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06.02.2015 16:02 World Economy Review - January 2015

The World Bank lowered its global growth forecast for 2015 and next year due to disappointing economic prospects in the euro zone, Japan and some major emerging economies that offset the benefit of lower oil prices.

The global development lender predicted the global economy would grow 3 percent this year, below a forecast of 3.4 percent made in June, according to its twice-yearly Global Economic Prospects report. World GDP growth will reach 3.3 percent in 2016, as opposed to a June forecast of 3.5 percent, before dipping to 3.2 percent in 2017, it said.

"The global economy is at a disconcerting juncture," World Bank chief economist Kaushik Basu told reporters. "It is as challenging a moment as it gets for economic forecasting." The world economy has been more sluggish than expected since the 2007-2009 global financial crisis.

The World Bank said strong growth prospects in the United States and Britain separated them from other rich nations, including members of the euro zone and Japan, which continue to face anemic economies and deflation fears. "The global economy is running on a single engine, ... the American one," Basu said. "This does not make for a rosy outlook for the world."

Among emerging markets, Brazil and Russia in particular weighed on the bank`s global growth predictions, along with China, which is in a managed slowdown as it transitions away from an investment-led growth model. Basu said India`s economic growth should finally catch up to China`s next year and in 2017, at a clip of about 7 percent.

Like other forecasters, the World Bank predicted the roughly 60-percent drop in global oil prices since June of last year should be a net positive for the world economy, boosting oil-importing countries.

But while the World Bank expected oil prices to stay low this year, it said the positive price shock could take several years to feed into its growth outlook, while increasing short-term market volatility and reducing investments in unconventional oil such as shale and deep sea oil. The immediate impact of lower crude prices was limited to a 0.1 percentage point boost to the global outlook this year, the World Bank said.

Falling oil prices could also depress inflation around the world. Fears of deflation, along with overall gloomier global prospects and stagnant U.S. wages, could encourage the U.S. Federal Reserve to raise interest rates more slowly than anticipated, Basu said.

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08.01.2015 15:26 World Economy Review - December 2014

What prospect does the New Year hold for the world economy? The outlook that emerges from many forecasts is perhaps best described as "not bad", though inevitably there are risks, some of them quite substantial. The International Monetary Fund, for example, predicts global growth this year of 3.8% compared with 3.3% in 2014. That is not boom-time, though it would be the fastest growth since 2011.

There is often a "but" that comes with comes with an economic forecast, and this time there are quite a few. One of them is a development which might actually be a boost for most of the world. It`s the price of crude oil which has fallen by nearly half from the high it reached in June. For most countries it means consumers have more to spend on other things and it reduces business costs. Of course the price decline is bad news for oil exporters and it has already hit Russia hard.

The main source of strength expected by most forecasters is the US. The IMF reckons economic growth there is likely to be almost a full percentage point faster than 2013. It says a stronger housing market and business investment suggest the rebound is becoming more sustainable. That raises one of the big issues for the coming months.

The US economy has been growing faster than previously forecast. The continued recovery in the US means the country`s central bank, the Federal Reserve will probably raise its main interest rate, which has been close to zero for six years.

Stronger economic growth and increasing spending can lead to higher inflation, which can be contained by higher interest rates. A senior Fed official, Bill Dudley acknowledged that this change "will undoubtedly be accompanied by some degree of market turbulence".

Higher interest rates would make American markets more attractive to investors, so funds could be pulled out of other countries especially emerging markets. The danger is that it might happen in a disruptive way that leads to sharp currency declines, higher inflation and rising borrowing costs for governments and business in developing countries. Mr Dudley, however, said that many emerging economies appear better equipped to handle the Fed`s move than they were in past.

China is another important factor. The country`s economic slowdown is likely to continue: that is almost universally seen as inevitable sooner or later. China has been driven by investment and export performance that couldn`t last for ever.

The boom years have ended in China. All the same, adjusting to a slower growth rate will present challenges both for China itself and for countries that sell goods to Chinese industry - raw materials suppliers in Africa among them. Jan Hatzius, chief economist at the investment bank Goldman Sachs expects "several years of declining growth rates" for China.

And now there is new uncertainty about the eurozone as Greece prepares for an early election. Financial markets in other financially stressed eurozone countries, notably Italy and Spain, wobbled as political events in Greece unfolded. There is some risk that serious financial instability could spreading from Greece to other countries, but the dangers are seen as less severe than at the height of the eurozone crisis.

The political crisis in Ukraine could yet could yet do wider economic damage, and if the problems in the Middle East disrupt oil production they could send the price of the commodity back up.

here are certainly some rumbling sources of potential trouble and little prospect of really strong growth year, but there is a decent chance that 2015 will be another year of gradual post-crisis rehabilitation.

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08.12.2014 15:18 World Economy Review - November 2014

The World Bank has revised its growth projections for Russia from 0.5 per cent up to 0.7 per cent in 2014 and from 0.3 per cent down to zero per cent in 2015, as part of its quarterly forecast review, the bank announced on December 2.

The numbers are an update to the projections released in the Russia Economic Report 32 of September 2014.

The main reason for the 2014 revision is stronger than expected net exports, with imports decreasing at a faster rate than anticipated due to the sharp depreciation of the rouble in recent months.

Higher prices for imports reduced demand by households and firms. Some temporary import substitution potential created by the weaker Ruble accelerated manufacturing activities, but is unlikely to be sustained next year given frail domestic demand.

Growth is projected to stall in 2015 at zero per cent as the sanctions would continue to negatively impact investments and would lead to a further slide in consumption growth, Birgit Hansl, World Bank Lead Economist for the Russian Federation, said on December 2.

If geopolitical tensions subside and the overall external environment of Russia improves, in 2016 the positive effects would allow for growth of 0.5 per cent, Hansl said.

The main driver for the lower 2015 growth projection is the assumption of a lower average oil price for 2015 of US$85 per barrel (compared to US$99.5 per barrel in the Bank`s September 2014 estimates), while the negative impact of sanctions and policy uncertainty on investment and consumption activities is expected to take hold more noticeably.

Consumption growth is projected to come to a standstill. Investment growth is expected to remain negative due to restricted access to external capital and higher borrowing costs.

The World Bank`s revised 2015 forecast assumes that net exports will become the main contributor to growth, replacing consumption growth as the key growth driver of previous years.

We expect that until mid-2016 net exports will support growth most. Only in 2016 do we project the possibility that investment and consumption growth starts its gradual recovery and begins to contribute positively to growth again, Hansl said.

On balance, the revised World Bank outlook remains subject to significant downside risks, which could stem from continued high volatility of the international oil market and international financial markets in line with an uneven and subdued global recovery.

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09.11.2014 17:41 World Economy Review - October 2014

The eurozone is struggling to revive itself, and may slip into recession in the next two years, slowing down the global economic recovery, according to the French Economic Observatory (OFCE). The director of the OFCE`s analysis and forecast department, Xavier Timbeau, presented his economic predictions for 2014-2015 on 29 October, saying "the eurozone is a problem for the global economy".

The expert believes that the eurozone is acting as a brake on the world economy, and will enter into "a phase of low inflation or even deflation in certain countries," leading to a eurozone recession within two years. The Observatory`s economists say this change will be slow, but almost inevitable.

Germany, the mainstay of the eurozone, is expected to see limited economic growth of 1.5% in 2015 (with 1.4% forecast for 2014). The prognosis for Italy is also disappointing: it is expected to go into recession. Spain, where unemployment remains at 25%, is the only eurozone economy where economic growth is expected to rise, with 2.1% percent predicted for 2015.

After a period of revival in 2011, the recovery of the eurozone has been sluggish. Timbeau attributes this to budgetary decisions taken by member states and to "the toughening of monetary conditions in 2013-2014". Even if economic constraints are loosened, the effects of austerity measures from 2012 and 2013 continue to weigh the economy down.

The Observatory claims to be "moderately optimistic for 2015," foreseeing eurozone growth of 1.3%.

The OFCE economists are sceptical about the future European Commission President`s investment plan. Xavier Timbeau said that "Jean-Claude Juncker`s investment plan will be expertly put together from existing measures, but it will not contain anything new".

The OFCE expects to see a slight improvement in the French economic situation in 2015, predicting growth of 1.1%, compared with 0.4% in 2014. This change is due to "the decline of two negative factors that have stifled economic growth since 2010: borrowing conditions and the reductions of deficits". "France should also become more competitive as the euro drops in value, and the tax credit for encouraging competitiveness and jobs (CICE) becomes more powerful," the OFCE said.

This moderate improvement in the situation will not be enough to bring down unemployment or have a significant impact on public deficits. The Observatory foresees an unemployment level of 9.8% and a public deficit of 4.3% for France in 2015.

Finally, Xavier Timbeau believes that the presentation of France`s 2015 budget was "rather clumsy". He said that France was making an effort, but that some of the measures outlined in the budget were questionable, such as the anticipated lowering of interest rates, which would bring down the total cost of borrowing in 2015. "This is not a structural change that should be brought about through the budget," the economist said, adding that the Commission`s acceptance of this bill demonstrates just how fed up everyone is with the French budget.

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05.10.2014 17:07 World Economy Review - September 2014

It has been a consistent theme in recent months that global growth has been slowing, a fact some investors may have missed in the good news about American GDP. The latest confirmation came from the World Trade Organization, which cut its forecast for trade growth this year from 4.6% to 3.1% and for 2015 from 5.3% to 4%. The WTO doesn`t forecast economic growth directly; it takes its lead from other international organizations.

What is interesting from the WTO announcement is that even the revised forecast relies on a bit of optimism. Actual trade growth in the first half of the year was just 1.8%; the organization is relying on a rebound in the second half. The first half regional numbers were revealing; Asia increased its exports by 4.2% but its imports by just 2.1%. In effect, it has been gaining market share. North America was more balanced, increasing exports by 3.3% and imports by 3%. Europe was predictably sluggish, increasing exports by 1.2% and imports by 1.9%. The real weakness came in South America which suffered a 0.8% fall in exports and a 3.4% decline in imports.

All told, developed economies provided the biggest share of demand; their imports rose 2.6% while those of developing economies increased by just 0.5%. In export terms, the developed economies continued to lose market share; their exports grew 1.6%, while those of developing economies grew 2.1%.

Sluggish growth in 2014 would confirm the recent trend. After a phenomenal rebound in 2010, trade growth slowed to 2.3% in 2012 and 2.2% in 2013. So what is going on? Part of the problem is the slowdown in emerging market growth detailed in a recent issue. In turn, this may be related to slowing Chinese demand for commodities (incidentally, Goldman cut its Chinese GDP forecast for 2015 from 7.6% to 7.1%); commodity prices have been very weak recently, with the widely-followed Bloomberg index dropping 12% since the end of June. Then there may be specific problems this year; the winter weather that seems to have hit US first quarter growth; the Japanese sales tax rise; the sanctions tit-for-tat between the west and Russia.

But it is still striking that most people think the bond markets are mispriced when a fall in commodity prices, weak inflation numbers in the developed world and those growth revisions would seem to form a pretty good backdrop for fixed income. The continued resilience of equity markets (despite yesterday`s wobble) looks more of the odd one out.

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