- Scenario 1, “More of the same”: An intermediate scenario, in which US government spending cuts and tax hikes continue to restrict consumption and investment, and a reduction in fiscal austerity in the eurozone only partially offsets the effects of tight lending conditions. In this scenario, US GDP growth remains steady but modest, although economic data gradually improve throughout 2013. Aggressive monetary policy in Japan continues to support growth and produces a limited increase in inflation. China continues its rebalancing process, and growth expectations remain on target.
- Scenario 2, “More of more”: The most bullish scenario, in which investment and consumer spending in the US pick up as housing, employment and income figures improve. In this scenario, quantitative easing and global fundamental improvements lead to rapid growth and sustainable inflation in Japan. The eurozone returns to growth in mid-2013 as the periphery countries begin to recover. In China, an increase in both domestic and external demand keeps GDP growth at about 8.5%. Easing programs in China and the US are gradually scaled back without disrupting growth.
- Scenario 3, “More of less”: The most bearish scenario, in which the eurozone remains in a recession until the end of 2014 due to tight lending conditions and deleveraging. Falling housing prices and stress in bank balances in Spain, the Netherlands and Slovenia keep sovereign markets volatile. US GDP growth stays close to 2% in response to sluggish business investment and reduced government and consumer spending. Weak external demand pushes Chinese growth down to just above 6%. Growth in Japan remains subdued, with trade flows lagging expectations.
UBS Global Asset Management: Fed Facilitating A Controlled Descent, Or Prompting A Sugar Crash?
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