World Economic Prospects

Overview: Forecasts steady but near‐term signals mixed

• Our world growth forecasts are steady this month, at 2.3% for 2016 and 2.7% for 2017.
• One factor behind the more stable outlook is the rally in financial markets since mid‐February. This rally appears to have been the result of a number of factors including a more dovish Fed and an improvement in some near‐term economic indicators.
• The implied 12‐month ahead Fed funds rate dropped around 0.5% from its January peak to mid-February and remains around 0.35% lower now. So the Fed still apparently has the capacity to boost markets with changes in communication policy.
• The Citigroup economic surprise indicators have also improved over recent weeks, especially for emerging markets where the indicator is back in positive territory. The G10 index nevertheless remains clearly negative.
• Other economic signals are mixed. The latest reading of OE's world trade indicator (based on survey evidence for March) suggests a modest improvement, although again the indicator continues to signal weak world trade growth.
• Meanwhile, there have been some warnings of potentially softer labour market conditions. Though payrolls gains have remained solid, a weighted sum of the employment subindices of the US ISM surveys has dropped sharply over recent months. A similar index for the Eurozone is more positive, although it has also softened from its late‐2015 peaks.
• These mixed signals suggest limited likelihood of near‐term upgrades to the world growth outlook and overall we maintain our view from last month that risks look skewed to the downside – so that further monetary policy stimulus remains a possibility.
• This assessment appears to be shared, to some extent at least, by global bond markets. US 10‐year yields have dropped back to only 1.7% since mid‐March (only 0.1% above their February lows), with German yields at just 0.1% and Japanese yields at ‐ 0.1%. So the ‘great squeeze’ on G7 bond yields is still continuing.