Global Economic Forecasts

Three-geared growth

Growth

After some rather dismal high frequency data, especially the surprisingly weak US consumption data, we have decided to shave our US average growth forecast for 2008 by 0.3 percentage points to 1.3%. Our expectations for the business cycle this year remain unchanged: negative or insignificant growth rates in the first half, a rebound in the third quarter and a return to low growth at year-end and into 2009. Europe's business cycle trails the US cycle by two to three quarters, we note. We have trimmed our 2009 growth forecasts in particular, down from 1.7% to 1.2% now for the EMU. We have also downgraded Japan in view of its uninspiring domestic demand data as well as the strengthening of the yen. Growth in the large emerging markets remains healthy so far.

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Inflation

Despite some relief on commodity prices as March closes, we have decided to raise our headline inflation forecasts for all the countries we track. China deserves special mention: it posted an inflation rate of 8.7% in February. We have hiked our average 2008 inflation forecast for China from 4.4% to 6.6% and we note that high Chinese inflation could have an impact on inflation in the US, where Chinese import prices rose by more than 3% in February. Core inflation remains tame for now, but the longer that headline inflation exceeds central bank targets, the greater the chances grow to see an increase in inflation expectations.

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Short-term Interest Rates

After cutting rates by 75 basis points at its regular meeting in March, we expect at least one more cut from the Fed, this time by 50 basis points in April, which would bring the Fed funds rate to 1.75%. Further rate cuts probably depend on whether the current financial turmoil abates in the next couples of months. We now expect three more rate cuts from the Bank of England and from the Bank of Canada for this year, bringing the BoE's rates to 4.50% and the BoC's to 2.00% by year-end. We expect the Swiss National Bank to cut at least twice this year, resulting in a year-end rate of 2.25%, while the European Central Bank and the Bank of Japan should stay on hold, in our view.

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Bond Yields

Recession concerns and the broad flight to quality have pushed government bond yields in March to their lowest levels in several months, but we expect them to turn higher in the next couples of months, once inflation expectations overtake recession fears.

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Growth and Inflation Forecasts

in %	GDP Growth			Inflation
	'07	'08 F2	'09 F2	'07	'08 F2	'09 F2
OECD	4.9	4.0	4.0	4.0	5.5	4.2
US	2.2	1.2	1.8	2.8	3.6	2.8
Canada	2.5	1.3	2.2	2.4	1.8	2.0
Japan	1.8	1.4	1.3	0.0	1.2	1.0
Euro-Zone	2.6	1.7	1.3	1.9	3.5	2.5
Germany	2.7	2.1	1.5	2.0	2.8	2.0
France	1.8	1.6	1.1	1.4	3.4	2.0
Italy	1.8	0.4	0.6	1.9	3.2	2.5
Spain	3.8	1.3	1.1	2.5	4.2	2.8
UK	3.1	1.2	0.6	2.4	3.3	2.2
Switzerland	3.1	2.3	1.4	0.7	2.4	1.4
China	11.4	9.8	9.0	4.8	7.2	5.2
Asia / Pacific1	8.6	7.4	7.1	3.9	6.6	4.6

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Interest Rate and Exchange Rate Forecasts

in %	Short rates (3m) in		Bond yields (10y) in		USD rate1 in
	6 m	12 m	6 m	12 m	6 m	12 m
US	2.40	3.00	4.50	4.90	1.00	1.00
Canada	3.20	3.20	4.00	4.00	1.08	1.15
Japan	1.00	1.00	1.90	2.00	105	110
Euro-Zone	4.70	4.25	4.50	4.70	1.50	1.39
UK	5.40	4.60	4.80	4.80	0.53	0.55
Switzerland	2.75	2.25	3.40	3.60	1.05	1.12

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