary base, up from an existing [yen] 60-70 trillion, by purchasing increasingly large quantities of Japanese government bonds as well as stocks and real-estate funds. This additional step, according to the governor of the Boj, illustrates their firm determination to end deflation.

Figure A1 illustrates the recent movement in, and our projections for, 10-year government bond yields in the US, Euro Area, the UK and Japan. Convergence in Euro Area bond yields towards those in the US, observed since the start of 2013, reversed at the beginning of last year. Since February 2014, the margin between Euro Area and US bond yields started to widen, reaching about 100-150 basis points (in absolute terms) since late February 2015. Government bond yields in the US and UK picked up marginally in February-March this year, but have drifted down since. The expectations for bond yields for 2015 are lower than expectations formed just three months ago, for the US, Euro Area and the UK, while for Japan they are roughly unchanged. While the expectations for yields in the US and UK are marginally lower, by about 10 basis points, expectations of yields in the Euro Area have fallen by more: by approximately 40 basis points.

[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 four years. Figure A2 depicts the spread between 10-year government bond yields of Spain, Italy, Portugal, Ireland and Greece over Germany's. The final agreement on Private Sector Involvement in the Greek government debt restructuring in February 2012 and the potential for Outright Money Transactions (OMT) announced by the ECB in August 2012 brought some relief to bond yields in these vulnerable economies. 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 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", which was further strengthened by an introduction of its asset purchase programme of March 2015. 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. In our forecast, we have assumed spreads over German bond yields continue to narrow in all Euro Area countries, and that this process resumes in Greece by the end of this year. The implicit assumption underlying the forecast is that the current Euro Area membership composition persists.

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.

Nominal exchange rates against the US dollar are generally assumed to remain constant at the rate prevailing on 15 April 2015 until the end of December 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 2.25 per cent annually from end-2015 to 2017. Figure A4 plots recent history as well as our forecast of the effective exchange rate indices for Canada, the Euro Area, Japan, UK, Russia and the US. Reflecting relative cyclical positions and associated expectations of monetary policy developments, the US dollar has appreciated by about 8 per cent against most other major currencies in effective terms since the end of the fourth quarter of 2014; however the general appreciation of the US dollar has eased in recent months as data have indicated slower growth in the US economy. In effective terms, the rate of US dollar appreciation in April is less than one third of the rate in the preceding three months. The most notable exception to the US dollar's appreciation has been the movement of the Russian rouble. After depreciating by about 78 per cent versus the US dollar in the last quarter of 2014, the rouble partially recovered, rising by about 15 per cent against the US dollar and by around 22 per cent in effective terms since the end of the first quarter of this year.

[FIGURE A3 OMITTED]

[FIGURE A4 OMITTED]

[FIGURE A5 OMITTED]

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 illustrated in figure A5. After their steep decline from mid-2014, oil prices bottom out in the first quarter of this year, but remain significantly below their levels of the previous four years. We assume that the price of oil will increase by about 30 per cent throughout 2015. Overall, oil price expectations for the end of this year have risen by about 5 per cent, compared to expectations formed just three months ago. EIA projections show an expectation of a 14 per cent increase in oil prices, on average, in 2016, which still leaves oil prices around $28 below their nominal level in mid-2014.

Our equity price assumptions for the US reflect the expected return on capital. Other equity markets are assumed to move in line with the US market, but are adjusted for different exchange rate movements and shifts in country-specific equity risk premia. Figure A6 illustrates the key equity price assumptions underlying our current forecast. Global share prices had performed well since 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 performance of equity prices has been buoyant in most countries, especially in the Euro Area economies, partly supported by the ECB's recently introduced widescale asset purchase programme. The most significant gains were observed in Denmark and Germany, where equity prices increased by about 33 and 29 per cent respectively from the start of 2015 until mid-April. Share prices continued to fall sharply in Greece. Equity prices there have fallen by about 40 per cent since the beginning of 2014.

[FIGURE A6 OMITTED]

Fiscal policy assumptions for 2015 follow announced policies as of 1 January 2015. Average personal sector tax rates and effective corporate tax rate assumptions underlying the projections are reported in table A3, while table A4 lists assumptions for government spending. Government spending is expected to decline as a share of GDP between 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 an 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 et al. (2013).

REFERENCE

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

NOTES

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

(2) Interest rate assumptions are based on information available for the period to 15 April 2015 and do not include the 50 basis point increase by the Central Bank of Brazil on 29 April 2015, or the 150 basis point cut by the Central Bank of Russia on 30 April 2015.

Table Al. Interest rates

Per cent per annum

                       Central bank intervention rates

              US     Canada     Japan     Euro      UK
                                          Area

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         0.42     0.76      0.10      0.05     0.50
2016         1.55     1.32      0.10      0.05     0.81
2017-21      3.36     3.12      0.44      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    Q    0.25     0.81      0.10      0.05     0.50
2015    Q2   0.25     0.75      0.10      0.05     0.50
2015    Q3   0.42     0.75      0.10      0.05     0.50
2015    Q4   0.75     0.75      0.10      0.05     0.50

2016    Q1   1.10     1.00      0.10      0.05     0.63
2016    Q2   1.40     1.25      0.10      0.05     0.75
2016    Q3   1.71     1.43      0.10      0.05     0.88
2016    Q4   2.00     1.61      0.10      0.05     1.00

                     10-year government bond yields

              US     Canada     Japan    Euro     UK
                                         Area

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          2.1      1.6       0.4      0.8     1.7
2016          2.8      2.4       0.6      1.3     2.3
2017-21       3.7      3.6       1.3      2.8     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    Q     2.0      1.4       0.3      0.8     1.6
2015    Q2    1.9      1.3       0.3      0.6     1.6
2015    Q3    2.1      1.6       0.4      0.8     1.8
2015    Q4    2.3      1.8       0.5      0.9     2.0

2016    Q1    2.5      2.1       0.6      1.1     2.1
2016    Q2    2.7      2.3       0.6      1.2     2.3
2016    Q3    2.9      2.5       0.7      1.4     2.4
2016    Q4    3.0      2.6       0.7      1.5     2.5

Table A2. Nominal exchange rates

                Percentage change in effective rate

               US      Canada     Japan     Euro
                                            Area

2011           -2.9       2.1       6.9       0.9
2012            3.4       1.0       2.2      -1.9
2013            2.9      -3.2     -16.7       2.9
2014            4.2      -5.5      -5.1       2.0
2015           11.9      -7.4      -5.3      -4.4
2016            0.4       0.0       0.7      -0.2

2013    Q1      1.2      -3.1     -12.0       1.2
2013    Q2      1.4      -0.2      -5.7       0.1
2013    Q3      2.0       0.3       2.9       2.0
2013    Q4     -0.1      -3.0      -2.0       0.9

2014    Q1      1.7      -3.9      -1.5       0.8
2014    Q2     -0.9       2.4       0.1      -0.1
2014    Q3      1.5      -1.0       -1.1     -0.8
2014    Q4      4.7      -3.1      -6.6      -0.4

2015    Q1      6.1      -5.2      -0.2      -2.1
2015    Q2      1.8      -0.1       0.6      -2.1
2015    Q3      0.0       0.1       0.1      -0.1
2015    Q4     -0.1       0.0      -0.1       0.0

2016    Q1      0.0       0.0       0.2       0.1
2016    Q2      0.0       0.0       0.3       0.2
2016    Q3      0.0       0.0       0.3       0.2
2016    Q4     -0.1       0.0       0.4       0.2

                Percentage change in effective rate

             Germany   France     Italy      UK

2011            0.5        1.1      1.4      -0.1
2012           -2.0      -2.0      -1.6       4.2
2013            2.9       3.1       3.8      -1.2
2014            1.8       2.0       3.4       7.9
2015           -4.9      -4.7      -4.1       4.3
2016           -0.3      -0.1      -0.1       0.2

2013    Q1      1.3       1.2       1.2      -3.9
2013    Q2      0.2       0.1       0.1       0.3
2013    Q3      1.7       2.3       3.1       1.9
2013    Q4      0.9       0.9       1.2       3.0

2014    Q1      0.9       0.7       1.2       2.6
2014    Q2     -0.2       0.0       0.3       1.4
2014    Q3     -0.8      -0.8      -0.8       1.6
2014    Q4     -0.4      -0.7      -0.3      -0.4

2015    Q1     -2.4      -2.4      -1.8       3.0
2015    Q2     -2.3      -1.9      -2.3       0.5
2015    Q3     -0.1      -0.1      -0.1       0.1
2015    Q4      0.0       0.0       0.0       0.0

2016    Q1      0.1       0.1       0.2       0.0
2016    Q2      0.1       0.2       0.2       0.0
2016    Q3      0.2       0.2       0.2       0.0
2016    Q4      0.2       0.2       0.3       0.0

                       Bilateral rate per US $

              Canadian      Yen      Euro     Sterling
                 $

2011             0.995     79.80     0.719      0.624
2012             0.997     79.80     0.778      0.631
2013             1.039     97.60     0.753      0.640
2014              1.112   105.80     0.754      0.607
2015             1.247      119.4    0.926      0.672
2016             1.248      118.7    0.933      0.675

2013    Q1       1.025     92.30     0.757      0.645
2013    Q2       1.032     98.80     0.765      0.651
2013    Q3       1.035     98.90     0.755      0.645
2013    Q4       1.064    100.40     0.735      0.618

2014    Q1        1.111   102.70     0.730      0.604
2014    Q2       1.083    102.10     0.729      0.594
2014    Q3       1.100    104.00     0.755      0.599
2014    Q4       1.153    114.60     0.801      0.632

2015    Q1       1.240    119.20     0.889      0.660
2015    Q2       1.250    119.50     0.937      0.677
2015    Q3       1.249    119.40     0.939      0.677
2015    Q4       1.249    119.40     0.939      0.677

2016    Q1       1.249    119.20     0.937      0.676
2016    Q2       1.248    118.90     0.935      0.675
2016    Q3       1.248    118.50     0.931      0.674
2016    Q4       1.247    118.00     0.928      0.673

Table A3. Government revenue assumptions

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

               2014    2015    2016    2014    2015    2016

Australia      14.5    14.6    14.6    25.7    25.7    25.7
Austria        31.3    31.8    32.3    21.8    21.8    21.8
Belgium        35.6    35.6    35.4    21.7    21.7    21.7
Canada         21.8    21.9    22.1    20.3    20.8    20.8
Denmark        38.5    38.3    37.4    32.8    32.8    32.8
Finland        32.8    32.8    32.4    23.1    23.1    23.1
France         30.9    31.0    31.1    32.7    32.7    32.7
Germany        28.7    28.7    28.4    19.4    19.4    19.4
Greece         25.2    24.2    24.0    13.5    13.5    13.5
Ireland        27.3    27.3    27.2     9.8     9.8     9.8
Italy          28.6    28.7    28.2    26.5    26.5    26.5
Japan          22.9    22.9    22.9    29.6    29.6    29.6
Netherlands    32.2    32.2    32.0     8.4     8.4     8.4
Portugal       23.6    23.6    23.5    18.1    18.1    18.1
Spain          24.9    24.2    23.7    15.8    15.8    15.8
Sweden         28.4    27.8    26.6    23.1    23.1    23.1
UK             22.7    22.6    22.8    14.6    13.3    13.1
US             18.8    18.9    18.9    28.8    29.1    29.4

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

               2014    2015    2016

Australia      30.8    30.9    31.1
Austria        43.2    42.6    42.7
Belgium        44.1    44.1    42.8
Canada         35.3    35.3    34.7
Denmark        49.3    49.0    48.2
Finland        47.6    46.9    47.6
France         46.3    45.8    45.8
Germany        41.1    41.1    40.9
Greece         40.3    43.9    44.1
Ireland        29.7    28.9    28.4
Italy          43.9    43.2    42.7
Japan          32.8    33.6    34.0
Netherlands    41.8    41.6    41.1
Portugal       40.0    39.4    39.3
Spain          35.4    35.3    34.4
Sweden         44.9    44.0    43.4
UK             35.4    35.4    35.7
US             30.4    30.4    30.3

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

Table A4. Government spending assumptions (a)

                Gov't spending excluding
                  interest payments
                    (% of GDP)

                2014    2015    2016

Australia       32.8    32.7    32.2
Austria         42.8    42.7    42.6
Belgium         43.9    44.1    43.0
Canada          33.9    34.0    33.6
Denmark         48.3    47.8    46.8
Finland         48.6    47.8    47.4
France          48.1    47.8    47.5
Germany         38.7    38.7    38.6
Greece          39.7    42.7    41.1
Ireland         28.5    27.2    26.3
Italy           41.9    41.4    40.4
Japan           39.2    38.9    38.8
Netherlands     42.3    42.4    41.8
Portugal        39.4    38.0    36.9
Spain           37.5    36.2    34.2
Sweden          44.9    43.5    42.8
UK              36.4    35.5    34.2
US              31.7    31.4    30.8

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

Australia        2.0     2.0     1.9         2017
Austria          2.4     2.0     1.7          --
Belgium          3.0     2.6     2.2         2013
Canada           3.1     2.9     2.7         2013
Denmark          1.5     1.4     1.2         2013
Finland          1.2     1.1     0.9          --
France           2.1     1.8     1.5         2017
Germany          2.0     1.6     1.4          --
Greece           3.2     3.1     3.0         2014
Ireland          4.4     4.1     3.8         2015
Italy            4.9     4.4     3.9         2015
Japan            1.8     1.5     1.3          --
Netherlands      1.4     1.2     0.9         2013
Portugal         5.2     4.5     3.6         2016
Spain            3.5     3.3     2.9         2016
Sweden           0.9     0.7     0.6          --
UK               2.0     1.8     2.0         2017
US               3.7     3.3     3.2         2018

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

Appendix B: Forecast detail

[FIGURE B1 OMITTED]

[FIGURE B2 OMITTED]

[FIGURE B3 OMITTED]

[FIGURE B4 OMITTED]

Table B1. Real GDP growth and inflation

                               Real GDP growth (per cent)

                   2012    2013    2014    2015    2016    2017-21

Australia           3.6     2.1     2.7     2.4     2.5        2.9
Austria(a)          1.0     0.1     0.4      1.1    2.4        1.9
Belgium(b)          0.1     0.3     1.0     1.5     2.4         1.1
Bulgaria(b)         0.4     0.9     1.5      1.1    2.5        2.7
Brazil              1.8     2.7     0.2    -0.1     1.4        2.8
China               7.7     7.7     7.4     6.8     6.7        6.1
Canada              1.9     2.0     2.5     2.0     2.3        2.4
Czech Rep.         -0.7    -0.7     2.0     1.8     3.3        2.0
Denmark(a)         -0.7    -0.5      1.1    1.4     2.3        1.7
Estonia(a)          4.7     1.6     2.1     2.5     4.8        2.5
Finland(a)         -1.4    -1.3    -0.1      1.1    1.6        1.3
France(a)           0.4     0.4     0.4     1.3     1.7        1.7
Germany(a)          0.6     0.2     1.6     1.9     2.4        1.7
Greece(a)          -6.6    -4.0     0.7    -0.3     2.8        3.6
Hong Kong           1.7     2.9     2.3     3.0     2.9        2.8
Hungary(a)         -1.5     1.6     3.6     1.6     3.0        2.0
India               5.1     6.4     7.2     7.5     7.4        7.1
Indonesia           6.0     5.6     5.0     4.7     4.9        5.3
Ireland(a)         -0.3     0.2     4.8     3.2     4.0        2.7
Italy(a)           -2.8    -1.7    -0.4     0.6     1.5        2.2
Japan               1.7     1.6    -0.1     1.0     1.2         1.1
Lithuania(a)        3.9     3.2     3.0     2.8     3.9        2.2
Latvia(a)           4.8     4.8     2.5     2.2     3.8        2.0
Mexico              3.8     1.7     2.1     2.8     3.6        3.7
Netherlands(a)     -1.6    -0.7     0.9     1.3     2.5        1.6
New Zealand         2.9     2.5     3.0     3.6     3.6        3.1
Norway              2.5     0.8     2.2     1.4     2.6        2.5
Poland(a)           1.9     1.6     3.3     3.3     3.9        3.3
Portugal(a)        -4.0    -1.6     0.9     1.8     2.3        2.4
Romania(a)          0.7     3.6     2.9     2.8     3.6        2.7
Russia              3.4     1.3     0.7    -3.8     0.1        4.5
Singapore           3.4     4.4     2.9     4.0     4.5        2.9
South Africa        2.2     2.2     1.5     2.8     3.7        3.8
S. Korea            2.3     2.9     3.3     3.1     4.4        4.3
Slovakia(a)         1.6     1.4     2.4     2.3     3.8        2.9
Slovenia(a)        -2.5    -1.0     2.4     2.2     3.8        1.4
Spain(a)           -2.1    -1.2     1.4     2.5     3.1        2.2
Sweden(a)           0.0     1.3     2.3     2.5     3.2        2.7
Switzerland          1.1    1.9     2.0     0.7     1.3        2.0
T aiwan             2.1     2.2     3.7     3.6     3.7        3.9
Turkey              2.1     4.2     2.9     3.1     4.0        4.3
UK(a)               0.7     1.7     2.8     2.5     2.4        2.6
US                  2.3     2.2     2.4     2.8     2.9        2.9
Vietnam             5.2     5.4     5.7     5.8     5.1        4.8
Euro Area(a)       -0.8    -0.4     0.9     1.5     2.2        1.9
EU-27(a)           -0.4     0.1     1.3     1.8     2.4        2.1
OECD                1.3     1.4     1.8     2.2     2.6        2.6
World               3.4     3.4     3.4     3.2     3.8        4.0

                             Annual inflation(3) (per cent)

                   2012    2013    2014    2015    2016    2017-21

Australia           2.5     2.6     2.3     1.7     2.5        2.1
Austria(a)          2.6     2.1     1.5     0.6     1.8        2.3
Belgium(b)          2.6     1.2     0.5     0.1     1.9        3.1
Bulgaria(b)         2.4     0.4    -1.6    -2.1     2.1        1.5
Brazil              5.4     6.2     6.3     7.9     4.9        4.5
China               2.7     2.6     2.0     1.0     1.2        2.6
Canada              1.3     1.3     1.9      1.1    2.0        2.2
Czech Rep.          3.5     1.4     0.4     1.0     0.8        1.7
Denmark(a)          2.4     0.5     0.3     0.6     1.9        1.6
Estonia(a)          4.2     3.2     0.5     0.2     2.0        1.7
Finland(a)          3.2     2.2     1.2     0.3     2.3        2.4
France(a)           2.2     1.0     0.6    -0.1     0.9        2.0
Germany(a)          2.1     1.6     0.8     0.1     1.3        2.2
Greece(a)           1.0    -0.9    -1.4    -2.3     0.3        3.9
Hong Kong           3.2     2.7     2.3     0.8     2.1        2.4
Hungary(a)          5.7     1.7     0.0     0.3     0.8        1.6
India               9.7    10.1     7.2     5.1     6.3        4.7
Indonesia           4.3     6.4     6.4     5.7     6.2        5.4
Ireland(a)          1.9     0.5     0.3     0.0     1.4        2.4
Italy(a)            3.3     1.3     0.2    -0.2     2.1        2.6
Japan              -0.9    -0.2     2.0     0.5     0.5        1.0
Lithuania(a)        3.2     1.2     0.2    -0.9     1.6        1.8
Latvia(a)           2.3     0.0     0.7     0.0     2.2        2.3
Mexico              4.1     3.8     4.0     3.2     3.8        4.3
Netherlands(a)      2.8     2.6     0.3    -0.6     1.8        2.0
New Zealand         0.7     0.5     0.8     0.3     2.0        2.4
Norway              1.2     2.8     2.3     2.1     2.6        2.4
Poland(a)           3.7     0.8     0.1    -1.2     1.0        1.9
Portugal(a)         2.8     0.4    -0.2     0.1     1.9        2.3
Romania(a)          3.4     3.2     1.4     0.4     1.3        0.6
Russia              5.1     6.8     7.8    16.9     9.3        5.3
Singapore           4.6     2.3     1.0      1.1    3.0        2.8
South Africa        6.3     5.5     5.9     3.2     5.0        4.2
S. Korea            2.2     1.3     1.3     0.9     2.3        2.5
Slovakia(a)         3.7     1.5    -0.1     0.6     3.0        1.9
Slovenia(a)         2.8     1.9     0.4     0.0     3.5        4.0
Spain(a)            2.4     1.5    -0.2    -0.7     2.3        2.5
Sweden(a)           0.9     0.4     0.2     0.7     2.3        2.4
Switzerland        -0.9    -0.4    -0.1    -0.8    -0.2        2.7
T aiwan             1.2     0.3     0.7    -0.5     1.3        2.3
Turkey              8.9     7.5     8.9     7.8     7.9        6.9
UK(a)               2.8     2.6     1.4    -0.1     1.0        2.0
US                  1.8     1.2     1.3    -0.3     1.9        2.3
Vietnam             9.1     6.6     4.1     3.8     4.3        6.4
Euro Area(a)        2.5     1.3     0.4    -0.2     1.6        2.4
EU-27(a)            2.6     1.5     0.6    -0.2     1.5        2.2
OECD                1.9     1.4     1.5     0.4     2.0        2.5
World               4.4     4.7     3.8     3.3     3.7        3.6

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

Table B2. Fiscal balance and government debt

                           Fiscal balance (per cent of GDP) (a)

                  2012    2013    2014    2015    2016    2021

Australia        -3.0     -1.3   -4.1    -3.7    -3.0    -2.1
Austria          -2.3     -1.5   -1.9    -2.1    -1.6    -1.8
Belgium          -4.1     -2.9   -2.9    -2.7    -2.4    -1.6
Bulgaria         -0.8     -1.5   -0.3     0.3     0.4    -0.7
Canada           -3.1     -2.7   -1.6    -1.6    -1.5    -1.7
Czech Republic   -4.0     -1.3   -0.7    -0.2     0.1    -1.3
Denmark          -3.9     -0.7   -0.5    -0.2     0.3    -0.9
Estonia          -0.3     -0.5   -0.9    -1.0    -1.1    -1.4
Finland          -2.1     -2.4   -2.3    -1.9    -0.7    -1.0
France           -4.9     -4.1   -3.9    -3.8    -3.2    -2.6
Germany           0.1      0.0    0.5     0.7     1.0    -0.2
Greece           -8.6    -12.2   -2.6    -2.0     0.1    -1.8
Hungary          -2.3     -2.4   -3.3    -3.1    -2.2    -1.9
Ireland          -8.1     -5.7   -3.3    -2.4    -1.8     0.0
Italy            -3.0     -2.8   -3.0    -2.6    -1.7    -1.8
japan            -8.7     -9.0   -8.2    -6.8    -6.2    -4.6
Lithuania        -3.2     -2.6    0.3     0.1    -0.2    -1.2
Latvia           -0.8     -0.9   -0.5    -0.7    -0.8    -1.2
Netherlands      -4.0     -2.3   -1.9    -2.0    -1.7    -1.7
Poland           -3.7     -4.0   -2.1    -2.7    -2.7    -2.9
Portugal         -5.5     -4.9   -4.5    -3.1    -1.1    -1.8
Romania          -3.0     -2.2   -1.8    -1.7    -1.7    -1.5
Slovakia         -4.2     -2.6   -2.6    -2.4    -2.1    -0.6
Slovenia         -3.7    -14.6   -5.5    -2.7    -3.7    -2.7
Spain            -6.8     -6.6   -5.6    -4.2    -2.7    -1.8
Sweden           -0.9     -1.3   -0.9    -0.2     0.1    -1.0
UK               -8.3     -5.7   -5.7    -4.5    -3.0     0.1
US               -9.0     -5.7   -5.0    -4.3    -3.6    -2.5

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

                  2012     2013     2014     2015     2016     2021

Australia         31.6     32.5     35.9     37.6     38.5     39.7
Austria           81.8     81.2     80.9     79.1     77.5     70.1
Belgium          104.0    104.6    109.2    110.3    106.9     90.8
Bulgaria          --       --       --       --       --       --
Canada            94.6     91.7     91.7     90.6     87.8     77.2
Czech Republic    45.5     45.7     42.2     43.5     42.2     39.0
Denmark           45.6     45.0     44.6     43.3     41.1     36.7
Estonia           --       --       --       --       --       --
Finland           53.0     56.0     58.7     57.7     57.3     49.7
France            89.3     92.2     96.2     96.7     97.2     90.4
Germany           79.3     77.1     74.7     71.6     68.3     48.5
Greece           156.8    175.1    178.1    186.5    189.1    129.6
Hungary           78.5     77.3     80.4     81.4     81.0     76.7
Ireland          121.8    123.4    117.8    112.9    107.4     85.8
Italy            122.2    127.9    132.7    132.4    129.4    104.8
japan            217.2    222.9    228.1    228.9    230.7    226.5
Lithuania         --       --       --       --       --       --
Latvia            --       --       --       --       --       --
Netherlands       66.7     68.9     69.4     69.8     69.4     64.7
Poland            54.4     55.7     48.6     48.1     48.3     48.4
Portugal         120.7    124.8    129.9    128.5    125.7    104.6
Romania           --       --       --       --       --       --
Slovakia          --       --       --       --       --       --
Slovenia          --       --       --       --       --       --
Spain             84.4     92.1     97.7     99.7     95.1     78.7
Sweden            36.9     39.0     38.5     37.1     35.3     29.5
UK                85.8     87.3     89.4     89.6     89.3     71.7
US               109.3    107.2    107.2    108.3    106.3     94.0

Notes: (a) General gove
for EU countries, (b) M

Table B3. Unemployment and current account balance

                            Standardised unemployment rate

                  2012     2013     2014     2015     2016    2017-21

Australia          5.2      5.7      6.1      6.4      6.2        5.9
Austria            4.9      5.4      5.6      5.2      4.7        4.9
Belgium            7.7      8.4      8.5      8.3      8.1        7.7
Bulgaria          12.3     12.9      11.4    10.2      9.8        9.9
Canada             7.4      7.1      6.9      6.8      6.5        6.7
China               --       --       --       --       --         --
Czech Republic      7.0     7.0      6.1      5.4      5.2        5.9
Denmark            7.6      7.0      6.5      5.8      5.1        4.9
Estonia           10.0      8.5      7.3      6.5      7.1        7.7
Finland            7.7      8.2      8.7      8.8      9.3        7.8
France             9.8     10.3     10.3     10.6     10.2        8.6
Germany            5.4      5.2      5.0      4.7      4.7        4.6
Greece            24.5     27.5     26.5     25.5     24.5       16.6
Hungary           11.0     10.1      7.7      7.0      6.4        6.5
Ireland           14.8     13.1     11.3      9.8      9.1        8.6
Italy             10.6     12.1     12.7     12.0     10.6       10.3
Japan              4.3      4.0      3.6      3.4      3.9        4.4
Lithuania         13.4     11.9     10.7     10.0     10.5       10.8
Latvia            15.0     11.8     10.9      9.7     10.0       10.5
Netherlands        5.8      7.3      7.4      6.8      6.1        4.8
Poland            10.1     10.4      9.0      7.7      7.1        7.1
Portugal          15.8     16.4     14.1     13.7     12.1        9.1
Romania            6.9      7.1      6.8      6.9      6.8        6.8
Slovakia          14.0     14.3     13.2     12.4     12.8       12.8
Slovenia           9.0     10.1      9.7      9.2      8.8        8.8
Spain             24.8     26.1     24.5     22.1     17.8       16.1
Sweden             7.9      8.0      7.9      7.4      7.1        6.9
UK                 8.0      7.6      6.2      5.4      5.3        5.2
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     -1.3     -0.3       -0.8
Austria            1.5      1.0      1.1      4.1      2.1        0.9
Belgium           -1.9      0.1      0.5     -1.0     -0.6        5.1
Bulgaria          -0.9      1.9      0.3      3.3      4.9        7.4
Canada            -3.3     -3.0     -2.2     -3.4     -1.5        1.4
China              2.5      1.9      2.0      1.3      0.0       -0.9
Czech Republic    -1.6     -1.4      0.3     -2.8     -2.6        1.3
Denmark            5.8      7.1      5.8      6.0      6.3       10.2
Estonia           -1.9     -1.2     -0.3      5.1      4.3        0.2
Finland           -1.2     -0.9     -1.2      2.2      0.4        0.9
France            -1.5     -1.4     -1.4     -1.0     -0.9       -1.3
Germany            7.2      6.8      7.7      8.7      7.1        8.4
Greece            -2.3      0.6      1.7      0.6     -3.8       -5.5
Hungary            1.8      4.1      4.8      6.6      3.8        2.2
Ireland            4.1      6.2      9.4      8.2      4.3        7.6
Italy             -0.2      1.0      1.8      4.0      4.5        6.8
Japan              1.0      0.8      0.5      0.3     -0.5        1.3
Lithuania         -0.2      1.4     -0.1     -0.1      0.8        3.1
Latvia            -2.5     -2.4     -3.6      0.5      1.2        2.9
Netherlands        8.9     10.2     12.0     10.9      7.0        7.2
Poland            -3.6     -1.3     -1.1      1.2      1.8       -1.8
Portugal          -2.0      0.5     -0.9      2.6      1.8        1.0
Romania           -4.4     -0.9     -0.8      0.2      0.4        2.1
Slovakia           2.2      2.1      3.2      7.1      3.1        0.7
Slovenia           2.7      5.6      5.7      8.3      9.3        9.3
Spain             -1.2      0.8      0.2      1.6      2.5        2.5
Sweden             5.8      7.3      5.3      3.6      1.5       -0.2
UK                -3.7     -4.5     -5.5     -4.7     -5.0       -3.0
US                -2.9     -2.4     -2.4     -2.5     -2.8       -3.5

Table B4. United States

Percentage change

                                       2011    2012     2013     2014

GDP                                    1.6      2.3      2.2      2.4
Consumption                            2.3      1.8      2.4      2.5
Investment : housing                   0.5     13.5     11.9      1.6
           : business                  7.7      7.2      3.0      6.3
Government : consumption              -2.7     -0.6     -1.3      0.4
           : investment               -4.5     -4.7     -4.9     -2.5
Stockbuilding (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      3.2
Import volumes                         5.5      2.3      1.1      4.0
Average earnings                       2.0      2.1      1.1      2.1
Private consumption deflator           2.5      1.8      1.2      1.3
RPDI                                   2.7      3.2     -0.2      2.5
Unemployment, %                        8.9      8.1      7.4      6.2
General Govt, balance as % of GDP    -10.7     -9.0     -5.7     -5.0
General Govt, debt as % of GDP (b)   105.9    109.3    107.2    107.2
Current account as % of GDP           -3.0     -2.9     -2.4     -2.4

                                                       Average
                                      2015     2016    2017-21

GDP                                    2.8      2.9        2.9
Consumption                            3.1      2.7        2.6
Investment : housing                   6.1      7.9        6.2
           : business                  6.3      7.2        4.7
Government : consumption               0.6      0.7        1.5
           : investment                0.7      1.2        2.0
Stockbuilding (a)                      0.0      0.1        0.0
Total domestic demand                  3.2      3.2        2.9
Export volumes                        -0.1      5.4        4.6
Import volumes                         2.6      6.7        4.3
Average earnings                       1.6      2.1        3.4
Private consumption deflator          -0.3      1.9        2.3
RPDI                                   3.9      2.1        2.3
Unemployment, %                        5.5      5.4        5.6
General Govt, balance as % of GDP     -4.3     -3.6       -2.8
General Govt, debt as % of GDP (b)   108.3    106.3       98.9
Current account as % of GDP           -2.5     -2.8       -3.5

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      2.5
Consumption                            2.3      1.9      2.5      2.7
Investment : housing                   1.7      5.7     -0.4      2.8
           : business                 12.4      8.4      2.2      0.2
Government : consumption               0.8      1.2      0.4      0.3
           : investment               -7.1     -4.8     -1.6     -2.3
Stockbuilding (a)                      0.7     -0.2      0.3     -0.3
Total domestic demand                  3.2      2.2      1.9      1.4
Export volumes                         4.6      2.6      2.0      5.4
Import volumes                         5.7      3.7      1.3      1.7
Average earnings                       3.6      2.5      2.6      3.3
Private consumption deflator           2.1      1.3      1.3      1.9
RPDI                                   2.1      2.6      2.3      1.3
Unemployment, %                        7.5      7.4      7.1      6.9
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     91.7
Current account as % of GDP           -2.7     -3.3     -3.0     -2.2

                                                       Average
                                      2015     2016    2017-21

GDP                                    2.0      2.3        2.4
Consumption                            2.2      1.6        1.5
Investment : housing                   3.0      1.9        1.9
           : business                 -1.8      0.5        2.0
Government : consumption               0.8      1.0        1.8
           : investment                1.2      1.6        1.9
Stockbuilding (a)                      0.0      0.0        0.0
Total domestic demand                  1.5      1.4        1.6
Export volumes                         2.3      4.7        4.7
Import volumes                         1.0      1.8        2.4
Average earnings                       0.9      2.1        3.5
Private consumption deflator           1.1      2.0        2.2
RPDI                                   0.7      1.3        1.3
Unemployment, %                        6.8      6.5        6.7
General Govt, balance as % of GDP     -1.6     -1.5       -1.6
General Govt, debt as % of GDP (b)    90.6     87.8       80.7
Current account as % of GDP           -3.4     -1.5        1.4

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     -0.1
Consumption                       0.3      2.3      2.1     -1.2
Investment : housing              5.1      3.2      8.7     -4.9
           : business             4.1      3.6      0.5      3.8
Government : consumption          1.2      1.7      1.9      0.3
           : investment          -7.7      2.0      7.9      3.7
Stockholding (a)                 -0.2      0.2     -0.4      0.1
Total domestic demand             0.5      2.6      1.8      0.0
Export volumes                   -0.4     -0.1      1.4      8.2
Import volumes                    5.9      5.3      3.0      7.2
Average earnings                  0.9     -0.6      0.9      1.2
Private consumption deflator     -0.9     -0.9     -0.2      2.0
RPDI                              0.8      0.7      2.3     -0.4
Unemployment, %                   4.6      4.3      4.0      3.6
Govt, balance as % of GDP        -8.8     -8.7     -9.0     -8.2
Govt, debt as % of GDP (b)      207.8    217.2    222.9    228.1
Current account as % of GDP       2.2      1.0      0.8      0.5

                                                  Average
                                 2015     2016    2017-21

GDP                               1.0      1.2         1.1
Consumption                       1.2      1.9        0.9
Investment : housing             -2.1      7.3        3.8
           : business             0.3      1.8        2.2
Government : consumption          0.4      0.0        0.2
           : investment           1.7     -0.1        0.2
Stockholding (a)                  0.5      0.0        0.0
Total domestic demand             1.4      1.6        1.0
Export volumes                    2.7      2.0        3.7
Import volumes                    4.8      4.3        3.4
Average earnings                  2.5      2.1        1.2
Private consumption deflator      0.5      0.5        1.0
RPDI                              1.9      1.0        0.7
Unemployment, %                   3.4      3.9        4.4
Govt, balance as % of GDP        -6.8     -6.2       -4.9
Govt, debt as % of GDP (b)      228.9    230.7      227.9
Current account as % of GDP       0.3     -0.5        1.3

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     -0.8     -0.4      0.9
Consumption                      0.2     -1.3     -0.6      1.0
Private investment               2.6     -3.4     -2.3      1.6
Government : consumption        -0.2     -0.1      0.2      0.7
 : investment                   -5.0     -4.7     -2.5     -1.2
Stockholding (a)                 0.1     -0.4      0.0     -0.1
Total domestic demand            0.5     -1.9     -0.8      0.9
Export volumes                   6.7      2.6      2.1      3.7
Import volumes                   4.5     -1.0      1.3      3.8
Average earnings                 1.5      1.9      1.7      1.0
Harmonised consumer prices       2.7      2.5      1.3      0.4
RPDI                            -0.2     -1.5     -0.8      1.1
Unemployment, %                 10.2      11.4    12.0     11.6
Govt, balance as % of GDP       -4.1     -3.6     -2.9     -2.3
Govt, debt as % of GDP (b)      85.9     89.1     91.1     94.1
Current account as % of GDP      0.2      1.7      1.9      2.1

                                                 Average
                                2015     2016    2017-21

GDP                              1.5      2.2        1.9
Consumption                      1.8      1.5        1.0
Private investment               2.0      3.0        4.0
Government : consumption         0.5      0.6        1.2
 : investment                    0.5      1.5        1.7
Stockholding (a)                 0.1      0.0        0.0
Total domestic demand            1.6      1.6        1.6
Export volumes                   4.5      6.3        3.4
Import volumes                   4.7      5.3        3.0
Average earnings                 1.0      2.0        3.4
Harmonised consumer prices      -0.2      1.6        2.4
RPDI                             2.1      1.2        1.4
Unemployment, %                 11.0     10.0        9.0
Govt, balance as % of GDP       -2.0     -1.3       -1.2
Govt, debt as % of GDP (b)      93.2     90.3       80.3
Current account as % of GDP      4.0      3.3        4.0

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      1.6
Consumption                      2.3      0.6      0.9      1.2
Investment : housing            10.3      4.3      0.8      4.1
           : business            7.1     -2.1     -1.4      3.8
Government : consumption         0.7      1.2      0.7       1.1
           : investment          3.5      0.9      1.3     -0.6
Stockholding (a)                -0.5     -0.1      0.2     -0.3
Total domestic demand            2.4      0.5      0.9      1.4
Export volumes                   8.2      3.5      1.7      3.8
Import volumes                   7.3      0.4      3.2      3.3
Average earnings                 2.6      3.7      2.7      2.1
Harmonised consumer prices       2.5      2.1      1.6      0.8
RPDI                             1.9      0.5      0.4      1.5
Unemployment, %                  5.8      5.4      5.2      5.0
Govt, balance as % of GDP       -0.8      0.1      0.0      0.5
Govt, debt as % of GDP (b)      77.9     79.3     77.1     74.7
Current account as % of GDP      6.0      7.2      6.8      7.7

                                                 Average
                                2015     2016    2017-21

GDP                              1.9      2.4        1.7
Consumption                      2.3      2.3        0.6
Investment : housing             1.5      1.8        1.2
           : business            2.8      2.4        0.6
Government : consumption         1.1     1.0        0.8
           : investment         -1.6     -0.8        0.7
Stockholding (a)                 0.2      0.0        0.0
Total domestic demand            2.2      1.9        0.7
Export volumes                   5.1      7.9        4.0
Import volumes                   4.8      7.9        2.3
Average earnings                 2.6      2.3        3.2
Harmonised consumer prices       0.1      1.3        2.2
RPDI                             2.5      1.2        1.0
Unemployment, %                  4.7      4.7        4.6
Govt, balance as % of GDP        0.7      1.0        0.3
Govt, debt as % of GDP (b)      71.6     68.3       56.2
Current account as % of GDP      8.7      7.1        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      0.4
Consumption                      0.3     -0.5      0.3      0.6
Investment : housing             1.0     -2.2     -3.1     -5.9
           : business            4.7      1.0     -0.5      0.6
Government : consumption         1.0      1.7      2.0      1.9
           : investment         -4.4      1.6      1.1     -3.3
Stockbuilding (a)                0.9     -0.5     -0.2      0.0
Total domestic demand            1.8     -0.2      0.2      0.4
Export volumes                   7.1      1.2      2.4      2.9
Import volumes                   6.5     -1.2      1.9      3.9
Average earnings                 2.1      2.6      1.6      1.2
Harmonised consumer prices       2.3      2.2      1.0      0.6
RPDI                             0.5      0.5      0.5      1.1
Unemployment, %                  9.1      9.8     10.3     10.3
Govt, balance as % of GDP       -5.1     -4.9     -4.1     -3.9
Govt, debt as % of GDP (b)      85.0     89.3     92.2     96.2
Current account as % of GDP     -1.0     -1.5     -1.4     -1.4

                                                 Average
                                2015     2016    2017-21

GDP                              1.3      1.7        1.7
Consumption                      1.6      1.5        1.4
Investment : housing            -3.6      0.6        9.1
           : business            1.5      4.1        2.6
Government : consumption         1.6      1.1        1.6
           : investment          0.6      1.9        1.9
Stockbuilding (a)                0.0      0.0        0.0
Total domestic demand            1.3      1.7        2.0
Export volumes                   5.0      5.2        3.3
Import volumes                   4.6      4.9        4.0
Average earnings                 1.3      2.4        3.6
Harmonised consumer prices      -0.1      0.9        2.0
RPDI                             1.6      1.3        1.5
Unemployment, %                 10.6     10.2        8.6
Govt, balance as % of GDP       -3.8     -3.2       -2.5
Govt, debt as % of GDP (b)      96.7     97.2       93.2
Current account as % of GDP     -1.0     -0.9       -1.3

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     -2.8     -1.7     -0.4
Consumption                      0.0     -4.0     -2.8      0.3
Investment : housing            -6.5     -7.7     -6.8     -4.1
           : business            1.5    -10.3     -5.2     -3.2
Government : consumption        -1.8     -1.2     -0.3     -0.9
           : investment         -5.6     -8.4     -6.9      2.0
Stockbuilding (a)                0.2     -1.2      0.2     -0.1
Total domestic demand           -0.5     -5.6     -2.6     -0.6
Export volumes                   6.1      2.0      0.7      2.4
Import volumes                   1.2     -8.3     -2.2      1.6
Average earnings                 1.1     -0.2      0.7      0.6
Harmonised consumer prices       2.9      3.3      1.3      0.2
RPDI                            -0.5     -4.4     -1.9      0.6
Unemployment, %                  8.4     10.6     12.1     12.7
Govt, balance as % of GDP       -3.5     -3.0     -2.8     -3.0
Govt, debt as % of GDP (b)     116.4    122.2    127.9    132.7
Current account as % of GDP     -2.9     -0.2      1.0      1.8

                                                 Average
                                2015     2016    2017-21

GDP                              0.6      1.5        2.2
Consumption                      0.6      0.7        1.0
Investment : housing             0.9      1.7        7.8
           : business           -1.1      0.2        6.9
Government : consumption        -0.2     -0.1        0.9
           : investment          1.9      1.8        1.3
Stockbuilding (a)                0.1      0.2        0.0
Total domestic demand            0.5      0.8        2.0
Export volumes                   4.1      4.3        3.4
Import volumes                   3.2      2.1        3.1
Average earnings                 0.5      2.2        2.9
Harmonised consumer prices      -0.2      2.1        2.6
RPDI                             1.4      1.0        1.5
Unemployment, %                 12.0     10.6       10.3
Govt, balance as % of GDP       -2.6     -1.7       -1.4
Govt, debt as % of GDP (b)     132.4    129.4      112.9
Current account as % of GDP      4.0      4.5        6.8

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      2.4
Investment : housing           -12.8     -9.0     -7.6     -1.8
           : business            2.3     -4.8      1.7      8.5
Government : consumption        -0.3     -3.7     -2.9      0.1
           : 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      4.2
Import volumes                  -0.8     -6.3     -0.5      7.6
Average earnings                -0.4      0.3      1.4     -0.4
Harmonised consumer prices       3.1      2.4      1.5     -0.2
RPDI                            -2.5     -5.1     -1.3      1.6
Unemployment, %                 21.4     24.8     26.1     24.5
Govt, balance as % of GDP       -8.5     -6.8     -6.6     -5.6
Govt, debt as % of GDP (b)      69.2     84.4     92.1     97.7
Current account as % of GDP     -3.6     -1.2      0.8      0.2

                                                 Average
                                2015     2016    2017-21

GDP                              2.5      3.1        2.2
Consumption                      3.0      2.0        1.5
Investment : housing             2.5      3.3        7.1
           : business            7.1      5.7        6.4
Government : consumption        -1.3      0.0        1.8
           : investment          1.9      3.0        2.4
Stockbuilding (a)               -0.1      0.0        0.0
Total domestic demand            2.4      2.2        2.7
Export volumes                   5.4      6.0        1.4
Import volumes                   5.5      3.3        2.8
Average earnings                -0.4      1.0        4.0
Harmonised consumer prices      -0.7      2.3        2.5
RPDI                             3.0      2.8        1.5
Unemployment, %                 22.1     17.8       16.1
Govt, balance as % of GDP       -4.2     -2.7       -1.8
Govt, debt as % of GDP (b)      99.7     95.1       83.3
Current account as % of GDP      1.6      2.5        2.5

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

REFERENCE

Abe, N., Enda, T., Inakura, N. and Tonogi, A. (2015), 'Effects of new goods and product turnover on price indexes', RCESR Discussion Paper Series, No. DP 15-2.

Holland, D. and Kirby, S. (2011), 'Is there a resolution to the Euro Area debt crisis?', National Institute Economic Review, 218, pp. F45-53.

Holland, D., Kirby, S. and Orazgani, A. (2011), 'Modelling the sovereign debt crisis in Europe', National Institute Economic Review, 217, pp. F37-45.

NOTE

(1) Also since late January, official benchmark interest rates have been lowered further, outside the Euro Area, in Denmark (by 25 basis points to -0.75 per cent), Hungary (by 15 basis points to 1.8 per cent), Poland (by 50 basis points to 1.5 per cent), and Sweden (by 25 basis points to -0.25 per cent), and outside Europe, in Australia (by 25 basis points to 2.25 per cent), Israel (by 10 basis points to 0.25 per cent) and Korea (by 25 basis points to 1.75 per cent).

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

* All questions and comments related to the forecast and its underlying assumptions should be addressed to Simon Kirby ([email protected]). We would like to thank Kanya Paramaguru for compiling the database underlying the forecast and Jonathan Portes for helpful comments and discussion. The forecast was completed on 28 April, 2015. Exchange rate, interest rates and equity price assumptions are based on information available to 15 April 2015. Unless otherwise specified, the source of all data reported in tables and figures is the NiGEM database and NIESR forecast baseline.

Table 1. Forecast summary

Percentage change

                                Real GDPW

          World    OECD     China     EU-27     Euro     USA    Japan
                                                Area

2011       4.2      1.9      9.5       1.8      1.7      1.6     -0.4
2012       3.4      1.3      7.7      -0.4      -0.8     2.3     1.7
2013       3.4      1.4      7.7       0.1      -0.4     2.2     1.6
2014       3.4      1.8      7.4       1.3      0.9      2.4     -0.1
2015       3.2      2.2      6.8       1.8      1.5      2.8     1.0
2016       3.8      2.6      6.7       2.4      2.2      2.9     1.2
2005-10    4.1      1.4     11.1       1.1      1.0      1.2     0.5
2017-21    4.0      2.6      6.1       2.1      1.9      2.9     1.1

                     Real GDPW

                                                              World
          Germany     France    Italy     UK      Canada    trade (b)

2011        3.7        2.1       0.7      1.6      3.0         6.3
2012        0.6        0.4       -2.8     0.7      1.9         2.7
2013        0.2        0.4       -1.7     1.7      2.0         2.9
2014        1.6        0.4       -0.4     2.8      2.5         3.1
2015        1.9        1.3       0.6      2.5      2.0         4.1
2016        2.4        1.7       1.5      2.4      2.3         6.2
2005-10     1.2        0.9       -0.1     0.9      1.6         4.9
2017-21     1.7        1.7       2.2      2.6      2.4         4.8

          Private consumption deflator

          OECD     Euro     USA     Japan    Germany     France
                   Area

2011       2.3     2.3      2.5      -0.9      1.9        1.8
2012       1.9     1.9      1.8      -0.9      1.5        1.4
2013       1.4     1.1      1.2      -0.2      1.3        0.6
2014       1.5     0.5      1.3      2.0       0.9        0.5
2015       0.4     -0.2     -0.3     0.5       0.0        0.0
2016       2.0     1.6      1.9      0.5       1.3        0.9
2005-10    2.0     1.7      2.1      -0.9      1.3        1.4
2017-21    2.5     2.4      2.3      1.0       2.2        2.0

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

2011       2.9      3.4      2.1      0.3     0.1      1.2     108.5
2012       2.7      2.1      1.3      0.3     0.1      0.9     110.4
2013       1.1      1.9      1.3      0.3     0.1      0.6     107.1
2014       0.2      1.6      1.9      0.3     0.1      0.2      97.8
2015       -0.3    -0.2      1.1      0.4     0.1      0.1      60.2
2016       2.1      1.1      2.0      1.6     0.1      0.1      79.8
2005-10    1.9      3.0      1.3      2.6     0.2      2.5      70.4
2017-21    2.6      2.0      2.2      3.4     0.4      1.1      84.5

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.

* AII 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 28
April, 2015. Exchange rate, interest rates and equity price
assumptions are based on information available to 15 April 2015.
Unless otherwise specified, the source of all data reported in tables
and figures is the NiGEM database and NIESR forecast baseline.