March 11, 2015 Economics Group MONTHLY OUTLOOK U.S. Overview International Overview Slow Start to Economic Growth in 2015 Global Economy Finds a Lower Gear Output and employment growth are starting the year in two entirely different ways. Expectations for real GDP growth have been continuously scaled back due to the abrupt slowdown in the energy sector, harsh winter weather in the Northeast and the effects of the West Coast port slowdown. We now look for real GDP to rise at just a 1.1 percent annualized rate in the first quarter, which is at the low end of consensus estimates. Job growth, however, seems to have been little affected by these events. Nonfarm payrolls rose by 295,000 jobs in February, following a 239,000-job gain the prior month. The unemployment rate fell to 5.5 percent in February. Since our prior monthly forecast, we have dialed back our global GDP growth estimate for 2015 by a tenth of a percentage point to 3.2 percent and for 2016 by two-tenths to 3.5 percent. We are not revising lower as a result of any major shift in the drivers of global growth, but rather we are just truing up our estimates after a run of economic data that have been disappointing on balance. The slower pace for first quarter real GDP growth is a bit deceiving. Much of the deceleration results from a further widening in the trade deficit and less inventory building. A drop in government spending also produces a slight drag during the quarter. Private final domestic demand is much healthier and is expected to rise at a 2.0 percent pace during the quarter and climb 2.8 percent for the year. Real GDP growth is also expected to be much stronger for the year, climbing 2.7 percent. Final demand remains solid outside of the oil patch and the positive effects of lower energy prices should build over the course of the year. Government spending should also perk up a bit. The split between GDP growth and employment conditions will further complicate the Fed’s decision as to when to begin to raise the federal funds rate. With final demand strong, we still expect the initial move to come in June and look for interest rates to rise modestly across the curve from current levels over the course of 2015. One of the top global economic worries is what happens next in Europe. While the Greek situation remains touch-and-go, the outlook for the Eurozone is brightening. The combination of quantitative easing by the European Central Bank (ECB), a weaker euro and lower oil prices play to Europe’s benefit. There was a time not long ago when the Bank of England (BoE) was expected to beat the Federal Reserve to the punch in raising rates. The U.K. economy continues to hum along but, in the absence of wage inflation, a rate hike from the BoE does not appear to be in the cards anytime soon. In Asia, economic growth continued with Japanese real GDP growth bouncing back in the fourth quarter after consecutive declines in prior quarters. China’s GDP growth target was reduced but this may make economic reform easier. The Russian economy is likely in recession at present, as it struggles to get its oil-centric, export-oriented economy back on its feet. Some of Latin America’s hobbled economies are on the mend, the recession in Brazil will likely be mild when compared to Russia, and we are forecasting better growth in 2016 for both Brazil and Mexico. Real Global GDP Growth U.S. Real GDP Bars = CAGR Year-over-Year Percent Change, PPP Weights Line = Yr/Yr Percent Change 10% 10% 7.5% 7.5% GDP - CAGR: Q4 @ 2.2% 8% GDP - Yr/Yr Percent Change: Q4 @ 2.4% 6% 8% 6% Forecast 4% 4% 2% 2% 0% 0% -2% -2% -4% -4% -6% -6% -8% -8% -10% 2000 -10% 2002 2004 2006 2008 2010 2012 2014 6.0% 6.0% Period Average 4.5% 4.5% 3.0% 3.0% 1.5% 1.5% 0.0% 0.0% -1.5% 2016 -1.5% 1980 Source: U.S. Department of Commerce, IMF and Wells Fargo Securities, LLC This report is available on wellsfargo.com/economics and on Bloomberg WFRE. 1985 1990 1995 2000 2005 2010 2015 Economics Group U.S. Outlook Strength Is a Matter of Perspective Wells Fargo Securities, LLC Business fixed investment also appears to be holding up well, despite the pullback in energy-related projects. The bulk of the impact of cutbacks in energy investment will show up in spending on nonresidential structures, which is where the effect of oil drilling shows up. Spending on business equipment will also be affected but should still remain positive in the first quarter. For the year, we are expecting equipment outlays to rise a solid 4.8 percent. Spending on intellectual property will rise by an even more robust 6.8 percent. Views on how strong the U.S. economy is at the start of 2015 are as opposed as they are about whether that dress was blue and black or white and gold. The headline numbers and underlying details provide ample support for all sides. Growth has clearly improved but long-running concerns about the labor market are also still present. We come down on the side that economic growth has broadened and strengthened to the point that the zero-interest rate policy enacted at the height of the financial crisis is no longer necessary. Spending on business equipment should be sustained by pentup demand. The equipment capital stock is currently the oldest that it has been in 20 years and the capacity utilization rate for manufacturers has risen back near its long-run average. Commercial construction is also showing signs of strengthening, although spending has so far gotten off to a slow start in 2015. Our expectations for first-quarter real GDP growth have been slashed further during the past month. Real GDP growth is now expected to rise at just a 1.1 percent annualized pace in the first quarter compared to 2.2 percent growth in the fourth quarter. Most of the deceleration is due to a further widening in the trade deficit and less inventory building. In addition, as we warned earlier, the bulk of the negative effects of lower oil prices are showing up fairly early, while the benefits from lower oil prices will gradually accrue over the course of 2015. Finally, as we pointed out last month, the energy sector is extremely capital intensive. So the cuts in energy exploration that have been announced in recent months have so far had only a relatively modest impact on job growth. The rapid appreciation of the U.S. dollar will also likely create some challenges for U.S. manufacturers. Producers of steel and other commodity-like products have already seen an onslaught of imports in recent months and U.S. exports will clearly be at a disadvantage with lower priced products from Europe and Latin America. We now see the trade deficit widening over the course of 2015 and subtracting 0.4 percentage points from real GDP growth. While the first quarter is off to a slow start, our forecast for 2015 is roughly the same as it was earlier. Real GDP is expected to rise 2.7 percent in 2015 and 3.0 percent in 2016. Consumer spending is growing solidly. Lower energy prices have not provided as much of an immediate lift to outlays as many had expected but are still clearly boosting spending. Restaurants have been a big beneficiary, with sales surging 13.1 percent over the past year. Gains elsewhere have been less dramatic but that should be expected given that the savings from lower gasoline prices accrue gradually from week to week. Job and income growth are the more important drivers and both remain solid. Despite a rebound in government outlays in coming quarters, the public sector remains a downside risk over the next two years. Beginning in the fourth quarter of this year, the full set of discretionary budget cuts, known as budget sequestration, enacted by Congress in 2011 will go back into effect in the absence of Congressional action. The magnitude of the acrossthe-board sequestration cuts was rolled back under the RyanMurray agreement that was forged in 2013, and we expect some of the cuts will likely be reversed again. Retail Sales Age of Capital Stock $60 $60 Eating & Drinking Places: Jan @ $50.5B Gasoline Stations: Jan @ $35.3B $50 $50 $40 $40 $30 $30 $20 $20 $10 $10 Thousands Thousands Billions of Dollars, Seasonally Adjusted Average Age of Private Equipment Fixed Assets, Years 7.8 7.8 7.6 7.6 7.4 7.4 7.2 7.2 7.0 7.0 6.8 6.8 6.6 6.6 6.4 6.4 Average Age: 2013 @ 7.5 $0 $0 00 02 04 06 08 10 12 6.2 14 6.2 80 84 88 92 96 00 04 08 12 Source: U.S. Department of Commerce and Wells Fargo Securities, LLC 2 Economics Group U.S. Economic Forecast Wells Fargo Securities, LLC Wells Fargo U.S. Economic Forecast Q4 2010 q12015 Actual 2015 Forecast 2013 1Q 2Q 2014 3Q 4Q 1Q 2Q Actual 2015 3Q 4Q 1Q 2Q 2016 3Q 4Q 1Q 2Q 2012 3Q Forecast 2013 2015 2016 4Q #### #### Real Gross Domestic Product (a) 2014 #### #### #### #### #### #### 2.7 1.8 4.5 3.5 -2.1 4.6 5.0 2.2 1.1 3.0 2.9 3.0 3.0 3.0 3.1 3.0 2.3 #### #### 2.2 #### #### 2.4 #### #### 2.7 #### #### 3.0 Personal Consumption 3.6 1.8 2.0 3.7 1.2 2.5 3.2 4.2 3.3 2.8 2.8 2.8 2.7 2.7 2.7 2.7 1.8 #### #### 2.4 #### #### 2.5 #### #### 3.2 #### #### 2.7 Business Fixed Investment 1.5 1.6 5.5 10.4 1.6 9.7 8.9 4.8 3.5 4.8 6.2 6.2 5.7 6.3 6.5 6.3 7.2 #### #### 3.0 #### #### 6.3 #### #### 5.5 #### #### 6.0 Equipment 4.8 1.5 4.7 14.1 -1.0 11.2 11.0 0.9 3.5 3.7 6.0 5.4 5.7 6.0 6.2 6.0 6.8 #### #### 4.6 #### #### 6.5 #### #### 4.8 #### #### 5.7 Intellectual Property Products 6.4 -1.9 2.8 3.6 4.7 5.5 8.8 10.9 6.5 4.6 4.6 4.6 5.0 5.0 5.0 5.0 3.9 #### #### 3.4 #### #### 4.9 #### #### 6.8 #### #### 4.9 -11.5 7.3 11.2 12.8 2.9 12.6 4.8 5.0 -0.7 7.7 9.2 10.3 6.5 8.5 9.0 8.5 13.1 #### #### -0.5 #### #### 8.1 #### #### 5.3 #### #### 8.4 7.8 19.0 11.2 -8.5 -5.3 8.8 3.3 3.3 2.0 12.0 13.0 12.0 11.0 11.5 12.0 12.0 13.5 #### #### 11.9 #### #### 1.6 #### #### 6.7 #### #### 11.8 #### #### -2.0 #### #### -0.2 #### #### 0.4 #### #### Structures Residential Construction Government Purchases -3.9 0.2 0.2 -3.8 -0.8 1.7 4.4 -1.8 -1.5 1.1 1.4 1.6 1.8 2.0 2.2 2.4 -1.4 -427.2 -446.0 -424.6 -384.0 -447.2 -460.4 -431.4 -476.4 -495.8 -503.4 -519.5 -534.9 -548.0 -564.1 -581.8 -602.6 -452.5 #### #### -420.5 #### #### -453.9 #### #### -513.4 #### #### -0.1 -0.5 0.6 1.1 -1.7 -0.3 0.8 -1.2 -0.5 -0.2 -0.4 -0.4 -0.3 -0.4 -0.4 -0.5 0.0 #### #### 0.2 #### #### -0.2 #### #### -0.4 #### #### -0.4 33.4 43.4 95.6 81.8 35.2 84.8 82.2 88.4 73.0 77.0 75.0 75.0 75.0 75.0 75.0 75.0 57.1 #### #### 63.6 #### #### 72.7 #### #### 75.0 #### #### 75.0 0.7 0.3 1.5 -0.3 -1.2 1.4 0.0 0.1 -0.4 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.1 #### #### 0.0 #### #### 0.1 #### #### 0.0 #### #### 0.0 Nominal GDP (a) 4.2 2.9 6.2 5.0 -0.8 6.8 6.4 2.3 -0.9 4.7 4.9 5.0 5.0 5.1 5.3 5.1 4.2 #### #### 3.7 #### #### 3.9 #### #### 3.2 #### #### 5.1 Real Final Sales 2.0 1.5 3.0 3.9 -1.0 3.2 5.0 2.1 2.0 2.9 3.0 3.0 3.0 3.0 3.1 3.0 2.2 #### #### 2.2 #### #### 2.3 #### #### 2.8 #### #### 3.0 Retail Sales (b) 4.1 4.5 4.4 3.8 2.6 4.6 4.6 4.1 2.9 1.9 2.0 2.8 4.8 4.8 4.7 4.6 5.1 #### #### 4.2 #### #### 4.0 #### #### 2.4 #### #### 4.7 #### #### #### #### Net Exports Pct. Point Contribution to GDP Inventory Change Pct. Point Contribution to GDP #### #### #### #### #### #### #### #### Inflation Indicators (b) #### #### #### #### #### #### #### #### 1.8 #### #### #### #### #### #### #### #### -574.1 #### #### #### #### #### #### #### #### #### #### #### #### #### #### #### #### #### #### #### #### #### #### #### #### #### #### #### #### PCE Deflator 1.4 1.1 1.2 1.0 1.1 1.6 1.5 1.1 0.2 0.1 0.3 0.9 1.9 2.0 2.0 2.1 1.8 #### #### 1.2 #### #### 1.3 #### #### 0.4 #### #### 2.0 Consumer Price Index 1.7 1.4 1.5 1.2 1.4 2.1 1.8 1.2 -0.2 -0.3 0.0 0.8 2.2 2.3 2.4 2.4 2.1 #### #### 1.5 #### #### 1.6 #### #### 0.1 #### #### 2.3 "Core" Consumer Price Index 1.9 1.7 1.7 1.7 1.6 1.9 1.8 1.7 1.6 1.4 1.5 1.6 1.7 1.8 1.8 1.9 2.1 #### #### 1.8 #### #### 1.7 #### #### 1.6 #### #### 1.8 Producer Price Index (Final Demand) 1.5 1.2 1.5 1.2 1.4 2.0 1.8 1.3 -0.2 -0.2 0.0 0.8 2.2 2.3 2.4 2.4 1.8 #### #### 1.4 #### #### 1.6 #### #### 0.1 #### #### 2.3 Employment Cost Index 1.9 1.9 1.9 2.0 1.8 2.0 2.2 2.3 2.5 2.3 2.3 2.5 2.6 2.7 2.7 2.8 1.9 #### #### 1.9 #### #### 2.1 #### #### 2.4 #### #### 2.7 #### #### #### #### Real Disposable Income (a) #### #### #### #### #### #### #### #### #### #### #### #### -12.6 3.8 2.0 0.2 3.4 3.1 2.4 3.8 6.8 3.0 2.7 2.6 2.7 2.5 2.5 2.5 3.0 #### #### -0.2 #### #### 2.5 #### #### 3.9 #### #### 2.6 Nominal Personal Income (b) 2.4 2.6 3.0 0.1 3.6 3.7 4.0 4.5 4.4 4.4 4.6 5.2 5.3 5.0 4.8 4.3 5.2 #### #### 2.0 #### #### 4.0 #### #### 4.6 #### #### 4.8 Industrial Production (a) 4.2 1.9 2.5 4.9 3.9 5.7 4.1 4.3 3.0 4.9 3.5 3.1 3.5 3.7 3.5 3.5 3.8 #### #### 2.9 #### #### 4.2 #### #### 4.0 #### #### 3.6 77.7 77.8 77.9 78.4 78.6 79.1 79.3 79.4 79.8 80.0 80.1 80.2 80.2 80.2 80.2 80.2 77.3 #### #### 77.9 #### #### 79.1 #### #### 80.0 #### #### 80.2 Corporate Profits Before Taxes (b) 3.1 3.9 4.9 4.7 -4.8 0.1 1.4 3.4 4.2 4.2 4.7 3.7 3.6 3.3 3.4 3.4 11.4 #### #### 4.2 #### #### 0.1 #### #### 4.2 #### #### 3.4 Corporate Profits After Taxes 2.5 6.0 4.5 3.4 -11.8 -8.9 -6.3 -2.8 1.2 4.8 4.3 5.1 5.5 5.7 5.8 4.9 9.1 #### #### 4.1 #### #### -7.4 #### #### 3.9 #### #### Capacity Utilization #### #### #### #### #### #### #### #### 5.4 -307.2 90.7 -170.4 -172.6 -240.7 47.4 -117.5 -176.7 -113.3 -60.0 -160.0 -170.0 -150.0 -115.0 -140.0 -160.0 -1089.2 Current Account Balance (d) -105.5 -106.1 -101.3 -87.3 -102.1 -98.4 -100.3 -100.0 -95.0 -95.0 -100.0 -105.0 -110.0 -115.0 -120.0 -125.0 -460.8 #### #### -400.3 #### #### -400.8 #### #### -395.0 #### #### -470.0 76.2 77.5 75.2 76.4 76.9 75.9 81.3 85.1 91.3 92.5 93.8 95.0 96.0 97.0 98.0 99.0 73.5 #### #### 75.9 #### #### 78.5 #### #### 93.1 #### #### 97.5 #### #### #### #### Nonfarm Payroll Change (f) Unemployment Rate 211 178 190 217 193 284 237 324 258 225 215 210 200 197 195 190 188 #### #### -483.3 #### #### #### #### #### #### Federal Budget Balance (c) Trade Weighted Dollar Index (e) -680.2 #### #### #### #### #### #### #### #### #### #### #### #### 199 #### #### -510.0 #### #### -575.0 #### #### #### #### 260 #### #### #### #### #### #### 227 #### #### 195 7.7 7.5 7.2 7.0 6.6 6.2 6.1 5.7 5.5 5.4 5.3 5.2 5.1 5.0 4.9 4.8 8.1 #### #### 7.4 #### #### 6.2 #### #### 5.4 #### #### 5.0 Housing Starts (g) 0.95 0.86 0.88 1.03 0.93 0.99 1.03 1.06 1.07 1.13 1.21 1.24 1.26 1.27 1.28 1.33 0.78 #### #### 0.92 #### #### 1.00 #### #### 1.15 #### #### 1.31 Light Vehicle Sales (h) 15.3 15.5 15.6 15.6 15.7 16.5 16.7 16.7 16.5 17.0 17.2 17.3 17.2 17.1 17.0 16.9 14.4 #### #### 15.5 #### #### 16.4 #### #### 17.0 #### #### 17.1 112.2 103.3 109.1 109.1 107.6 109.5 103.7 77.2 55.0 57.5 60.0 62.0 64.0 66.0 67.0 68.0 111.3 #### #### 108.4 #### #### 99.5 #### #### 58.6 #### #### 66.3 Crude Oil - Brent - Front Contract (i) Quarter-End Interest Rates (j) #### #### #### #### #### #### #### #### #### #### #### #### #### #### #### #### #### #### #### #### #### #### #### #### Federal Funds Target Rate 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.50 0.75 1.00 1.25 1.75 2.25 2.75 0.25 #### #### 0.25 #### #### 0.25 #### #### 0.63 #### #### 3 Month LIBOR 0.28 0.27 0.25 0.25 0.23 0.23 0.24 0.26 0.30 0.70 0.95 1.20 1.45 1.95 2.45 2.85 0.43 #### #### 0.27 #### #### 0.23 #### #### 0.79 #### #### 2.18 Prime Rate 3.25 3.25 3.25 3.25 3.25 3.25 3.25 3.25 3.25 3.50 3.75 4.00 4.25 4.75 5.25 5.75 3.25 #### #### 3.25 #### #### 3.25 #### #### 3.63 #### #### 5.00 Conventional Mortgage Rate 3.57 4.07 4.49 4.46 4.34 4.16 4.16 3.86 3.60 3.72 3.87 3.89 4.07 4.39 4.86 4.90 3.66 #### #### 3.98 #### #### 4.17 #### #### 3.77 #### #### 4.56 3 Month Bill 0.07 0.04 0.02 0.07 0.05 0.04 0.02 0.04 0.14 0.56 0.86 1.15 1.41 1.80 2.28 2.80 0.09 #### #### 0.06 #### #### 0.03 #### #### 0.68 #### #### 2.07 6 Month Bill 0.11 0.10 0.04 0.10 0.07 0.07 0.03 0.12 0.26 0.62 0.92 1.20 1.52 1.83 2.36 2.83 0.13 #### #### 0.09 #### #### 0.06 #### #### 0.75 #### #### 2.14 1 Year Bill 0.14 0.15 0.10 0.13 0.13 0.11 0.13 0.25 0.29 0.68 0.98 1.22 1.56 1.87 2.43 2.86 0.17 #### #### 0.13 #### #### 0.12 #### #### 0.79 #### #### 2.18 2 Year Note 0.25 0.36 0.33 0.38 0.44 0.47 0.58 0.67 0.71 0.89 1.08 1.28 1.74 2.05 2.47 2.88 0.28 #### #### 0.31 #### #### 0.46 #### #### 0.99 #### #### 2.28 5 Year Note 0.77 1.41 1.39 1.75 1.73 1.62 1.78 1.65 1.69 1.79 1.90 1.99 2.22 2.33 2.62 2.92 0.76 #### #### 1.17 #### #### 1.64 #### #### 1.84 #### #### 2.52 10 Year Note 1.87 2.52 2.64 3.04 2.73 2.53 2.52 2.17 2.20 2.36 2.40 2.45 2.51 2.76 2.88 3.04 1.80 #### #### 2.35 #### #### 2.54 #### #### 2.35 #### #### 2.80 30 Year Bond 3.10 3.52 3.69 3.96 3.56 3.34 3.21 2.75 2.80 2.91 2.98 3.08 3.17 3.35 3.57 3.65 2.92 #### #### 3.45 #### #### 3.34 #### #### 2.94 #### #### 3.43 #### #### Forecast as of: March 11, 2015 Notes: (a) C ompound Annual Growth Rate Quarter-over-Quarter (b) Year-over-Year Percentage C hange (c) Quarterly Sum - Billions USD; Annual Data Represents Fiscal Yr. (d) Quarterly Sum - Billions USD (e) Federal Reserve Major C urrency Index, 1973=100 - Quarter End #### #### #### #### 2.00 #### #### (f) Average Monthly C hange (g) Millions of Units - Annual Data - Not Seasonally Adjusted (h) Quarterly Data - Average Monthly SAAR; Annual Data - Actual Total Vehicles Sold (i) Quarterly Average of Daily C lose (j) Annual Numbers Represent Averages Source: U.S. Department of Commerce, U.S. Department of Labor, Federal Reserve Board, IHS Global Insight and Wells Fargo Securities, LLC 3 Economics Group International Outlook Wells Fargo Securities, LLC The United States continues to be the locomotive of the global economy. As discussed in our domestic outlook section, U.S. economic growth has broadened and strengthened and that momentum in the world’s largest economy is a net positive for the global outlook. The relative outperformance of the U.S. economy and divergent policy path for the Federal Reserve relative to the expected trajectory of other major central banks has contributed to a stunning run-up in the value of the U.S. dollar. Since July, the trade-weighted value of the dollar has appreciated roughly 21 percent. That rivals the run-up in the value of the greenback that we saw at the height of the financial crisis. Between July 2008 and March 2009, the trade-weighted dollar rallied roughly 23 percent. Slow Global Growth In Europe, recent economic headlines have revolved around the latest developments in Greece, where the newly elected government’s willingness to cooperate with European finance ministers ebbs and flows. While the problems in Greece should not be discounted, developments in Europe are moving in a direction that is positive for growth prospects. The drop in oil prices and the advent of outright deflation in the Eurozone has compelled the ECB to at last embrace quantitative easing. Many European countries are net oil importers, so the decline in prices should boost discretionary spending. The euro, down more than 14 percent versus the dollar just since December, likely has room for further depreciation as the quantitative easing program gets underway, which should support export growth and perhaps boost interest in European tourism from foreign travelers. Growth prospects are not as unequivocally positive in other foreign economies, particularly in the developing world where our largest revisions took place this month. One of the major developments in the past few weeks has been the announcement from the Chinese government that it is now targeting GDP growth of roughly 7.0 percent, versus roughly 7.5 percent previously. Across the English Channel, economic growth in the United Kingdom has been outpacing the Eurozone in the past couple years, which has driven the unemployment rate to its lowest level since 2008. Unfortunately, the firming in the labor market has not yet translated into wage inflation. The lack of wage pressure and falling oil prices has had the predictable effect of pushing down inflation and, consequently, a widely expected tightening by the Bank of England has been pushed back at least through the end of this year, in our view. The Chinese government is in the midst of a transition in which growth is being driven more by domestic consumer demand rather than business spending fueled by surging bank loans to the Chinese corporate sector. In some ways, the slightly lower growth target removes some pressure to grow while these reforms are implemented. The People’s Bank of China has eased policy somewhat in recent months. While we look for further policy accommodation this year, we do not anticipate a wholesale relaxation in policy as we saw during 2008-2009. Despite the fact that economic growth in Japan has been negative in three of the past five quarters, we suspect that real GDP growth there will stay positive for the rest of the year. The approaching anniversary of the unpopular consumption tax hike in April will result in a drop in the year-over-year inflation rate. Even modest wage gains will result in higher real income, which should underpin consumer spending in Japan later this year. If the drop in inflation is more than temporary the Bank of Japan will not hesitate to increase the pace of its QQE as it did in October 2014. Growth expectations for India have waned somewhat in recent months as well. The newly elected government has achieved some of the promised reforms, but a return to double-digit percentage growth in India is not likely until substantive economic reforms are enacted. Japanese Consumer Price Index U.S. Trade Weighted Dollar Major Index Year-over-Year Percent Change March 1973=100 5% 5% 4% 4% 3% 3% 2% 2% 1% 1% 0% 0% -1% -1% -2% -3% 94 96 98 90 90 85 85 80 80 75 75 70 70 Major Currency Index: Mar-06 @ 91.6 CPI Forecast -3% 92 95 -2% CPI: Jan @ 2.4% 90 95 00 02 04 06 08 10 12 14 16 65 2004 65 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Source: IHS Global Insight, Bloomberg, LP and Wells Fargo Securities, LLC 4 Economics Group International Economic Forecast Wells Fargo Securities, LLC Wells Fargo International Economic Forecast (Year-over-Year Percent C hange) GDP CPI 2014 2015 2016 2014 2015 2016 Global (PPP weights) Global (Market Exchange Rates) 3.2% 2.7% 3.2% 2.8% 3.5% 3.1% 3.6% n/a 3.3% n/a 3.6% n/a Advanced Economies 1 United States Eurozone United Kingdom Japan Korea Canada 1.8% 2.4% 0.9% 2.6% 0.0% 3.4% 2.5% 2.3% 2.7% 1.4% 2.5% 1.0% 3.4% 1.9% 2.6% 3.0% 1.8% 2.4% 1.5% 3.8% 2.4% 1.6% 1.6% 0.4% 1.5% 2.7% 1.3% 1.9% 0.4% 0.1% -0.1% 0.8% 1.1% 1.1% 0.4% 1.9% 2.3% 1.2% 1.7% 1.5% 2.6% 2.1% Developing Economies 1 China India2 Mexico Brazil Russia 4.4% 7.4% 6.9% 2.1% -0.1% 0.4% 4.0% 6.8% 7.4% 2.4% -0.2% -3.7% 4.4% 6.6% 7.0% 2.8% 0.5% 0.7% 5.5% 2.0% n/a 4.0% 6.3% 7.8% 5.9% 1.5% 5.2% 3.4% 7.6% 15.1% 5.3% 2.1% 5.4% 3.6% 6.8% 5.7% Forecast as of: March 11, 2015 1 2 Aggregated Using PPP Weights Forecasts Refer to Fiscal Year Wells Fargo International Interest Rate Forecast (End of Quarter Rates) 3-Month LIBOR 2015 U.S. Japan Euroland1 U.K. Canada2 Q1 0.30% 0.10% 0.03% 0.55% 1.00% Q2 0.70% 0.10% 0.03% 0.55% 1.00% 10-Year Bond 2016 Q3 0.95% 0.10% 0.03% 0.65% 1.00% Q4 1.20% 0.10% 0.03% 0.95% 1.00% Q1 1.45% 0.10% 0.03% 1.15% 1.05% 2015 Q2 1.95% 0.10% 0.05% 1.20% 1.25% Q1 2.20% 0.38% 0.38% 1.95% 1.60% Q2 2.36% 0.40% 0.40% 2.10% 1.70% Q3 2.40% 0.42% 0.45% 2.20% 1.80% Q4 2.45% 0.45% 0.55% 2.30% 1.90% 2016 Q1 2.51% 0.50% 0.70% 2.50% 2.00% Q2 2.76% 0.55% 0.85% 2.60% 2.30% Forecast as of: March 11, 2015 1 10-year German Government Bond Yield 2 3-Month C anada Bankers' Acceptances Source: IHS Global Insight, IMF and Wells Fargo Securities, LLC 5 Wells Fargo Securities, LLC Economics Group Diane Schumaker-Krieg Global Head of Research, Economics & Strategy (704) 410-1801 (212) 214-5070 [email protected] John E. Silvia, Ph.D. Chief Economist (704) 410-3275 [email protected] Mark Vitner Senior Economist (704) 410-3277 [email protected] Jay H. Bryson, Ph.D. Global Economist (704) 410-3274 [email protected] Sam Bullard Senior Economist (704) 410-3280 [email protected] Nick Bennenbroek Currency Strategist (212) 214-5636 [email protected] Eugenio J. Alemán, Ph.D. Senior Economist (704) 410-3273 [email protected] Anika R. Khan Senior Economist (704) 410-3271 [email protected] Azhar Iqbal Econometrician (704) 410-3270 [email protected] Tim Quinlan Economist (704) 410-3283 [email protected] Eric Viloria, CFA Currency Strategist (212) 214-5637 [email protected] Sarah Watt House Economist (704) 410-3282 [email protected] Michael A. Brown Economist (704) 410-3278 [email protected] Michael T. Wolf Economist (704) 410-3286 [email protected] Mackenzie Miller Economic Analyst (704) 410-3358 [email protected] Erik Nelson Economic Analyst (704) 410-3267 [email protected] Alex Moehring Economic Analyst (704) 410-3247 [email protected] Donna LaFleur Executive Assistant (704) 410-3279 [email protected] Cyndi Burris Senior Admin. Assistant (704) 410-3272 [email protected] Wells Fargo Securities Economics Group publications are produced by Wells Fargo Securities, LLC, a U.S broker-dealer registered with the U.S. Securities and Exchange Commission, the Financial Industry Regulatory Authority, and the Securities Investor Protection Corp. Wells Fargo Securities, LLC, distributes these publications directly and through subsidiaries including, but not limited to, Wells Fargo & Company, Wells Fargo Bank N.A., Wells Fargo Advisors, LLC, Wells Fargo Securities International Limited, Wells Fargo Securities Asia Limited and Wells Fargo Securities (Japan) Co. Limited. 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