Economic prospects for many advanced economies are worsening, with soft Q2 data,
worsening prospects for Q3, heavy fiscal drag and heightened sovereign risk premia in
some countries, plus widespread and escalating fiscal uncertainties that deter risktaking
and investment. We still forecast strong global GDP growth, at 3%-4% in both
2011 and 2012. But, we are again making more GDP forecast downgrades than
upgrades. This month, we are cutting our 2011-12 GDP growth forecasts for the US,
Japan, Euro area and UK.
 We continue to expect there will eventually be sizeable debt restructuring (with big
haircuts) for Greece, Ireland and Portugal, perhaps phased over several years. Spain’s
economy and fiscal trends are likely to disappoint. Our US outlook assumes a debt
ceiling agreement with fiscal proposals that do not seriously damage nearterm growth
prospects.
 We still expect that the US Fed will keep rates on hold until H2-2012. If anything, the
balance of risks over the next six months or so is tilted toward additional easing. The
ECB remains likely to hike rates in October this year (to 1.75%), unless downside risks
to growth surge, but we now forecast rates will be 2.0% at end-Q3 2012 versus 2.25%
previously. We have scaled back or postponed our tightening forecasts for the UK,
Switzerland, Sweden, Norway, Hungary and Czech Republic.
 Global Economics View (see page 16): EU policymakers need to agree to three items
this week to calm markets for the next few months, in our view: i) the full details of a
programme to provide liquidity to the Greek sovereign, ii) an easing of the terms on
EFSF/EFSM loans, and iii) allowing the EFSF to purchase sovereign debt in secondary
markets, and not just for programme countries. We expect further measures to address
sovereign and banking sector insolvency issues will still be needed in the autumn.
Economics