© The Economist Intelligence Unit Limited 2010 gfs.eiu.com Global Forecasting Service August 2010

Global Forecasting Service

Global outlook summary(Forecast closing date: July 9th 2010)

World eeconomyThe world economy has shaken off recession, but growth will soften in the next

six months as the effects of the stimulus measures introduced in many large

economies fade. Leading indicators for the developed world already suggest a

mild slowdown is on the way, and the Economist Intelligence Unit’s latest glob-

al forecast reflects this. We think world GDP (at purchasing power parity) will

grow by 4.2% this year, but by just 3.6% in 2011. However, although economic

conditions will be tougher next year, we do not expect any large developed

countries to slip back into full-blown recession.

Recent data offer a mixed picture. On the positive side, private demand has

improved. More businesses are restocking. Many companies are in far more

robust financial health, having shed jobs and cut salaries during the worst of the

crisis. Consumers have also become more confident and are spending again.

More negatively, recent US jobs figures have been weak, while a massive stabil-

isation package has failed thus far to restore confidence in euro zone debt mar-

kets. There are also signs of slowing growth in China.

The biggest concern is how strongly the global economy can keep growing once

temporary factors such as inventory adjustments and fiscal stimulus, which

kick-started the initial recovery, wear off. It is just possible that the private sec-

tor now has enough momentum of its own, but the odds are against it. Balance

sheets have improved, but many households are still overstretched and will

have little spare cash in the next few years. This would be less of a problem if

the public sector were in better shape, but as the sovereign-debt crisis in the euro

zone has illustrated, the finances of many governments in the developed world

are extremely weak. Austerity programmes threaten to crimp economic growth.

Even governments with healthier fiscal positions will soon have to withdraw

stimulus—if they are not already doing so.

Hopes that emerging markets will be the saviours of the world economy also

look misplaced. Many developing countries (with the exception of much of cen-

tral and eastern Europe) have indeed recovered exceptionally well. But this

growth has depended on a combination of easy monetary and fiscal policy and

exports to the rich world. Most emerging countries will not be able to grow so

quickly without policy support, especially as an increasing number of such

countries are also having to think about raising interest rates to ward off infla-

tion. Nor are exports likely to remain as buoyant if growth weakens in key mar-

kets like the US. In short the idea that emerging markets have “decoupled” from

demand in the developed world, or that they can drive global economic growth

in the absence of such demand, doesn’t really wash.

The global economy will struggle togrow at the same pace once policystimulus is withdrawn

2010: AT A GLANCE

World GDP growth, at PPP 4.2%World inflation (av) 2.9%Oil/barrel (av, Brent) US$80US$:€ (av) 1.26

2 Global outlook summary

Global Forecasting Service August 2010 gfs.eiu.com © The Economist Intelligence Unit Limited 2010

Developed wworldThe US economy epitomises many of these issues. Growth is being driven by fis-

cal and monetary stimulus and by changes in the inventories held by manufactur-

ers and other companies. But these effects will weaken in the second half of 2010.

We think the government may pass small additional stimulus measures, but there

is no political appetite for stronger action. This will leave the economy to grow

largely on its own. Recent data do not inspire confidence. The economy would

typically be creating 300,000 jobs a month at this stage in the cycle, but instead

some 125,000 were lost in June. New single-family home sales plummeted in May,

highlighting the fact that the weak property market continues to weigh on the

economy. Our forecast for the US is much more pessimistic than the consensus;

we expect GDP growth of 3.3% in 2010 and 2% in 2011.

Elsewhere, the supposedly moribund Japanese economy is doing remarkably

well. Real GDP grew at a blistering annualised rate of 5% in the first quarter of

2010, largely on the back of strong exports. Japan is benefiting from its proxim-

ity to the booming Chinese market. But it is still struggling to revive domestic

demand. Deflation is entrenched, and policy options are limited. Although we

have raised our GDP forecast for 2010 to 3%, we expect growth to slow to just

1.3% next year once the export bounce ends. The strong yen remains a serious

concern for exporters, despite the current boom.

In the euro zone, concerns over government solvency continue to overshadow

all else. However, we still think the economy will continue its weak recovery,

with GDP growth of 0.7% in 2010 and 0.8% in 2011. Exports are buoyant thanks

to the weak euro and the global recovery. This is benefiting countries such as the

Netherlands and Germany (some German exporters are even struggling to keep

up with demand). But some of the weaker euro economies, such as Greece and

Portugal, lack the export bases to really exploit the upturn in external trade.

Meanwhile the debt crisis continues to raise questions about the viability of the

euro area. A joint EU/IMF programme to restore market confidence has had only

a marginal impact, and several euro area countries may now be beyond rescue

even if they try to cut budgets aggressively. We think Greece, for example, will

eventually default, probably in 2012.

We expect Greece to default on itsdebt, probably in 2012

The US economy should be creatingmore jobs at this stage in therecovery

OECD leading indicators(% change, month on month)

Source: OECD.

-3.0-2.5-2.0-1.5-1.0-0.50.00.51.01.52.02.5

ChinaGermanyJapanUS

100908070605040302012000

Global outlook summary 3

© The Economist Intelligence Unit Limited 2010 gfs.eiu.com Global Forecasting Service August 2010

Emerging mmarketsMany developing countries have come through the crisis relatively unscathed,

and are now growing robustly. Asia has led the way, owing to a combination of

heavyweight fiscal packages and a recovery in global trade. China’s economy

grew rapidly in 2009 thanks to the government’s huge stimulus programme and

its cajoling of banks to increase lending. Chinese growth will accelerate to 9.9%

this year but will slow to 8.3% next year in response to policy tightening.

Elsewhere, central and eastern Europe has put the worst of the crisis behind it.

But the regional economy will grow by only about 3% to 3.5% a year in 2010-11,

because of high unemployment, governments’ weak finances and sluggish

growth in the euro zone—the region’s dominant trading partner. Foreign banks

and investors will also remain wary of committing funds to the region again.

Latin America is recovering well, but the going will be tougher next year. Chinese

stimulus spending initially boosted the region’s commodity exports, and in the

past six months the pick-up in the US economy has also benefited countries, such

as Mexico, that are more dependent on the US market. However, both China and

the US are set to slow in 2011. Latin American growth will therefore moderate too.

In the Middle East and Africa, higher oil prices, the pick-up in global growth and

Chinese demand for raw materials are driving the region’s economies. Weakness

in the euro area remains a problem for parts of North Africa, because of the

impact on exports and worker remittances. In the Middle East and Africa as a

whole, we expect real GDP growth of about 4.5% a year in 2010-11, helped vari-

ously by loose domestic policy, rising commodity prices and higher oil output.

Exchange rratesThe main story in the first half of 2010 has been the euro, which has come under

intense pressure as the European debt crisis has escalated. The US dollar, Japanese

yen and Swiss franc have appreciated against the euro as investors have sought

safe haven in these currencies. The euro has rallied a bit since hitting a low of

US$1.19:€1 in June, but this largely reflects the unwinding of record short positions

that traders had built up against the European single currency. Once these techni-

Latin American growth will softenonce the Chinese and USeconomies slow

Euro wobbles(daily US$:€ exchange rate)

Sources: Federal Reserve Bank of New York; Haver Analytics.

1.0

1.1

1.2

1.3

1.4

1.5

1.6

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4 Global outlook summary

Global Forecasting Service August 2010 gfs.eiu.com © The Economist Intelligence Unit Limited 2010

cal dynamics have played out, we think the euro will soften again. Concerns

about debt sustainability could also hurt confidence in the dollar and yen, but on

balance we think there will be stronger downward pressure on the euro in 2010-

11. Interest rates will also increasingly favour the dollar in the next two years.

In emerging markets, the main news has been China’s loosening of its currency

peg to the US dollar, a move aimed at deflecting criticism (particularly in the US)

of Beijing’s weak-renminbi policy. But the change will not have a big effect on

currency movements, and we expect the ever-cautious Chinese authorities to let

the renminbi appreciate only very gradually.

CommoditiesCommodity prices slumped in the second quarter of 2010 on concerns about

the euro and signs of monetary tightening in China. However, this hasn’t mate-

rially changed our commodity-price forecasts, as prices had run well ahead of

fundamentals earlier in the year. China will continue to buy large quantities of

raw materials, but official efforts to cool the economy will begin to dampen its

demand for commodities in the second half of 2010.

Oil prices have been volatile. We think the price of a barrel of oil will average

US$80 in 2010. Market fundamentals suggest there is little scope for prices to

rally strongly, as global oil stocks are high and OPEC member states still have

ample spare capacity. The price of oil will fall slightly, to US$78.5 a barrel, in 2011

as the effects of economic stimulus fade.

World economy: Forecast summary2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Real GDP growth (%)World (PPP* exchange rates) 4.4 5.0 5.1 2.8 -0.7 4.2 3.6 4.0 4.1 4.2

World (market exchange rates) 3.6 4.0 3.9 1.7 -2.2 3.2 2.6 2.9 3.0 3.1

US 3.1 2.7 2.1 0.4 -2.4 3.3 2.0 2.1 2.3 2.4

Japan 1.9 2.0 2.3 -1.2 -5.3 3.0 1.3 1.3 1.1 1.1

Euro area 3.7 3.0 2.6 0.8 -4.0 0.7 0.8 1.4 1.7 1.8

China 10.4 11.7 13.0 9.6 9.1 9.9 8.3 8.4 8.2 8.0

Central and eastern Europe 5.6 7.3 7.3 4.6 -5.6 3.1 3.6 4.2 4.2 4.3

Asia & Australasia (excl Japan) 7.3 7.9 8.9 5.6 4.6 7.4 6.5 6.7 6.6 6.6

Latin America 4.9 5.6 5.6 4.0 -2.1 4.1 3.4 4.2 4.1 4.2

Middle East & North Africa 6.1 5.9 5.6 6.1 1.4 4.5 4.4 4.6 4.6 4.8

Sub-Saharan Africa 6.8 6.7 7.0 4.8 0.5 4.4 4.5 5.5 5.0 5.0

World inflation (%; av) 3.0 3.3 3.4 4.9 1.6 2.9 2.7 3.0 3.2 3.3

World trade growth (%v) 7.5 9.1 7.6 3.7 -11.2 6.8 5.3 6.3 6.4 6.3

CommoditiesOil (US$/barrel; Brent) 54.4 65.4 72.7 97.7 61.9 80.0 78.5 82.3 78.3 75.5

Industrial raw materials (US$; % change) 10.2 49.6 11.2 -5.1 -25.6 33.7 5.1 2.5 0.2 0.0

Exchange rates (av)¥:US$ 110 116 118 103 94 93 93 93 92 92

US$:€ 1.25 1.26 1.37 1.47 1.39 1.26 1.19 1.18 1.18 1.21* PPP = Purchasing power parity.

Source: Economist Intelligence Unit.

China’s new exchange-rate policywill not lead to rapid renminbiappreciation