1. Global forecasting service
Economic forecast summary - May 2012
Master Template 1
www.gfs.eiu.com

2. We have raised our forecast for real GDP
growth in 2012 to 2.2% from 1.9%. US
economic figures this year have been
reasonably strong, especially on the
consumer spending front.
Serious headwinds remain, and our
outlook is still cautious. Job creation
slowed in March, and income growth of
late has been negative in real terms.
Housing market data has improved
recently but a large overhang of unsold
houses remains a drag on the property
market.
A drastic tightening of fiscal policy is in
prospect in 2013 for the incoming
administration.

3. The euro zone debt crisis has returned
as the effects of the ECB’s recent
liquidity injections fade. Spain’s fiscal
misjudgements sent bond yields
soaring in late March and April. Yields
also rose in Italy, but at a slower pace.
As in 2011, the authorities will struggle
to keep sovereign funding costs at
sustainable levels We expect the euro
zone to survive, but anticipate much
turmoil in 2012. The EU’s bail-out
funds, at present, are not large enough
to accommodate Spain.
We expect euro zone GDP to contract
by 0.7% in 2012. Germany will fare
best; Greece, Portugal and Spain worst.

4. The economy contracted by 0.7% in
2011, undermined by the negative impact
of the March earthquake and tsunami as
well as a strong yen that constrained
export potential.
A recovery in Japan's automotive sector
—after the disruption caused by the
natural disasters and flooding later in the
year in Thailand—will support both
industrial output and exports.
The economy is expected to grow by
1.5% in 2012, supported by a stronger
export performance and reconstruction
activity. From 2013 we expect the
economy to grow at a rate of between
1-1.5%, a downgrade from prior
forecasts.

5. Growth in 2012 will be constrained by
sluggish OECD demand. EMs will still
comfortably outperform their peers in
the developed world in 2012-16.
EM currencies will be sensitive to the
“risk-on”, “risk-off” trade, rallying when
investors are more tolerant of risk and
falling back when investors flock to the
US dollar.
We have raised our China 2012 GDP
forecast to 8.3% from 8.2%, higher
than the government’s new medium-
term target of 7.5%. Rebalancing the
economy away from investment
towards private spending will make for
less commodity-intensive growth.

6. Oil consumption growth will be
constrained in 2012 by the weak
OECD economic outlook. It will
average nearly 2% year on year in
2013-16, led by rising demand in the
developing world.
Geopolitical risks are weighing on the
supply picture particularly the
tensions between the West and Iran.
Our forecast assumes a military
outcome is avoided.
Prices will average around US$115/b
in 2012 as supply concerns offset the
negative impact of weaker demand.

7. Consumption growth is expected to
slow in 2012, constrained by weak EU
and growth and somewhat slower
growth in the developing world.
However, rising emerging market
incomes and urbanisation will underpin
medium-term demand growth.
Years of underinvestment, particularly
in agriculture, will support prices.
Nominal prices will remain historically
high in 2012-16, but prices will ease
back in real terms.

8. Sluggish demand will be deflationary
but high oil prices will push up
headline inflation in coming months.
The Fed has said it will keep interest
rates very low until late 2014. A
further round of quantitative easing
appears unlikely if the US economy
grows at a reasonable pace.
The ECB cut its policy rate twice in
2011 as the regional economic crisis
worsened. We expect the ECB to
hold its policy rate steady at 1% in
2012.
Most emerging market central banks
will keep interest rates broadly stable
in 2012.

9. The return of Europe’s debt crisis will
keep the euro under pressure. We
expect an average 2012 rate of
US$1.31:€1 vs US$1.39:€1 in 2011.
The yen has weakened since the start
of the year as risk appetite has
recovered somewhat and the Bank of
Japan has become more aggressive in
easing monetary policy.
EM currencies will be supported over
the medium term by positive growth and
interest rate differentials with OECD
economies.
China’s decision to allow the renminbi
to move in a wider trading ban will
increase volatility.

10. + Unprecedented policy response after Greek exit prevents contagion 16
- An attack on Iran results in an oil price shock 15
- The global economy falls into recession
15
- The euro zone breaks up
15
+ Stronger than anticipated US growth boosts the global economy 12

11. - Tensions over currency manipulation lead to protectionism 12
- The Chinese economy crashes 10
- US dollar crashes
10
- Economic upheaval leads to widespread social and political unrest
9
- Resumption of monetary stimulus leads to new asset bubbles 8

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