Global scenario service - Kauppakamari · In this scenario, Chinese GDP would fall around 3.5-4%...

Global scenario service June 2012

Contents

Executive Summary.................................. ................................................ 1

1 Overview ........................................... ............................................... 7

2 Baseline scenario.................................. .......................................... 8

3 Multiple Eurozone exits............................ ..................................... 13

4 Greek exit ......................................... .............................................. 19

5 China hard landing ................................. ....................................... 25

6 US fiscal cliff.................................... .............................................. 30

7 Corporate reawakening.............................. ................................... 35

8 Conclusion......................................... ............................................ 40


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Executive Summary

Financial tensions in the Eurozone have flared up again having subsided somewhat during 2012Q1. Most attention has been focused on instability in Greece and Spain. In Greece, a pro-austerity coalition has been formed, but severe doubts remain about its ability or willingness to stick to the terms of Greece’s agreement with international lenders. In Spain, Eurozone governments have pledged a loan of up to €100bn to banks but this has done little to reduce the government’s cost of borrowing. Our baseline forecast assumes that Greece and all other current members stay in the Eurozone and that measures are taken to restore stability in the region. In that case, we expect Eurozone GDP to fall by 0.6% this year, followed by growth of just 0.4% in 2013.

Eurozone woes have contributed to a loss of momentum in other parts of the world economy. In the US, consumer spending has slowed again and labour market developments have been disappointing in recent months. We forecast 2012 GDP growth of 2.2%, picking up slightly to 2.6% in 2013. These growth rates are not sufficient to enable the US to act as a ‘locomotive’ of world growth.

The capacity for emerging markets to support world growth has also fallen due to slower export growth and reduced capital inflows. We have cut our 2012 Chinese growth forecast to 7.5% from 8.4% three months ago. For emerging markets as a whole, 2012 growth is now expected to be 4.6% this year and 5.5% in 2013. Both of these forecasts are 0.3-0.4 percentage point lower than three months ago.

Total, world growth is forecast to slow from 3.8% in 2011 to 3.2% this year, on a PPP basis, the slowest pace of growth since 2008. In 2013 growth should pick up somewhat to 3.7%.

Uncertainty remains very high. We currently assign a 45% probability to our baseline forecast, with risks significantly skewed to the downside. Downside risks come from three separate sources: the possibility of countries exiting the Eurozone, with the financial and economic turmoil that this would trigger; a sharper correction in the Chinese property and construction sectors than we currently envisage; and uncertainty over the fiscal stance in the US next year with the possibility that fiscal policy is tightened substantially more than assumed in our baseline forecast. There are also some upside risks, related to cash piles accumulated by businesses in a number of countries, which, given the right economic and policy environment could be spent faster than we currently envisage.

Multiple Eurozone exits

By far the most serious threat to the global economy at the moment stems from the Eurozone and the potential for much more adverse developments than foreseen in our baseline forecast. The new Greek government only enjoys a slim majority and could fall should the burden of austerity demanded by the bailout package prove unacceptable. This would trigger a Greek exit which would be


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very difficult to contain. Financial contagion would spread instantaneously throughout the Eurozone. Multiple exits, involving Portugal, Ireland, Spain, Italy and Cyprus would likely ensue. Exiting countries would suffer GDP losses of around 15% compared to our baseline within a couple of years. A sharp rise in inflation would cut households’ real incomes, and unprecedented uncertainty would all but halt investment and recruitment.

The remaining Eurozone countries would also suffer very large declines in GDP. The exiting countries represent large export markets in which demand would collapse. A large number of businesses would also face losses on their assets in the exiting countries as defaults multiply. In addition, a sharp currency depreciation would reduce the value of their remaining assets further. The GDP of the remaining Eurozone countries would fall 9% below our baseline forecast.

World GDP growth, on a PPP basis, would fall to 2% in both 2013 and 2014. We assign a 15-20% probability to this scenario. Making multiple Eurozone exits our second most likely scenario. The probability assigned to this scenario has risen significantly over the last three months due to heightened tensions and ongoing policy procrastination.

Greece alone exits the Eurozone

There is a possibility that a Greek exit is contained and multiple exits avoided, a scenario to which we assign a 10-15% probability. To prevent a domino effect of further countries exiting the Eurozone following a Greek exit would require very significant and swift action by Eurozone policymakers, something that has been crucially lacking so far in this crisis. But a Greek exit, especially if it is foreseen, could spur policymakers into action. The ECB would need to intervene immediately with very large bond purchases and liquidity provision. Governments would need to agree on bailouts for the peripheral countries and accelerate plans towards a banking and fiscal union. If these steps were quickly taken, the damage to the Eurozone and world economy would be much less than in the multiple exit scenario.

The level of GDP in the remaining Eurozone countries would fall 3.5% below our baseline forecast. World GDP growth, on a PPP basis, would slow to 3.0% in 2013 and 3.7% in 2014 compared to 3.7% and 4.5% under our baseline scenario.

China hard landing

We think that the risk of a hard landing in China has diminished somewhat in recent months. Property prices have been falling in a number of cities and investment is slowing down, which, as long as the pace of decline remains contained, will help the economy achieve a soft landing. Less overheated property and construction markets will give the monetary authorities some additional room to loosen policy should the economic environment worsen.


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But there is still a possibility that the adjustment in the property and construction sector is sharper than we currently envisage. We assign a 5-10% probability to this scenario compared with 10% three months ago. This could lead to a sharp increase in non-performing loans (NPLs). In addition, risk premia in China would rise, pushing up the cost of borrowing. As a consequence, investment would fall sharply, hitting GDP growth and leading to lower employment, which would subsequently weigh on consumption. Knock-on effects on business and consumer confidence from a collapse in the property sector would further depress demand, leading to a hard landing of GDP growth.

In this scenario, Chinese GDP would fall around 3.5-4% below its baseline path, with 2013 growth down to 5.3%. Given the size of the Chinese economy, the shock would have global implications. Our simulations show that under this scenario, world GDP growth, on a PPP basis, is down to 2.6% and 3.9% in 2013 and 2014 respectively.

US fiscal cliff

In the US, a large number of fiscal stimulus measures are due to expire at the end of the year. Congress may fail to act before automatic tax increases and expenditure cuts come into force on 1 January 2013. According to the Congressional Budget Office, the measures are estimated to amount to about 3.5% of GDP for the fiscal year 2013 (5% of GDP for 2013 calendar year). Our baseline forecast assumes that the payroll tax holiday is not extended. This represents a tightening of the fiscal stance of 0.8% of GDP. However, political gridlock could lead to more tightening.

Our US fiscal cliff scenario describes the potential effects of significantly tighter fiscal policy than assumed in our baseline forecast. We assign a probability of 10% to this scenario.

US growth would fall to 0.6% in 2013 and 2.3% in 2014 compared with 2.6% and 3.2% under the baseline. While the Eurozone would see its recovery delayed by one year, with GDP falling by 0.8% in 2013, growth would also slow significantly in other advanced and emerging economies. As a result, world GDP would increase by only 2.5% and 4.0% in 2013 and 2014.

Corporate reawakening

On the upside, we continue to see a possibility that cash hoarded on corporate balance sheets in a number of countries gets spent on investment, procurement and staff increases more quickly than implied by our baseline forecast. The probability of this scenario is low, at around 5%. It requires decisive action from Eurozone policymakers to deal with current tensions and uncertainties. In Europe this would involve swift and credible agreement on a closer banking, fiscal and political union. In the US, clarity over the fiscal stance would be beneficial.


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Under this scenario, US GDP would accelerate to 4.0-4.5% in 2013 and 2014. The Eurozone would still experience a shallow recession this year, but GDP growth would rise to 1.4% in 2013. After 3.4% in 2012, world GDP growth, on a PPP basis, would rise to 4.8% in 2013 and then to 5.4% in 2014.


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Figure 1: map of downside risks (excludes corporate awakening)

Pol

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l str

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�Multiple Eurozone exits (30%)■ Fiscal austerity in Greece becomes

unbearable; government falls, defaulting on all external debt

■ Financial contagion spreads■ Run on banks in peripherals leading to

credit crunch■ Cyprus, Portugal, Spain, Italy and

Ireland also forced out of the Eurozone

Corporate stress

�China hard landing (5-10%)■ Commercial property crash & external

weakness leads to banking sector stress

■ Flight from risk leads to falling share & property prices

■ Investment slumps in China as government recapitalises banks

■ Asian supply chain affected as domestic engine of growth stalls

�Oxford forecast (45%)■ Eurozone avoids breakup. ECB and

governments take significant steps taken to ensure Eurozone survival

■ Risk premia fall, and consumer and business confidence gradually recover

■ Recovery limited by high debt, weak job growth and fiscal retrenchment

■ EMs robust as policy eases and growing middle class support consumer spending and trade

�US fiscal cliff (10%)■ Stalemate in the House would imply

much larger fiscal tightening than in baseline (up to 3.5% of GDP in fiscal year 2013)

■ Business and consumer confidence negatively affected

■ Additional QE and weaker US$ to provide only partial offsets

■ Trade and financial linkages lead to global slowdown

Pol

itica

l str

ess

�Multiple Eurozone exits (30%)■ Fiscal austerity in Greece becomes

unbearable; government falls, defaulting on all external debt

■ Financial contagion spreads■ Run on banks in peripherals leading to

credit crunch■ Cyprus, Portugal, Spain, Italy and

Ireland also forced out of the Eurozone

Corporate stress

�China hard landing (5-10%)■ Commercial property crash & external

weakness leads to banking sector stress

■ Flight from risk leads to falling share & property prices

■ Investment slumps in China as government recapitalises banks

■ Asian supply chain affected as domestic engine of growth stalls

�Oxford forecast (45%)■ Eurozone avoids breakup. ECB and

governments take significant steps taken to ensure Eurozone survival

■ Risk premia fall, and consumer and business confidence gradually recover

■ Recovery limited by high debt, weak job growth and fiscal retrenchment

■ EMs robust as policy eases and growing middle class support consumer spending and trade

�US fiscal cliff (10%)■ Stalemate in the House would imply

much larger fiscal tightening than in baseline (up to 3.5% of GDP in fiscal year 2013)

■ Business and consumer confidence negatively affected

■ Additional QE and weaker US$ to provide only partial offsets

■ Trade and financial linkages lead to global slowdown


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Figure 2: Summary scenario results

2010 2011 2012 2013 2014

Oxford Forecast (45%)US 3.0 1.7 2.2 2.6 3.2Eurozone 1.9 1.5 -0.6 0.4 1.7China 10.4 9.2 7.5 8.4 8.8World 2005 PPP 4.0 3.8 3.2 3.7 4.5

Multiple Eurozone exits (15%-20%)US 3.0 1.7 2.2 1.0 0.5Eurozone 1.9 1.5 -0.6 -3.0 -3.5China 10.4 9.2 7.5 6.5 8.2World 2005 PPP 4.0 3.8 3.1 2.0 2.0

Greece alone exits the Eurozone (10%-15%)US 3.0 1.7 2.2 2.1 2.4Eurozone 1.9 1.5 -0.6 -1.8 0.5China 10.4 9.2 7.5 7.7 8.0World 2005 PPP 4.0 3.8 3.1 3.0 3.7

China hard landing (5%-10%)US 3.0 1.7 2.1 2.0 2.6Eurozone 1.9 1.5 -0.7 -0.4 1.0China 10.4 9.2 6.6 5.3 8.3World 2005 PPP 4.0 3.8 2.9 2.6 3.9

US fiscal cliff (10%)US 3.0 1.7 2.2 0.6 2.3Eurozone 1.9 1.5 -0.6 -0.8 1.5China 10.4 9.2 7.5 6.7 8.5World 2005 PPP 4.0 3.8 3.2 2.5 4.0

Corporate awakening (5%)US 3.0 1.7 2.4 3.9 4.4Eurozone 1.9 1.5 -0.4 1.4 2.3China 10.4 9.2 8.0 9.8 9.4World 2005 PPP 4.0 3.8 3.4 4.8 5.4

Alternative GDP growth forecasts


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1 Overview

This paper sets out the assumptions behind Oxford Economics’ central forecast for the global economy and outlines the key risks around that projection. Financial tensions in the Eurozone have flared up again having subsided somewhat during 2012Q1. In addition, growth in emerging markets has slowed more significantly than we expected. Combined with mixed developments in the US, this has led us to revise our global growth forecast down. Moreover, uncertainty remains high and we only assign a 45% probability to our baseline forecast. This is particularly low, certainly much lower than typical before the global crisis when the probability of the baseline was at least 55%.

In this analysis, we have considered five alternative scenarios based on modelling work using our Global Economic Model, four downside scenarios and one upside. The scenarios considered are multiple exits from the Eurozone, an exit by Greece alone, a hard landing of the Chinese economy, significant tightening of US fiscal policy and a revival of corporate investment.

The Oxford Global Economic Model is a fully integrated Global Economic Model used for forecasting and for performing ‘what if’ analysis. The Model covers 46 economies in detail including the US, Japan, most EU economies, China, India and other leading emerging markets, as well as providing headline indicators for another 30 economies. The Model provides a rigorous and consistent structure for analysis and forecasting, and allows the implications of alternative global scenarios and policy developments to be readily analysed and quantified, taking into account all of the linkages between economies – e.g. through trade volumes and prices, financial markets and capital flows, oil and commodity prices, exchange rates etc.

The document is organised as follows:

� Section 2 describes our central forecast for the global economy.

� Sections 3-7 outline the four alternative scenarios and summarise the results from modelling these using the Global Economic Model.

� Section 8 concludes.


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2 Baseline scenario

� Financial tensions in the Eurozone have flared up a gain and are posing a serious threat to the cohesion of the mone tary union. Recent survey evidence suggests that GDP is contrac ting, with even key German indicators weakening. We now expect Euro zone GDP to fall 0.6% this year and to grow by just 0.4% in 201 3.

� Eurozone woes have contributed to a loss of momentu m in other parts of the world economy . In the US, this combines with ongoing weakness in parts of the domestic economy. We forec ast 2.2% growth in the US this year, picking up slightly to 2.6% in 2013. These growth rates are not sufficient to enable the US to act as a ‘locomotive’ of world growth.

� The capacity for emerging markets to support world growth has also fallen due to slower export growth and reduced capi tal inflows . Although emerging markets will still see respectabl e growth this will not be enough to prevent world growth falling to 3. 2% this year, the slowest rate since 2008.

� We currently place a 45% probability on this baseli ne scenario.

Eurozone crisis flares up again…

Financial tensions in the Eurozone have flared up again having subsided somewhat during 2012Q1. Most attention has been focused on instability in Greece and Spain. A stream of weak data releases together with inconclusive election results in May raised concerns that Greece would leave the euro, and the results of the election re-run in June have done little to dampen market fears. A pro-austerity coalition has been formed, but severe doubts remain about its ability or willingness to stick to the terms of Greece’s agreement international lenders. Meanwhile, rising borrowing costs forced Spain to seek external help to support its troubled banking sector in June. The Eurozone authorities agreed to provide up to €100 billion in loans to recapitalise Spain’s banks. This has not been enough to stabilise markets, though, with Spanish bond yields still at unsustainably high levels amid worries that Spain may need more help still. Much depends on whether the new loans will rank ahead of existing bonds in the event of a Spanish default. If they do, it would significantly raise the potential risk to bondholders in the case of a sovereign default. In turn, this would likely push bond yields yet higher. Financial tensions in the Eurozone are now posing a serious threat to the cohesion of the monetary union. Recent survey evidence suggests that GDP is contracting, with even key German indicators weakening. We now expect Eurozone GDP to fall 0.6% this year and to grow just 0.4% in 2013. Widespread forecast downgrades…


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Eurozone woes have contributed to a loss of momentum in other parts of the world economy. In the US, consumer spending has slowed again and labour market developments have been disappointing in recent months. Sluggish payroll growth will constrain personal income and consumer spending. But there are enough positive indicators to suggest that the economy will continue to expand – albeit at a very moderate pace. Though still low by historical standards, consumer confidence has been holding steady. Falling gasoline prices will boost discretionary income, and there is probably some pent up demand. The ISM indices remain at levels consistent with expansion, and the slow productivity growth in recent quarters followed by an outright decline in Q1, suggest that businesses will have to increase employment to increase production. We forecast US GDP growth of 2.2% in 2012, picking up slightly to 2.6% in 2013. These growth rates are not sufficient to enable the US to act as a ‘locomotive’ of world growth. Growth in the UK has also been disappointing. The economy dipped back into technical recession in the first quarter of 2012 and is likely to grow only 0.1% over the year as a whole. By contrast, Japan had a strong first quarter, but this is unlikely to be sustained in the face of weakening external demand and a strong yen. …including for emerging markets

The capacity for emerging markets to support world growth has also fallen due to slower export growth and reduced capital inflows. April’s data indicated that the Chinese economy was clearly going through a “soft patch”, with the weakness most evident in imports (which slumped on an estimated seasonally adjusted basis) and industrial output. And in India, there are ongoing concerns about inflation, which will preclude a significant easing of monetary policy in the near future. The outlook for Brazil is somewhat better. Provided the global background does not shatter, Brazilian growth should start to pick up later this year in response to a much more expansionary policy. We have cut our 2012 Chinese growth forecast to 7.5% from 8.4% three months ago. For emerging markets as a group, 2012 growth is now expected to be 4.6% this year and 5.5% in 2013, both of these forecasts are 0.3-0.4 percentage point lower than three months ago. …pointing to weak global growth

Although emerging markets will still see respectable growth this will not be enough to prevent world growth slowing to 3.2% this year, on a PPP basis, the slowest rate since 2008.


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Chart 2.1: US GDP Chart 2.2: Eurozone GDP

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Chart 2.5: Eurozone CPI Chart 2.6: World C PI

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Chart 2.7: US government bonds Chart 2.8: Eu rozone government bonds

Chart 2.9: US interbank rates C hart 2.10: Eurozone interbank rates

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2011 2012 2013 2014 2015 2016 2017Real GDP

North AmericaUnited States 1.7 2.2 2.6 3.2 3.2 3.1 3.0

Canada 2.4 2.1 2.4 2.6 2.6 2.5 2.5

EuropeEurozone 1.5 -0.6 0.4 1.7 2.0 2.0 2.0

Germany 3.1 0.7 1.4 2.1 2.0 2.0 1.8

France 1.7 0.1 0.9 1.7 1.9 1.8 1.8

Italy 0.5 -2.3 -0.2 1.2 1.6 1.8 1.7

UK 0.7 0.1 1.6 2.7 2.8 2.7 2.6

EU27 1.6 -0.1 1.0 2.1 2.4 2.3 2.2

AsiaJapan -0.7 1.9 2.0 2.0 1.4 1.2 1.0

China 9.2 7.5 8.4 8.8 8.5 8.0 7.7

India 7.5 5.7 7.5 8.7 8.5 7.9 7.5

World 2.8 2.4 3.0 3.7 3.8 3.6 3.5

World 2005 PPPs 3.8 3.2 3.7 4.5 4.6 4.4 4.3

World trade 6.4 2.7 5.9 7.3 7.0 6.6 6.3Inflation (CPI)


Canada 2.9 2.2 2.0 2.0 2.2 2.2 2.1

EuropeEurozone 2.7 2.4 1.9 1.8 1.8 1.9 1.9

Germany 2.3 2.0 1.8 1.9 2.0 2.0 2.0

France 2.1 2.2 2.0 1.9 1.9 1.9 1.9

Italy 2.8 3.1 2.4 2.3 2.0 2.0 2.0

UK 4.5 2.9 1.8 1.8 1.8 1.9 2.0

EU27 3.1 2.5 1.9 1.9 1.9 1.9 1.9

AsiaJapan -0.3 0.4 0.6 0.8 0.9 0.8 0.8

China 5.4 3.1 2.8 2.9 3.0 3.0 3.0

India 8.9 7.6 5.4 4.5 4.1 3.9 3.8

World 4.4 3.4 2.2 2.1 2.1 2.0 2.0Exchange Rates

US$ Effective 70.9 74.8 76.4 78.4 80.1 80.3 80.2$/€ 1.4 1.3 1.3 1.3 1.2 1.2 1.2¥/$ 79.7 81.8 88.3 92.8 95.5 97.4 98.7

Commodity PricesBrent oil ($/bl) 111.3 105.1 100.7 107.6 113.2 117.4 121.5

Summary of International Forecasts


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3 Multiple Eurozone exits

� By far the most serious threat to the global econom y at the moment stems from the Eurozone and the potential for much more adverse developments than foreseen in our baseline forecast .

� We consider the case of six countries leaving the E urozone in 2013Q1: Greece, Portugal, Ireland, Spain, Italy an d Cyprus.

� Exiting countries would suffer GDP falls of around 15% compared to our baseline within a couple of years. A sharp rise in inflation would cut households’ real incomes, and unprecedented unc ertainty would all but halt investment and recruitment.

� The remaining Eurozone countries would also suffer very large declines in GDP. The exiting countries represent la rge export markets in which demand would collapse. A large num ber of businesses would also face losses on their assets i n the exiting countries as defaults multiply. In addition, a shar p currency depreciation would reduce the value of their remain ing assets further. The GDP of the remaining Eurozone countrie s would fall 9% below our baseline forecast.

� World GDP growth, on a PPP basis, would slow to 2% in both 2013 and 2014.

� We assign a 15-20% probability to this scenario. Th is is significantly higher than envisaged three months ago due to heigh tened tensions and ongoing policy procrastination. This makes mult iple Eurozone exits our second most likely scenario.

By far the most serious threat to the global economy at the moment stems from the Eurozone and the potential for much more adverse developments than foreseen in our baseline forecast. Swift policy action is required to head off downside risks. Structural changes such as fiscal union and closer banking coordination would help but look likely to materialise only in the long term. The most important short-term step to preserve the euro is for the ECB to act quickly to cap bond yields in the ‘peripherals’ and head off the risk of bank runs. Unfortunately, political resistance to such actions suggests that significant further bond markets turmoil may not be avoided. The new Greek government only enjoys a slim majority and could fall should the burden of austerity demanded by the bailout package prove unacceptable. This would trigger a Greek exit which would be very difficult to contain. Financial contagion would spread instantaneously throughout the Eurozone with steep increases in bond spreads, falls in share prices and very significant tightening of credit conditions. Fear that other peripheral countries could also leave the Eurozone would trigger a run on banks, leading to their collapse. Multiple exits, involving Portugal, Ireland, Spain, Italy and Cyprus would likely ensue.


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We assign a 15-20% probability to this scenario. This is significantly higher than envisaged three months ago due to heightened tensions and ongoing policy procrastination. This makes multiple Eurozone exits our second most likely scenario. The exiting countries have suffered a substantial loss of competitiveness over the past decade and, as such, we would expect their new national currencies to depreciate sharply. In addition, exiting countries would almost certainly see large-scale capital outflows initially, leading their exchange rates to ‘overshoot’ fair value. The residual euro is likely to weaken initially as turmoil significantly dampens the value and return prospects of investment in the Eurozone. As activity stabilises and the Eurozone emerges as a more stable entity, the euro exchange rate may appreciate.

The introduction of new currencies in the exiting countries would cause huge economic disruption. There would also be substantial costs related to the redenomination of contracts from euros into the new currencies, including legal costs. Though euro exiting countries would increase nominal interest rates following a surge in inflation, they would not be able to raise rates to the level needed to keep inflation down, given the need to support their fragile economies.

The series of defaults on external debt would have a significant impact on banks’ balance sheets across the world, but particularly in the Eurozone and exiting countries. Credit conditions would tighten by as much as they did in 2008/09.

Outside of the Eurozone, heightened uncertainty would cause stock markets to sell off sharply. Business confidence would be dampened by the weaker outlook and increased uncertainty. This in turn would have a negative impact on investment spending in all countries. In addition, trade linkages with the Eurozone would depress demand for exports, particularly in the UK.

The key assumptions of this scenario are -

� The six exiting countries default and their new debt is re-denominated in their new currencies in 2013Q1. The new currencies depreciate sharply. In the first year, national exchange rates drop by 50% against the euro in Greece and Cyprus, 25% in Italy, Spain and Portugal, and by 15% in Ireland.

� Equity prices fall by 30% initially in Greece and remain 10% below central scenario levels at the end of 2017. In the other exiting countries, equities fall by 20% initially and remain 8% below base by the end of our forecast period. Elsewhere in the Eurozone, equities fall by 15% initially, but subsequently recover back in line with the baseline forecast by 2017. Stock markets fall around 10% initially in the other major economies, and recover to the level seen in our central scenario by 2017.

� Banking sectors in both the exiting countries and the Eurozone suffer massive losses and tighten credit standards dramatically.


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� Government bond spreads initially rise by 1200bp in Greece, 1100bp in Portugal, Italy and Spain, and by 700bp in Ireland.

� The residual euro exchange rate initially depreciates by around 15% against the US dollar.

� The risk premium for emerging markets rises to a level last seen at the worst point of the global financial crisis at the end of 2008.

� Business and consumer confidence drop sharply in the short term in reaction to heightened uncertainty and sharp declines in equity prices.

The results of this scenario may be summarised as follows –

� In the exiting countries , the level of GDP drops sharply, falling to around 15% below our central scenario in 2014 and 2015.

� The Eurozone, made up of the eleven remaining countries, is plunged into a deep recession, with GDP falling by nearly 10% relative to the baseline. Although short-term interest rates fall to zero, this is not sufficient to offset the financial shocks.

� US GDP falls 4% below our baseline forecast, with a mild recession in 2013. The UK suffers a more severe downturn because of its closer trade and financial links with the Eurozone, with GDP about 7% below baseline by end-2014.

� In China growth dips to about 6.5% in 2013, thanks to the effect of weak world growth on exports and the large scale of the financial shock which damages local asset markets and pushes down FDI. The level of GDP is 2.5% below baseline in 2014. The GDP impact on the smaller Asian emergers is also large, especially for those highly geared to exports such as Singapore and Taiwan. In response, the emerging market economies reduce interest rates to mitigate the impact from weakened economic activity.

� Interest rates fall to zero in most of the major economies and remain there until 2015 as central banks attempt to offset the impact of the financial shock on growth and prevent a deflationary spiral.

� Inflation falls sharply with the Eurozone experiencing deflation in 2014. Oil prices fall to close to $70/barrel.

� World GDP growth , on a PPP basis, slumps to just 2% in both 2013 and 2014 in the wake of recessions in the major economies and a sharp slowdown in the main emerging countries. From 2015, a recovery sets in as the financial shock fades. However, by 2017, world GDP is still 2% below our baseline forecast.


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Chart 3.5: Eurozone CPI Chart 3.6: Worl d CPI

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2005 2007 2009 2011 2013 2015 2017

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Baseline

Multiple exits

Forecast


18

2011 2012 2013 2014 2015 2016 2017Real GDP


Canada 2.4 2.1 1.3 0.4 3.0 3.9 3.3

EuropeEurozone 1.5 -0.6 -3.0 -3.5 1.3 3.9 4.6

Germany 3.1 0.5 -2.3 -3.2 1.2 4.0 4.7

France 1.7 0.1 -3.0 -4.0 1.9 4.2 4.0

Italy 0.5 -2.4 -5.4 -6.8 -2.7 4.5 4.6

UK 0.7 0.1 -0.3 -1.4 1.8 4.3 4.9

EU27 1.6 -0.1 1.0 2.1 2.4 2.3 2.2

AsiaJapan -0.7 1.9 1.0 -0.7 0.7 2.2 2.9

China 9.2 7.5 6.5 8.2 9.1 8.3 8.5

India 7.5 5.7 5.6 7.3 9.4 9.0 7.7

World 2.8 2.3 1.0 0.7 3.7 4.9 4.8

World 2005 PPPs 3.8 3.1 2.0 2.0 4.6 5.5 5.3


North AmericaUnited States 3.1 2.2 0.1 -0.2 1.8 2.5 2.6

Canada 2.9 2.2 1.7 -0.2 1.5 2.3 2.4

EuropeEurozone 2.7 2.4 1.5 -1.2 0.4 1.4 2.1

Germany 2.3 2.0 1.5 -1.3 0.3 1.4 2.1

France 2.1 2.2 1.6 -1.0 0.3 1.1 1.9

Italy 2.8 3.1 6.6 6.2 4.0 3.9 3.5

UK 4.5 2.9 0.8 -0.9 0.7 1.5 2.2

EU27 3.1 2.5 2.3 0.3 1.4 2.0 2.3

AsiaJapan -0.3 0.4 -1.0 -3.5 -1.9 1.0 2.7

China 5.4 3.1 1.5 -0.2 2.7 3.6 2.8

India 8.9 7.6 2.3 1.1 4.0 4.1 3.6

World 4.4 3.4 1.1 -0.3 1.2 2.3 2.5Exchange Rates

US$ Effective 70.9 74.8 79.6 76.8 76.1 74.1 75.1$/€ 1.4 1.3 1.2 1.3 1.4 1.5 1.4¥/$ 79.7 81.8 83.2 84.0 89.6 93.3 98.7


Summary of Multiple Eurozone Exits


19

4 Greece alone exits the Eurozone

� We assign a 10-15% probability to Greece alone exit ing the Eurozone, under the assumption that European author ities are able to intervene in a timely manner and prevent other p eripheral countries from exiting as well.

� We assume that Greece leaves the Eurozone at the st art of 2013. The new Drachma depreciates sharply against the euro, t hus lowering its debt burden and eventually helping to restore compe titiveness.

� But in the short term, the depreciation leads to so aring inflation which cuts households’ real incomes very sharply. I nterest rates increase dramatically which raises the cost of outs tanding domestic debt.

� Banks across the Eurozone suffer heavy losses and a severe credit crunch ensues.

� The Eurozone falls into a steep recession in 2013, while growth in other major economies, such as the US and China, sl ows markedly as well. World GDP growth falls to 3.0%, on a PPP b asis, in 2013, compared to 3.7% in the baseline.

The Greek elections held on 17 June saw a victory for the pro-bailout parties, suggesting that Greece is likely to stay in the Eurozone for now. However the risk of a Greek exit within the next six months remains high and could be triggered by a number of events. The current bailout terms are not achievable. Without some renegotiation, austerity – and thereby the cost of staying in the Eurozone - is likely to become unacceptable. Greece would then be led to conclude that growth can only be restored outside the Eurozone. Moreover, a Greek exit could also be triggered by a worsening outflow of bank deposits (which have already plunged by about 30% from their peak in 2009).

We assign a 10-15% probability to a scenario where Greece alone exits the Eurozone. This requires swift intervention from the European authorities to prevent other peripheral countries from exiting as well. This would involve massive bond purchases by the ECB to keep yields at manageable levels as well as bailouts for the remaining peripheral countries. Governments would need to agree on bailouts for the peripheral countries and accelerate plans towards a banking and fiscal union. In the short term, temporary capital controls may be needed to stem deposit outflows from peripheral banks.

The key assumptions of this scenario are -

� Greece defaults and adopts the new Drachma in 2013Q1, which depreciates by 50% against the euro.

� This causes an increase in import prices. In order to curb inflation, the Greek central bank raises interest rates by 700 basis points.


20

� Greek banks suffer from an outflow of deposits and tighten credit conditions significantly.

� Greece can no longer access international financial markets. 10-year government bond yields rise by more than 1000 basis points.

� Investors’ confidence slumps and share prices fall 20% below the level assumed in our baseline.

� Business and consumer confidence are dampened by very high uncertainty.

� Other peripheral countries face increased pressures. 10-year government bond yields rise by 300 basis points. This leads to further rounds of fiscal austerity via lower government spending.

� Further bailouts are required for the peripherals, funded by the core Eurozone countries. To fund these, governments in these countries need lower spending which damages growth.

� Credit conditions are tightened throughout the Eurozone as banks face further losses on Greek government debt and deposit outflows.

� Major central banks engage in further quantitative easing , worth around 10% of GDP.

� Investors’ confidence slumps across the region. Share prices are depressed, falling by around 10-15% below baseline levels.

� The euro exchange rate initially depreciates by around 10% versus the dollar.

The results of this scenario may be summarised as follows –

� GDP drops sharply in Greece , by nearly 6% below the baseline in 2013 and about 13% in 2014. GDP in the peripherals declines by over 6%.

� The Eurozone (excluding Greece) undergoes a recession and GDP falls by 3.5% relative to the baseline by 2014.

� The impact on the US is relatively limited with GDP growth slowing to 2.1% in 2013 and 2.4% in 2014 compared to 2.6% and 3.2% in the baseline respectively. The UK suffers a more severe downturn because of its closer trade and financial links with the Eurozone, with GDP about 1% below the baseline towards the end of the forecast horizon.

� GDP in China falls by about 1.5% below baseline by 2014 primarily due to the effect of weak world growth on exports but also the financial shock which damages local asset markets and pushes down FDI.

� Interest rates fall to almost zero in the Eurozone and for a shorter period, in the US and the UK, as central banks attempt to offset the impact of the financial shock on growth and prevent a deflationary spiral. Inflation falls considerably in all the major developed economies.


21

� World GDP growth , on a PPP basis, falls to 3.0% and 3.7% in 2013 and 2014 compared to 3.7% and 4.5% in the baseline respectively, driven by a recession in the major European economies as well as a slowdown in emerging markets.


22



Chart 4.5: Eurozone CPI Chart 4.6: Worl d CPI

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-4-3-2-10123456

2005 2007 2009 2011 2013 2015 2017

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Greek exit

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2011 2012 2013 2014 2015 2016 2017Real GDP


Canada 2.4 2.1 2.0 2.1 2.6 2.6 2.4

EuropeEurozone 1.5 -0.6 -1.8 0.5 2.3 2.6 2.7

Germany 3.1 0.7 -0.3 1.2 2.3 2.1 2.3

France 1.7 0.1 -1.6 0.4 2.3 2.3 2.8

Italy 0.5 -2.4 -3.0 0.1 1.8 2.8 2.5

UK 0.7 0.1 1.0 2.0 2.9 2.7 2.8

EU27 1.6 -0.1 1.0 2.1 2.4 2.3 2.2

AsiaJapan -0.7 1.9 1.5 1.1 1.2 1.6 1.9

China 9.2 7.5 7.7 8.0 8.8 8.7 7.9

India 7.5 5.7 6.7 8.2 8.8 8.0 7.6

World 2.8 2.3 2.1 2.9 3.8 4.0 4.0World 2005 PPPs 3.8 3.1 3.0 3.7 4.6 4.8 4.7

World trade 6.4 2.7 3.9 6.2 8.0 7.4 7.1

Inflation (CPI)North America

United States 3.1 2.2 1.9 1.2 1.3 1.1 1.2

Canada 2.9 2.2 1.9 1.6 1.6 2.1 2.6

EuropeEurozone 2.7 2.4 2.5 1.5 0.9 1.3 1.5

Germany 2.3 2.1 2.5 1.8 1.3 1.7 1.6

France 2.1 2.3 2.7 1.8 1.2 1.5 1.5

Italy 2.8 3.1 2.5 0.9 0.2 1.5 2.3

UK 4.5 3.0 2.1 1.2 1.3 1.9 1.9

EU27 3.1 2.6 2.6 1.6 1.1 1.5 1.6

AsiaJapan -0.3 0.4 0.3 -0.3 -0.3 -0.4 -0.3

China 5.4 3.1 2.6 2.1 2.8 3.4 3.1

India 8.9 7.5 4.7 2.9 3.6 3.7 3.4


US$ Effective 70.9 75.3 79.6 82.4 82.4 81.8 81.1$/€ 1.4 1.3 1.2 1.2 1.2 1.2 1.2¥/$ 79.7 81.8 88.3 93.2 96.6 99.5 100.4


Summary of Greece alone exits the Eurozone


25

5 China hard landing

� We think that the risk of a hard landing in China h as diminished somewhat in recent months. We now assign a 5-10% pr obability to this scenario.

� A sharp correction in the property and construction sectors would lead to a sharp increase in non-performing loans (N PLs). In addition, risk premia in China would rise, pushing up the cos t of borrowing. As a consequence, investment would fall sharply, hi tting GDP growth and leading to lower employment, which would subsequently weigh on consumption.

� Chinese GDP would fall around 3.5-4% below its base line path, with 2013 growth down to 5.3%.

� Given the size of the Chinese economy, the shock wo uld have global implications. We find that in this scenario, world GDP growth, on a PPP basis, falls to 2.6% and 3.9% in 2013 and 2014 respectively.

Recent data indicate that the Chinese economy is clearly going through a “soft patch”, with the weakness most evident in imports and industrial output, whose annual growth rate slowed to its lowest level since 2001 (outside of the 2008/09 global crisis period) in April 2012. In response to weak indicators, the central bank has cut banks’ reserve requirements ratio for the third time this cycle and the government announced several expansionary measures. Compared to the huge (and rather indiscriminate) policy stimulus initiated in 2008 to counter the global crisis, the policy loosening so far is modest, but we expect further gradual easing this year.

This careful management of liquidity and of the fiscal stance suggests a lesser risk of a hard landing of the Chinese economy than a few months ago. Property prices have been falling in a number of cities and investment is slowing down, which, as long as the pace of decline remains contained, will help soft land the economy. Less overheated property and construction markets will give the monetary authorities some room to loosen policy should the economic environment worsen.

But there is still a possibility that the adjustment in the property and construction sector is sharper than we currently envisage. Poor returns to infrastructure investment at the local level could threaten local government finances and the profitability of the industrial sector. This could lead to a sharp increase in non-performing loans (NPLs). In addition, risk premia in China would rise, pushing up the cost of borrowing. Moreover, a sharper correction in property prices could hit residential investment, a significant part of the economy’s overall investment flows. As a consequence, GDP growth would be hit, leading to lower employment, which would subsequently weigh on consumption. Knock-on effects onto business and consumer confidence from a collapse in the property sector would likely further depress demand, leading to a hard landing for GDP growth.


26

We assign a 5-10% probability to this scenario. This is a low probability because we anticipate that the Chinese authorities will be able to respond more aggressively to slowing growth.

The assumptions used in this scenario are as follows:

� Property prices fall sharply bringing prices back to 2007 level towards the end of 2012. Other property markets in Asia are affected including Hong Kong and Singapore.

� A slowdown in demand for China’s exports and a slump in the construction sector leads to a weak profitability and banking sector weakness.

� Non-performing loans in China rise sharply to around 20% of GDP.

� Liabilities of local governments rise and, alarmed at the scale of bad loans, the government stops the flow of credit through the banking system while it recapitalises the banking sector.

� Share prices in China fall by about 40%.

� A flight from risk leads to a rise in emerging market spreads by 100 basis points over the course of 2013. This pushes up the cost of borrowing in emerging markets leading to slowing consumption and investment.

� A rise in risk premia and financial contagion leads to falls in share prices in the major financial centres in the US, Eurozone and the UK.

The results of this scenario may be summarised as follows:

� The impact on the economy begins in 2012 H2 with a sharp slowing in investment growth, particularly investment funded through bank loans or directly from the government. The slump in construction related activity, estimated to be around 15% of GDP, contributes to growth in China slowing to 5.3% in 2013 and to 8.3% in 2014.

� Falls in share prices and weaker export growth impact on the advanced economies. However, lower oil prices help to offset some of the impact with oil prices falling to $80 by mid-2013.

� GDP growth in the US is 2.0% in 2013 while the Eurozone’s recession is extended for a year with a 0.4% fall in GDP in 2013 following on from 2012’s 0.7% decline.

� Higher costs of borrowing and weaker trade hit other emerging markets with growth slowing to around 4% in the emerging market bloc as a whole in 2013. World GDP growth is around 1 percentage point lower than in the baseline in 2013, at 2.6%.


27

Chart 5.1: US GDP Chart 5.2: China GDP

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2005 2007 2009 2011 2013 2015 2017

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Chart 5.5: China CPI Chart 5.6: World CPI

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& China hard landing

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2011 2012 2013 2014 2015 2016 2017Real GDP


Canada 2.4 2.0 1.7 1.9 2.8 3.2 2.7

EuropeEurozone 1.5 -0.7 -0.4 1.0 2.1 2.5 2.4

Germany 3.1 0.5 0.5 1.4 2.0 2.4 2.5

France 1.7 0.0 0.1 1.0 2.0 2.3 2.2

Italy 0.5 -2.4 -1.0 0.5 1.5 2.2 2.1

UK 0.7 0.0 1.0 2.2 2.8 3.1 3.0

EU27 1.6 -0.1 1.0 2.1 2.4 2.3 2.2

AsiaJapan -0.7 1.6 0.8 1.0 1.1 2.1 2.6

China 9.2 6.6 5.3 8.3 9.3 8.8 9.6

India 7.5 5.4 6.8 8.8 8.9 8.2 7.4

World 2.8 2.2 2.0 3.1 3.8 4.2 4.2

World 2005 PPPs 3.8 2.9 2.6 3.9 4.7 4.9 5.0



Canada 2.9 2.2 1.7 1.6 1.6 1.7 1.9

EuropeEurozone 2.7 2.3 1.0 0.8 1.0 1.3 1.6

Germany 2.3 2.0 0.9 0.8 1.3 1.6 1.9

France 2.1 2.2 1.1 1.0 1.2 1.6 1.8

Italy 2.8 3.1 1.8 1.3 1.5 1.7 1.8

UK 4.5 2.8 0.7 1.2 2.0 2.3 2.5

EU27 3.1 2.4 1.0 0.9 1.3 1.5 1.7

AsiaJapan -0.3 0.4 0.5 0.9 1.0 0.5 0.1

China 5.4 3.0 1.4 1.7 3.0 3.3 3.2

India 8.9 7.3 2.8 2.1 2.7 3.3 3.8


US$ Effective 70.9 74.8 76.3 78.7 81.0 81.5 81.4$/€ 1.4 1.3 1.3 1.3 1.2 1.2 1.2¥/$ 79.7 81.8 88.0 92.9 97.5 101.3 103.1


Summary of China Hard Landing


30

6 US fiscal cliff

� Under current law, the US is heading toward a ‘fisc al cliff’ – a sharp tightening of fiscal policy to take effect on 1 Jan uary 2013. The Congressional Budget Office has estimated that take n together, the automatic measures will amount to about a 3.5% of G DP tightening of fiscal policy for fiscal year 2013.

� Our baseline forecast assumes that much of this tig htening will be avoided. But there is a risk that political gridloc k leads to a much more restrictive fiscal stance.

� The expected effect on the US economy is a sharp sl owdown in economic growth in 2013, with two consecutive negat ive quarters in 2013H1.

� The rest of the world would also be significantly a ffected via a decline in business and consumer confidence and wea ker demand from the US.

� The result is a decline in world GDP growth, on a P PP basis, to 2.5% in 2013 and 4% in 2014.

On 1 January 2013, the US could face a significant tightening of fiscal policy due to a number of automatic expirations and impositions that are scheduled to take effect if the Congress does not agree on an alternative plan for the reduction of federal debt. The Congressional Budget Office has estimated that taken together, these will amount to about a 3.5% of GDP tightening of fiscal policy for fiscal year 2013 (5% of GDP in 2013 calendar year).

Although our baseline forecast assumes that Congress will again find a way to avoid or delay most of these measures, we have constructed a scenario to describe the potential effects of the fiscal cliff on the US and the rest of the world.


� Effective federal corporate and personal tax rates are increased back towards their 2001 levels. These are effective rates rather than statutory rates, and there is some movement in them over time in response to changes in the composition of income, inflation and other factors including tax rebates.

� We have applied the same percentage cuts (for a total of $95bn) to the major components of federal spending , including: defence investment, wages and salaries, purchases of goods and other services, and nondefense investment.

� We assumed that the dollar would depreciate by around 5% as economic prospects for the US deteriorated. That impact hits immediately in 2013Q1 and dissipates over time.


31

� Finally, we assumed that the Federal Reserve would step in immediately to support the economy with additional quantitative easing , boosting its balance sheet by another $500 billion (around 3% of GDP) and maintaining that level for one year before beginning to unwind it.


� In the US, GDP growth slows down significantly. Indeed, in the quarter that it hits the fiscal cliff, 2013Q1, the economy shrinks at an annual rate of 1.8% and it continues to decline by 0.8% in Q2. That means that the fiscal contraction will have thrown the economy into a brief technical recession. Growth turns positive again in the second half of the year, but remains constrained throughout 2014. By 2017, US GDP is still around 1% below its baseline level.

� In the Eurozone , which faces its own debt crisis, the fiscal cliff delays the recovery by one year, prolonging the recession well into 2013. In particular, GDP drops 0.8% in 2013. The UK and Japan are also affected by a decline in business and consumer confidence, and GDP growth slows down significantly, although it remains in positive territory – at 0.3% and 0.7% respectively in 2013.

� Emerging market economies suffers a deceleration of external demand growth and subdued capital inflows, although domestic demand growth remains robust. In China, GDP growth slows down to 6.7% in 2013 and 8.5% in 2014.

� For the world as a whole, GDP growth falls to 2.5% in 2013 and 4.0% in 2014.


32



Chart 6.5: Eurozone CPI Chart 6.6: World CPI

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2011 2012 2013 2014 2015 2016 2017Real GDP


Canada 2.4 2.1 0.9 1.8 2.7 3.2 3.1

EuropeEurozone 1.5 -0.6 -0.8 1.5 2.4 2.4 2.2

Germany 3.1 0.7 0.3 1.9 2.5 2.3 1.9

France 1.7 0.1 -0.3 1.7 2.5 2.1 1.8

Italy 0.5 -2.3 -1.6 1.3 1.9 2.0 2.0

UK 0.7 0.1 0.3 1.8 2.9 3.4 3.4

EU27 1.6 -0.1 1.0 2.1 2.4 2.3 2.2

AsiaJapan -0.7 1.9 0.7 1.3 1.3 1.7 1.9

China 9.2 7.5 6.7 8.5 9.4 8.6 8.1

India 7.5 5.7 6.8 8.7 8.4 7.9 7.7

World 2.8 2.4 1.6 3.2 4.0 4.2 4.0

World 2005 PPPs 3.8 3.2 2.5 4.0 4.8 4.9 4.7



Canada 2.9 2.2 1.8 1.2 1.1 1.0 1.0

EuropeEurozone 2.7 2.4 1.3 0.6 0.9 1.2 1.4

Germany 2.3 2.0 1.1 0.4 0.9 1.4 1.5

France 2.1 2.2 1.3 0.5 0.9 1.4 1.6

Italy 2.8 3.1 1.9 1.1 1.1 1.6 1.7

UK 4.5 2.9 1.2 0.4 1.1 1.5 1.5

EU27 3.1 2.5 1.3 0.6 1.1 1.3 1.4

AsiaJapan -0.3 0.4 0.0 -0.2 0.0 -0.5 -0.5

China 5.4 3.1 2.1 1.4 2.1 2.4 2.0

India 8.9 7.6 4.2 2.9 4.3 4.0 3.7


US$ Effective 70.9 74.8 72.6 75.0 77.4 78.4 79.1$/€ 1.4 1.3 1.3 1.3 1.3 1.3 1.3¥/$ 79.7 81.8 83.9 88.8 92.3 95.1 97.3


Summary of US Fiscal Cliff


35

7 Corporate reawakening

� Our final scenario is an upside scenario in which b usinesses increase investment and boost hiring. We assign a p robability of 5% to this scenario.

� In developed countries, the corporate sector has bu ilt up large financial surpluses, and stability brought about by fiscal consolidation leads business to spend these funds q uicker than in our baseline scenario. This boosts confidence, lead ing to a quick recovery in demand.

� The risk premium currently factored into the oil pr ice falls due to increased political stability in oil producing coun tries.

� The result is a rise in world GDP growth, on a PPP basis, to 3.4% in 2012 and to around 5-5.5% in 2013 and 2014.

On the upside, we continue to see a possibility that cash hoarded on corporate balance sheets in a number of countries gets spent on investment, procurement and staff increases more quickly than implied by our baseline forecast. This enhances confidence in industrialised economies, leading to a quick recovery in demand.

The probability of this scenario is low, at around 5%. It requires decisive action from Eurozone policymakers to deal with current tensions and uncertainties. In Europe this would involve swift and credible agreement on a closer banking, fiscal and political union. In the US, clarity over the fiscal stance would be beneficial


� Quarterly business investment growth rises by 1.5% above our central forecast through 2013 in the major economies.

� Higher investment leads to a rise in the capital stock and higher total factor productivity . This boost to the supply-side means that higher demand does not create inflationary pressures.

� Oil prices in 2013 fall $15 below baseline. The current level of oil prices is assumed to include a risk premium due to tensions with Iran. Lower political tensions would reduce this risk premium.


� In the major developed economies, corporations expand their workforces. Workers’ wages rise and, combined with a fall in oil prices, their real disposable incomes increase. With both total employment and disposable income up, consumers increase their spending.

� In the US, GDP grows by 3.9% in 2013 and 4.4% in 2014. Meanwhile, Eurozone GDP growth rises to 1.4% next year and 2.3% in 2014.


36

� Emerging market economies benefit from trade links with the developed world and higher capital inflows. Domestic demand remains buoyant, and China sees growth of about 9.8% and 9.4% in 2013 and 2014 respectively. For the world as a whole, GDP grows by 4.8% in 2013 and around 5.5% in 2014, on a PPP basis.

� Inflation falls across the board as higher growth stems from higher supply and thereby does not cause any inflationary pressures.


37



Chart 7.5: Eurozone CPI Chart 7.6: World CPI

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-7

-6

-5

-4

-3

-2

-1

0

1

2

3

4

5

2005 2007 2009 2011 2013 2015 2017

Eurozone: GDP % year


Baseline

Corporate reawakending

Forecast

-3

-2

-1

0

1

2

3

4

5

6

2005 2007 2009 2011 2013 2015 2017

World: GDP% year


Baseline


Forecast

0

2

4

6

8

2005 2007 2009 2011 2013 2015 2017

World: CPI% year


Baseline


Forecast

-1

0

1

2

3

4

5

2005 2007 2009 2011 2013 2015 2017

Eurozone: CPI% year


Baseline


Forecast

-2

-1

0

1

2

3

4

5

6

2005 2007 2009 2011 2013 2015 2017

US: CPI% year


Baseline


Forecast


38



2

3

4

5

6

2005 2007 2009 2011 2013 2015 2017



Baseline


Forecast

1

2

3

4

5

6

2005 2007 2009 2011 2013 2015 2017



Baseline


Forecast

0

1

2

3

4

5

6

2005 2007 2009 2011 2013 2015 2017



Baseline


Forecast

0

1

2

3

4

5

6

2005 2007 2009 2011 2013 2015 2017



Baseline


Forecast


39

2011 2012 2013 2014 2015 2016 2017Real GDP


Canada 2.4 2.4 3.2 2.7 2.5 2.1 2.5

EuropeEurozone 1.5 -0.4 1.4 2.3 2.1 1.8 1.9

Germany 3.1 0.8 2.4 2.8 2.2 1.8 1.7

France 1.7 0.2 1.9 2.5 2.0 1.6 1.7

Italy 0.5 -2.1 0.6 1.8 1.6 1.5 1.6

UK 0.7 0.3 2.8 3.5 3.0 2.5 2.6

EU27 1.6 -0.1 1.0 2.1 2.4 2.3 2.2

AsiaJapan -0.7 2.1 3.4 3.2 1.6 0.3 0.6

China 9.2 8.0 9.8 9.4 9.1 7.0 7.6

India 7.5 5.9 8.6 10.0 8.8 7.6 7.6

World 2.8 2.6 4.0 4.6 4.2 3.1 3.4

World 2005 PPPs 3.8 3.4 4.8 5.4 5.1 3.9 4.1



Canada 2.9 2.2 1.9 2.1 2.6 2.6 2.3

EuropeEurozone 2.7 2.3 1.5 1.1 1.3 1.3 1.3

Germany 2.3 2.0 1.4 1.0 1.3 1.4 1.5

France 2.1 2.2 1.6 1.1 1.3 1.4 1.4

Italy 2.8 3.1 2.1 1.6 1.4 1.4 1.3

UK 4.5 2.9 1.4 1.1 1.1 1.2 1.0

EU27 3.1 2.5 1.5 1.2 1.4 1.5 1.4

AsiaJapan -0.3 0.4 0.2 -0.3 0.2 0.7 0.8

China 5.4 3.1 2.2 1.8 2.3 1.9 1.8

India 8.9 7.5 3.9 2.9 3.1 2.6 2.6


US$ Effective 70.9 74.7 76.2 78.4 80.1 79.7 79.1$/€ 1.4 1.3 1.3 1.3 1.2 1.3 1.3¥/$ 79.7 81.8 88.5 93.0 94.9 95.2 96.1


Summary of Corporate Reawakening


40

8 Conclusion

Financial tensions in the Eurozone have flared up again having subsided somewhat during 2012Q1. Eurozone woes have contributed to a loss of momentum in other parts of the world economy. In particular, the capacity for emerging markets to support world growth has declined due to slower export growth and reduced capital inflows.

Overall, world growth is forecast to come down from 3.8% in 2011 to 3.2% this year, on a PPP basis, the slowest rate since 2008. In 2013 growth should pick up somewhat to 3.7%. We continue to assign a low probability to our baseline forecast of only 45%.

For the major countries, we have weighted the GDP growth rates in each scenario by their estimated probability of occurrence. In this risk-weighted scenario outlook, growth in 2012-17 in all major economies is lower than in our baseline scenario. At the world level, risk-weighted growth is around 0.6-0.7 percentage point below our baseline forecast.

2011 2012 2013 2014 2015 2016 2017Real GDP


Canada 2.4 2.1 1.9 2.0 2.7 2.9 2.7

EuropeEurozone 1.5 -0.6 -0.6 0.5 1.9 2.5 2.6

Germany 3.1 0.6 0.3 0.9 2.0 2.4 2.5

France 1.7 0.1 -0.3 0.4 2.0 2.4 2.4

Italy 0.5 -2.3 -1.7 -0.5 0.9 2.4 2.4

UK 0.7 0.1 1.1 1.7 2.6 3.1 3.2

EU27 1.6 -0.1 1.0 2.1 2.4 2.3 2.2

AsiaJapan -0.7 1.9 1.6 1.3 1.2 1.5 1.7

China 9.2 7.4 7.6 8.6 8.8 8.2 8.1

India 7.5 5.7 6.9 8.5 8.8 8.2 7.6

World 2.8 2.3 2.3 3.0 3.8 4.0 3.9

World 2005 PPPs 3.8 3.1 3.1 3.9 4.6 4.7 4.6

Risk-weighted GDP growth


41

Chart 8.1: Risk-weighted GDP growth

-12

-9

-6

-3

0

3

6

9

12

15

2005 2007 2009 2011 2013 2015 2017

Risk weighted average: GDP growth% year


Eurozone

US

Forecast

Japan

BRICS

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Global scenario service - Kauppakamari · In this scenario, Chinese GDP would fall around 3.5-4%...

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