World Economic Prospects Monthly

Overview: Global growth resilient to trade slowdown

• ? It seems increasingly clear that the manufacturing‐ and trade‐driven soft patch in late‐2018 is extending into this year. But we still think that global recession risks remain low and see no reason to make any notable shifts to our outlook for the global economy this year. We continue to forecast that GDP growth will slow from 3.0% in 2018 to 2.7% this year, with a similar outcome seen in 2020.
• ? Various indicators show that trade volumes slowed sharply at end‐2018 and survey indicators for January suggest that the situation has not improved since then (see Chart). The main reason for this weakness has been China, where imports ended the year on a very weak note and we expect a further slowdown in Q1.
• ? We have lowered our forecast of Chinese imports in 2019 by around 1.5pp in response. However, we expect a bounce back in Q2 and beyond; reflecting this, Chinese import growth over the year as whole is still expected to be notably stronger than in the 2015/16 soft patch. In a similar vein, while global trade growth is expected to slow sharply from 4.6% to 3.3% this year (down from 3.6% last month), it should still be stronger than in 2012–16, providing a solid backdrop for exporters.
• ? Meanwhile, financial markets have rebounded sharply from the December sell‐off due to renewed optimism regarding US and China trade talks and a more dovish Fed. We now expect the Fed to leave rates on hold until at least Q3 and hike rates only once this year. This, along with lower government bond yields and weaker inflation, is also likely to reduce the need for monetary tightening elsewhere, particularly in emerging markets (EMs), helping to support global growth later in the year.
• ? Overall, we still see global GDP growth softening in H1, but with a modest rebound in H2 as Chinese growth stabilises and EMs and European growth regain momentum. Sharper slowdowns in China and global trade and financial‐market weakness remain key concerns for the 2020 outlook. But the risk of inflation‐induced policy tightening is still low and the odds of a renewed flare‐up in trade tensions have ebbed lately.

     

World Economic Prospects Monthly

Overview: Some glimmers of hope start to appear

• ? Prospects for early‐2019 remain downbeat, but latest data offer some glimmers of hope that growth is beginning to stabilise. We continue to expect easier financial conditions and other policy support to trigger a modest acceleration in global GDP growth in the latter part of 2019.
• ? On the face of it, our latest forecasts suggest that we have become more upbeat about the outlook for the global economy. We now forecast world GDP will rise by 2.7% this year and 2.9% in 2020, after last year's 3.2% gain, upward revisions of 0.2pp for both 2018 and 2019 and 0.1pp for next year. But these revisions largely reflect a change in the GDP base year from 2010 to 2015. This has increased the weights of faster‐growing economies such as China at the expense of slower‐growing economies, in turn boosting world GDP growth.
• ? There are plenty of reasons to remain cautious in the near term. For instance, trade indicators have continued to weaken recently, while the global manufacturing PMI has fallen to only just above the 50 no‐change level.
• ? However, there are some signs that both trade and manufacturing data (at least outside the eurozone) may be beginning to stabilise. Just as importantly, the global services PMI has picked up in the early stages of this year. In the past, sustained global slowdowns have tended to see the services PMI follow the manufacturing PMI down. Meanwhile, European retail sales have continued to expand in early‐2019.
• ? Beyond the short term, we remain cautiously optimistic that GDP growth will pick up again. Chinese credit data, which leads hard activity data, has recently improved and, although uncertainties over US‐EU trade relations remain, global trade tensions seem to be waning. Last but not least, more dovish central banks — we no longer expect the Fed to hike rates again in this cycle — and the resultant loosening in financial conditions should support growth in both the advanced and emerging economies.

     

The global impact of a sharper US‐China slowdown

• ? We forecast a moderate global slowdown through 2020, but risks are looming of a sharper downturn in China and the US. If these were to materialise, our simulations suggest global GDP growth would hit a post‐crisis low, with the level of GDP dropping by 0.6% and growth slowing by 0.4 ppt in 2019/20.
• ? Economies with strong trade linkages to China and the US – Korea, Taiwan and Mexico – would suffer most. Conversely, a weaker dollar, lower oil prices and relatively smaller trade flows with the US and China would offset the blow in Europe and for some EMs, including Turkey, Argentina and India.
• ? Since 2010, Chinese activity has been a powerful leading indicator of every major economy's exports, proving stronger than similar indicators for US or eurozone activity. This is even the case for non‐Asian economies such as Canada, Mexico, Italy, Germany, France and the UK. This may reflect deepening trading relationships and the relatively high volatility of Chinese cyclical indicators over the period.
• ? Over the past decade, global macro stability has been supported by the US and Chinese cycles moving counter to each other. But this could reverse if the ongoing Chinese policy stimulus fails to gain traction and the weakness gains momentum.

     

World Economic Prospects

Overview: 2016 – unhappy New Year?

• 2016 has got off to a shaky start, with sharp declines in global equity markets and renewed jitters about China and its currency. Recent asset market trends have prompted some observers to suggest a high risk of a global recession this year.
• A glance back at recent history suggests why. Since last May, global stocks and non‐fuel commodity prices have both dropped by 12–13%. Over the last forty years, such a combination in a similar time frame has usually been associated with recession.
• There have been exceptions to this pattern; there were similar sell‐offs in stocks and commodities in 2011, 1998 and 1984 without associated recessions. Notably though, in at least two of these cases, expansionary US policy helped reverse market movements – but US policy is now headed in the opposite direction.
• More heart can be taken from the relative resilience of real economy developments in many of the advanced economies over recent months. There are few signs, for instance of sharp declines in consumer or business confidence, or in property prices.
• Policy settings also remain expansionary in the Eurozone, Japan and China – where broad money and growth has moved higher in recent months.
• Industry remains the problem area, both for commodity price‐sensitive extractive sectors and manufacturing. The global manufacturing PMI continues to suggest very subdued output growth.
• Services output remains more robust, and should be supported during 2016 by tightening labour markets – December's strong US payrolls release was encouraging in this regard.
• But there are downside risks to services, too, should stock price declines hit consumer spending. Our Global Economic Model suggests a 15% fall in world stocks may cut global GDP by 0.4–0.7%.
• As a result, there is a real danger that our global growth forecast of 2.6% for 2016 proves too optimistic with growth instead slipping below last year's already‐modest 2.5% reading.

     

World Economic Prospects Monthly

Overview: Growth resilient to protectionist concerns

• ? Despite the mounting threat of more protectionist trade measures, we expect the impact on global growth and trade to be mild. Given this, and the still fairly solid underlying economic picture, we have left our global GDP growth forecasts for 2018 and 2019 unchanged at 3.2% and 3.0% respectively.
• ? Although economic data in Q1 painted a pretty solid picture, there are signs that the global expansion may lose momentum in Q2. Most notably, the global PMI fell sharply in March, more than offsetting the gains of the previous three quarters or so. Some of the decline may reflect an over‐reaction to recent trade threats and could be reversed in April and despite the drop, the surveys still point to strong growth. But the fall highlights the risk that lingering trade tensions could damage confidence and prompt firms and consumers to delay investment and major spending plans.
• ? On a more positive note, China's economic growth picked up markedly in early 2018, which could provide a fillip to global trade growth in the near term. Given the betterthan‐expected start to the year, we have made no change to our 2018 China GDP growth forecast (of 6.4%) despite the probable negative effects of trade measures.
• ? Meanwhile, most advanced economies remain in the late expansionary stage of the cycle. And those that show signs of slowing, such as the Eurozone, are doing so from multi‐year highs. While we have nudged down our 2018 Eurozone GDP growth forecast slightly to 2.2%, the pace is expected to remain well above trend. We judge the impact of US tariffs and counter‐measures on the US economy to be subdued and have lowered our GDP growth forecasts for 2018 and 2019 by just 0.1pp.
• ? For now, we see further solid growth for the world economy this year even in the environment of rising protectionism. While there is a risk that a further escalation of trade tensions could trigger a sharper slowdown in global GDP growth, we still see the risks of a full‐blown and damaging trade war as limited and the chances of protectionism leading to recessions as smaller still.

     

Five shocks that could lead to recession

• ? Although world growth has slowed sharply, we are still some way from global recession territory. Additional shocks, probably in combination, would be needed to tip the global economy into recession.
• ? Of the range of possible shocks, we consider five plausible candidates: rising oil prices, a sharp slump in equities, tightening credit standards, a financial shock to emerging markets, and further escalation in trade tensions.
• ? By themselves, each would need to be very large to trigger a recession. However, a combined set of plausibly‐sized shocks could well be enough. Historically it is common for different shocks to coincide or overlap, and there is a risk of a slowdown feeding on its own momentum.
• ? In our view, the risk of these shocks occurring is not insignificant, as we've seen in recent oil price volatility and given factors such as high equity valuations.

     

Global economy robust to higher oil,but EM vulnerable

• ? We do not envisage major central banks being pricked into deflationary action by the oil spike as there are limited concerns over a wage‐price spiral. But further rises — say to $100pb — would sour the global economy's ‘Goldilocks’ period. Vulnerable EM are the biggest concern; for some the impact is relatively large and could pile pressure on already‐strained domestic policies .
• ? A comparison with historical precedents is generally consoling. First, the price rise of 60% in the last year — though big — is only the sixth largest since 1973. Second, oil‐related global slowdowns have usually been associated with central bank hikes, which are less likely now than in past periods when inflation was less well anchored.
• ? Global implications: our baseline forecast of $80bp in H2 2018 may prompt a modest rise in non‐energy inflation and wages, and slightly weaker GDP growth. But we anticipate limited monetary policy responses. Concerns about the negative impact on activity are likely to trump fears of second‐round inflation effects.
• ? Model simulations: souring Goldilocks' porridge. Our $100pb oil simulations reveal a peak impact in 2020, knocking 0.7% off the level of global GDP. Inflation rises 1.2pp above our baseline by 2019.
• ? The recent association between strong oil and a strong dollar is unusual, but is probably not reflective of a fundamental change in the usual historic relationship (strong oil‐weak dollar).
• ? Simulations suggest EM oil importers endure the biggest hits via a (i) sharp terms of trade reversal; (ii) dollar strength; (iii) capital flows reversals; and (iv) recent reductions of oil price subsidies leaving consumers vulnerable to price increases. The most affected include already‐vulnerable economies Greece, Argentina and Turkey, as well as EM heavyweights China and India.

     

Meagre house price growth may kill off a UK obsession

• ? Short of an unlikely jump in interest rates or a no‐deal Brexit proving more damaging than we expect, we think that positive but sluggish growth will continue to characterise UK house prices for the foreseeable future.
• ? Mooted reforms to stamp duty could prompt some upward price pressure, although stretched affordability and the end of ‘Help to Buy’ will work in the opposite direction.
• ? Meanwhile, compared to the dominant role interest rates play in driving house prices, fulfilling the government's housebuilding goals ‐ even if these very ambitious target could be met ‐ would make only a modest difference.

     

Who's most exposed to the world trade slowdown?

• ? A new indicator of exposure to the world trade slowdown points to Asian economies like Taiwan and Korea being most exposed, but also to significant vulnerability in Germany. Better insulated from the slowdown are the less open economies, such as the US, Brazil and India.
• ? Asian economies’ exposure is greater due to their generally high export orientations and strong trade integration with China – especially significant given the escalation of US‐China trade tensions. Likewise, Germany is highly export‐oriented but is also specialised in capital goods exports, which tend to weaken most in trade downturns.
• ? The indicator used is based on factors including trade openness, export specialisation in weakening sectors and exposure to spillovers from US‐China tariffs. It explains around 40% of the pattern of economic slowdown from 2017–2019 across a sample of key economies.

     

World Economic Prospects Monthly

Overview: entering 2018 with plenty of momentum

• ? Further evidence that the global economy ended last year on a high note is consistent with our view that world GDP growth in 2018 will be around 3.2%, a little better than the likely rise of 3% in 2017 and the best annual outturn since 2011.
• ? The global economy has entered 2018 with plenty of momentum. In December, the global composite PMI continued to trend upwards, rising to its highest level of 2017. This was primarily down to developments in the manufacturing sector, with several emerging markets recording especially strong gains.
• ? While the strength of the manufacturing PMI bodes well for global trade, other timely trade indicators, particularly from Asia, have been less positive. On balance, though, we have nudged up our forecast for world trade growth iwn 2018 to 4.8%. But this would still be a slowdown after last year's estimated rise of 6%.
• ? This partly reflects the change in the drivers of GDP growth from 2017. We still expect a modest slowdown in China, triggering a sharper drop‐off in import growth there. Eurozone GDP growth is also likely to slow slightly, to 2.2%, which is still well above our estimate of potential growth. By contrast, we have nudged up our US GDP growth forecast for this year to 2.8% – 0.5pp higher than the probable 2017 outturn – as looser fiscal policy will not be fully offset by tighter monetary policy. The recent rise in commodity prices, further dollar weakness and still‐strong global trade growth all bode well for prospects in many emerging markets.
• ? Some commentators have questioned the durability of the global economic expansion, reflecting the long period of uninterrupted GDP growth and concerns that a financial market slowdown could eventually impinge on growth. But economic expansions do not die of old age. And while equity markets look expensive on many metrics, we expect strong earnings growth to push equity prices higher over the coming months. Meanwhile, although various geopolitical risks remain, more generally economic uncertainty has diminished.

     

G7 consumption: after the wealth rush

• ? In only one of 12 large advanced economies do we expect consumption to outstrip GDP growth in 2018. As key drivers rotate, the impact of a recovery in real incomes will be dampened by higher oil prices and waning wealth effects .
• ? Policy‐fuelled asset booms sustained the post‐crisis recovery in G7 consumption, though by historical standards the recovery was nothing special. Historically, the G7's average 5‐year recovery from troughs entailed consumption matching GDP growth, but in the five years from 2010 consumption was 0.2 ppt weaker. Its relative strength only picked up from 2015, when boosted by weak oil prices.
• ? Relatively weak G7 consumption growth is likely to continue as key drivers rotate. Strong employment growth and a modest pick‐up in wage inflation will offset waning equity and housing wealth effects.
• ? Near‐term risks are two‐way. An oil‐fuelled inflation surprise could hit consumers, wreck central bank gradualism and reveal balance sheet weaknesses. Currently, however, we see only limited pockets of credit risk and vulnerability to higher rates.
• ? Conversely, there is scope for a credit‐fuelled boost to consumption. G7 household borrowing relative to its trend is arguably close to 40‐year lows, so unless financial deepening has reached a limit, there is scope for increases in borrowing. Furthermore, G7 bank deleveraging could be over, boosting credit supply conditions.
• ? We see two positive longer‐term drivers of the global consumption share: (i) Asian economies will become more consumption‐driven; (ii) Household re‐leveraging offers scope for some debt‐fuelled consumption growth. Offsetting negatives are that demographics, interest rates and asset prices will provide little support

     

Supply surprise is a ‘nice’ reprise

• ? This year advanced economies have enjoyed a rare positive supply surprise: output is higher than expected and inflation is lower. The initial China‐related boost not only proved to be a great antidote to secularly weak global demand, but it has also engendered unexpected global momentum and a benign inflation response. As a result, 2016–17 resembles a mini‐reprise of the “nice” 1990s, a non‐inflationary, consistently expansionary decade.
• ? The global momentum has been propelled by a strong international trade multiplier. This has contributed to strength in several advanced economies, particularly the Eurozone. We expect global growth in 2018 to be bolstered by US fiscal stimulus as the impulse from China fades.
• ? It will remain “nice” in 2018, albeit in the context of weak secular trend growth. We expect the benign output‐inflation trade‐off to continue. Several of the factors that are underpinning low inflation and unemployment as well as weak wage growth are likely to be present for some time.

     

World Economic Prospects Monthly

Overview: Outlook darkens as coronavirus spreads

• ▀ What began as a supply shock in China has morphed into something much more serious. The effects of financial market weakness and the disruption to daily life around the world will trigger lower consumer spending and investment on top of the disruptions to the global supply chain. We now expect global GDP growth to slow to 2.0% this year from 2.6% in 2019, before picking up to 3.0% in 2021. But a global pandemic would lead to a far bigger slowdown this year.
• ▀ China seems to have made progress in containing the spread of the coronavirus, but the slow return to business as normal has prompted us to cut year-on-year GDP growth in Q1 from 3.8% to 2.3%, the weakest in decades. But we expect a healthy growth rebound in Q2 which will also provide Asian economies with a lift.
• ▀ It is isolation policies not infection rates that determine the economic impact. Outbreaks around the world are leading authorities to announce a growing list of measures to curb the virus spread. At a global level any Q2 rebound will thus be small at best. We expect investment in the advanced economies as a whole to contract on a year-on-year basis in Q2 for the first time since the global financial crisis, while annual household spending growth may slow to its lowest since the eurozone crisis.
• ▀ Our baseline assumes that the global economy will return to business as usual in Q3 and that some catch-up will result in robust H2 GDP growth. Combined with favourable base effects in early-2021, this is expected to result in world GDP growth averaging about 3% in 2021.
• ▀ Since January, we have cut our 2020 global GDP growth forecast by a hefty 0.5pp. But larger revisions may be required if the disruption triggered by shutdowns and other responses to coronavirus proves longer than we assume currently or if more draconian actions are needed in the event of a global pandemic. Our scenarios suggest that the latter could push the global economy into a deep recession.

     

Goodbye grey skies? 2018's global shocks may be fading

• ? It may be premature to declare the onset of happy days for the global economy, but our trawl through the various drivers of weakness over the last year or so suggests the worst is behind us.
• ? Our lengthy list of lifting clouds is led by China, where policy stimulus is showing signs of boosting lending, but there are other sources of optimism too. The eurozone's run of bad luck may be turning, and there are reasons for optimism on trade wars. Plenty of 2018's bad news was interconnected and centred around adverse global financial conditions, US dollar strength and very tough external conditions for EM. These have reversed in Q1 2019 amid receding fears that global inflation is set to surge.
• ? But we are not yet proclaiming hello to blue skies. After all, recent shocks – good or bad – should on average fade over time. The context is one of weakening trend growth (we are partial believers in the secular stagnation hypothesis) and of pockets of weakness in global balance sheets, including in China.
• ? And we see three conspicuous potentially negative drivers for the global economy. First, there is the fading impact of the US fiscal boost. Second, there is a small probability that some of the ongoing negatives – such as trade wars – could blow up into something very nasty. Third, there is a possibility that negative momentum from past and ongoing shocks may push weakness into Q2 and beyond.
• ? But on balance, all of this adds up to a receding risk of global recession. We now attach a 20% probability to a fall in advanced economy GDP per capita over the next two years, down from 25% previously. Our increased optimism is based on (i) the analysis in this article, (ii) our growing confidence that soft landings are attainable and (iii) our assessment that late‐cycle vulnerabilities may be overstated.

     

Global wages: we don't (yet) have lift‐off

• ? Policymakers, most notably in the US, have been expecting wage growth to pick up for some time as job markets tighten. But the data over the last six months have shown few indications of wage lift‐off. Our review of the latest evidence suggests that although labour markets are, on the whole, still tightening, we see increased downside risks to our forecasts for faster global wage growth in 2018–19.
• ? Rates of “churn” in labour markets – a possible precursor to faster wage growth – have continued to rise in the US and parts of Europe.
• ? But other structural factors may still be holding wages down. A recovery in prime‐age participation in the US may be helping to cap wage rises, as may a pool of “underemployed” workers in the US and UK (though this pool is shrinking fast).
• ? Productivity growth also remains weak, running at a 0.5%–1% annual pace in Q1 2017 across the US, UK, Germany and Japan. This compares with a G7 average pace of 1.5% per year in 1985–2006.
• ? Overall, the risks to our baseline forecast of faster wage growth in the major economies in 2018 look skewed to the downside. We expect wage growth to firm in 2018 by 0.5–1 percentage points in the US, UK, Germany and Japan. We would give this modal forecast a probability of around 60%, but with a 25% chance that wage growth is somewhat slower than this and only a 15% chance that it is higher.

     

Four reasons why 2018 will be the best post‐crisis year

• ? We head into 2018 in a fairly optimistic mood. The current upswing is more broadly based than any other since the global financial crisis, and – unusually by recent standards – we have entered the new year without any major crisis looming. We see world GDP growth accelerating from 3.0% last year to 3.2% in 2018, which would be the best year for the global economy since the post‐global financial crisis rebound .
• ? There are four key reasons why 2018 is going to be a good one globally: (i) strong trade growth; (ii) muted inflation keeping monetary policy accommodative; (iii) emerging markets staying robust; (iv) resilience to political uncertainty.
• ? The near‐term risk of an abrupt slowdown in China looks limited, while the Eurozone economy continues to stage robust growth which is underpinned by strong fundamentals. A potential fiscal loosening, a weaker dollar and business investment revival bode well for the US. The outlook is bright for economies that are heavily integrated into global manufacturing supply chains or reliant on commodity exports.
• ? Granted, soaring debt is a cause for concern, particularly in some emerging markets, along with high asset price valuations. They warrant close monitoring and are plausible triggers for the next global slowdown. Nonetheless, while such risks could linger or indeed escalate further before correcting, we don't see them as 2018 issues.
• ? The most obvious trigger for any such correction would be a widespread and more aggressive monetary policy normalisation. However, in our view, inflation pressures look set to build only slowly. Add the fact that high debt will make the economy more sensitive to interest rate moves, we expect central banks to normalise with caution and see policymakers doing less tightening that the consensus expectation.

     

UK inflation set to tumble below target by autumn

• ? We expect CPI inflation to slow markedly this year, dropping below the 2% target by the autumn. The inflationary impulse from the 2016 depreciation is fading and should partially reverse, while global food and energy prices are expected to stabilise. Base effects will become increasingly important.
• ? CPI inflation reached a five‐and‐a‐half‐year high of 3.1% in November, up from a little over 1% a year earlier. The 2017 pick‐up in inflation was the result of a perfect storm of a weaker pound, higher oil prices and sharp rises in domestic electricity bills. But inflation has subsequently slowed, reaching 2.5% in March. And, after a brief hiatus, we expect the downward trend to continue as we move through the year.
• ? The key driver of lower inflation will be weaker core pressures. In line with the literature, there is already evidence that the impact of sterling's depreciation is fading, and we think that the pressures could partially reverse if sterling continues to strengthen. We see little prospect of an offsetting escalation in domestic cost pressures. The recent pick‐up in wage growth has been muted and a further acceleration above 3% looks unlikely while there remains slack in the labour market.
• ? The food, petrol and energy categories contributed 0.8 ppt to CPI inflation last year, compared with a drag of 0.5 ppt in 2016, as stronger global pressures combined with the weaker pound. But as global prices have been more subdued of late, by the end of 2018, we expect these categories to be contributing 0.5 ppt to CPI inflation.
• ? The final element behind the expected slowdown in inflation is base effects. The comparison with last year's strong price pressures will depress the 2018 inflation rate, and we see the base effects being at their strongest mid‐year.
• ? We think it unlikely that such a slowdown in inflation would derail the MPC from hiking interest rates twice this year. But it could temper its hawkishness in 2019.

     

Alternative policy options for combatting a downturn

• ? With limited scope for conventional monetary policy options, central banks and governments may need to turn to alternative approaches to combat slowing global growth and respond to economic shocks.
• ? Our analysis shows that not only do governments in advanced economies have limited room to cut rates but that doing so has proved less effective in boosting growth in recent years. This increases the need to look at alternatives, such as negative interest rates, renewed QE and fiscal stimulus.
• ? While negative interest rates have helped reduce borrowing costs in some economies, the impact on banks has been ambiguous. Also, lowering rates further into negative territory could be hard without incurring significant costs.
• ? QE in the form practised up to now is also likely to be less effective than in the past due to low yields, narrow risk spreads and high asset valuations. So, a deeper downturn might require more radical QE ‐ buying corporate bonds, bank loans and equities ‐ which comes with significant drawbacks.
• ? Some central bankers are starting to acknowledge the limits of monetary action, with the next step being to consider fiscal action as a more effective alternative ‐ as argued recently by the likes of Larry Summers.
• ? In our view, fiscal policy is likely to be especially effective in a climate of weak growth and low rates, with large multiplier effects. Advanced economies have more scope for fiscal stimulus than often recognised and could finance a large public investment programme by issuing ultra‐cheap long‐dated debt

     

World trade recovering but still reasons for caution

• ? World trade has picked up in recent months, expanding at the fastest pace in six years in the first quarter, with the rise fairly evenly split between advanced and emerging markets. Stronger activity in China and a broader upturn in global investment have been key factors. But there are still reasons for caution. Although the ‘cyclical’ element in world trade is improving, the ‘trend’ element is not thanks to changes in supply chains and a lack of trade liberalisation.
• ? World trade growth looks set to reach about a 4% annual rate in Q1 2017, the fastest pace since 2011. Alternative freight‐based indicators confirm the upturn. This suggests some modest near‐term upside risk to our world growth forecasts.
• ? Recent growth has been evenly split between advanced countries and emerging markets (EM). In EM, the end of deep recessions in Russia and Brazil and an upturn in China have been key factors. China directly added 0.5 percentage points to annual world trade growth over recent months and firmer growth there has also pushed up commodity prices and the spending power and imports of commodity exporters.
• ? Another important positive factor is an improvement in investment, which is a trade‐intensive element of world GDP. Rising capital goods imports across a range of countries suggest the drag on world trade from weak investment is fading.
• ? The decline in the ratio of world trade growth to world GDP growth over recent years has both cyclical and structural elements. But while the cyclical component now seems to be improving, there is little evidence that the structural part – responsible for between a half and two‐thirds of the recent decline – is doing likewise.
• ? Key factors behind the structural decline in world trade growth are changes in supply chains and a lack of trade liberalisation/protectionism. Both are likely to remain a drag over the coming years. Meanwhile, a levelling‐off of growth in China and drop back in commodity prices could curb the recent cyclical uptick.

     

China‐commodity nexus at the heart of global upturn

• ? The China‐commodity nexus has been at the heart of the global upturn in trade and industry. It could directly and indirectly account for as much as 70% of the recovery since mid‐2016, based on our analysis. We think this nexus will continue to support world growth in the near term, but the global upturn is vulnerable to moderating Chinese growth and slippage in commodity prices.
• ? China has directly accounted for around a third of the upturn in world trade, similar to the contribution of G7 countries. But adding in indirect effects, China's influence is likely to have been much more significant. Stronger Chinese demand has contributed to an improvement in the trade performance of its Asian trading partners, commodity exporters and other advanced economies.
• ? Using a model simulation that introduces positive shocks to imports in “greater China” and to commodity prices (based on the scale we have seen since mid‐2016), our top‐end estimate for China's contribution to the upturn in world trade is around 70%.
• ? The simulation points to especially strong improvements in output and exports for economies such as South Korea, Japan, Malaysia and some commodity exporters. This broadly matches the pattern of performance seen over recent months, though commodity exporters' performance has been quite mixed.
• ? G7 investment growth is likely to have played only a modest role in the recent global upturn. But Japan is an exception, while upgrades to investment forecasts for South Korea, Taiwan and Hong Kong have also been large.
• ? A 1% rise in commodity prices could raise commodity exporters' investment by 0.3–0.6%, based on our analysis. As a result, there could be additional improvement in commodity exporters' investment this year, supporting world growth. However, with our forecasts suggesting that commodity prices are set to slip further over the coming quarters, this boost could prove short‐lived.