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In summary:

Global: US and emerging markets drive growth upgrade

 ·        We have increased our forecasts for global GDP growth in 2010 a result of upgrades to the US and emerging markets. We are now more confident of a sustainable recovery as an improving corporate sector is expected to increase capital expenditure and employment. However, ongoing de-leveraging pressures will limit the strength of the upturn.

·        Whilst we see better prospects in the US and emerging economies our growth forecasts for the UK and Eurozone are little changed following a run of disappointing data and the likelihood of an earlier tightening of fiscal policy than previously expected. Policy tightening by the ECB and Bank of England has been delayed in the forecast as a result.

·        We remain sanguine on inflation in the OECD economies as the output gap weighs on prices and drives core inflation lower. We do not subscribe to the view that governments will be willing or able to inflate away their rising debts. Inflation could however be a problem in the emerging economies where there are signs of over heating.

·        Upside risks are for a stronger recovery in line with the past performance of economies emerging from a deep recession. On the downside, there is potential for the sovereign debt problems in the Eurozone to escalate, creating the risk of default and a more deflationary environment as the markets force governments to tighten fiscal policy more rapidly.

·        Fourth quarter Eurozone growth left little to be desired as domestic demand continues to be hampered by fears that unemployment will resume its upward trend. Many countries are still in recession while those that are doing better, have done so with substantial aid from the inventory cycle.

·        Meanwhile, there has been a downward step change in sentiments towards Greek debt as the new government revealed the previous administration’s attempts to hide the extent of the public finances crisis. Greece will now face greater EU scrutiny, though an EU bail-out is still likely to be needed.