World Economic Prospects Monthly

Overview: A recovery in trade

• ? Our world GDP growth forecasts are unchanged this month, at 2.6% for 2017 and 2.9% in 2018. Similarly, our outlook for inflation has remained stable and we expect consumer price inflation to accelerate to 3.3% in 2017 owing to the effect of higher oil prices. Despite the multi‐year highs shown by global surveys, we remain cautious about further upgrades to our growth forecast, as we believe that the they may be overstating the pace of growth .
• ? Global indicators continue to point to a pick‐up in activity, driven by stronger manufacturing. The global manufacturing PMI remained at its highest level in almost three years in January, while the composite index – which includes services – was at a 22‐month high. Underpinned by stronger manufacturing activity, global trade is also recovering, with trade volumes rising a strong 2.8% on the month in November.
• ? After a disappointing 2016, we expect US growth to rise to 2.3% from an estimated 1.6%, bolstered by the anticipated effects of President Trump's expansive fiscal policies. However, uncertainties around our central forecast are unusually high given the major doubts about the new president's policies. The first days of the Trump administration have shown that he does not intend to tone down his rhetoric and we believe there is risk of a general underestimation of the economic risks derived from protectionism and his anti‐immigration stance.
• ? We still expect two increases in the Federal funds rate this year and US bond yields are likely to continue to rise. Despite some recent dollar weakness, the widening of interest rate differential between the US and the Eurozone, where rates are likely to remain unchanged, will drive the euro down to parity with the US dollar by end‐2017.
• ? Emerging market growth overall will improve in 2017, but performance will differ across countries. Countries with weak balance of payments positions, high dollar debt and exposure to possible US protectionist actions will be at risk. Our research shows that Turkey, South Africa and Malaysia are most at risk from potential financial turmoil.

     

World Economic Prospects

Overview: Are we entering another global ‘soft patch’?

• Global growth has tended to hit ‘soft patches’ at the start of recent years and some indicators are again pointing in that direction at present.
• In the US, we expect GDP growth at around 2% annualised in Q1 based on recent indicators which have included subdued jobs growth and some slowdown in housing.
• Meanwhile, the latest readings for the export orders components of key manufacturing surveys – which are good predictors of world trade growth – suggest some pullback after a modest upturn in the final months of 2013. Trade growth remains especially subdued in Asia, including Japan and China.
• The crisis in Ukraine also poses some downside risks, should it escalate further – in particular the danger of a sharp rise in European gas prices which could harm the still fragile Eurozone economy.
• Overall, we regard most of these factors as temporary and continue to forecast a strengthening global economy over the coming 18 months. US data at the start of this year have been partly dampened by climatic factors, while underlying domestic demand growth in Japan remains robust and the Eurozone outlook has continued to improve slowly.
• As a result, our world GDP growth forecasts are little changed from last month, at 2.8% for 2014 and 3.2% for 2015.
• This forecast is partly underpinned by a renewed pickup in world trade. But there are some risks to this assumption, including the possibility that emerging market countries will have to rapidly improve their current account positions due to the more restrictive external financing conditions associated with US tapering.
• Such an adjustment could put a significant dent in our forecast for world trade growth. For ten large emergers, shifting current account balances to our estimates of their sustainable levels would mean an adjustment of around US$280 billion – around 40% of the increment to world trade that we forecast for 2014.

     

A long dollar fall: likelihood and consequences

• ? The dollar has tended to move in long swings over the last forty years, raising the risk that the recent decline could extend considerably further. This is not our base case, but risks do look skewed towards additional dollar weakness. Our modelling work suggests that a large further dollar slide would have significant effects on the pattern of world growth – the US and some emerging markets would gain, with other advanced economies the main losers.
• ? There have been several large multi‐year swings in the dollar over the last four decades. We identify seven such episodes since 1971 including three long declines averaging 31%, the last being in 2002‐08. Since 2017 the dollar has fallen 10%, implying a possible further considerable drop.
• ? Our dollar strength indicator, which covers a range of economic variables associated with dollar moves in the past, does not currently point to a re‐run of the dollar weakness of the 2000s. But we do expect some further near‐term dollar losses and risks to our baseline forecast look skewed to the downside, especially given the emergence of large twin deficits in the US.
• ? Should a further large dollar slump nevertheless occur, our modelling suggests large effects on the pattern of world growth. The main gainers would be commodity‐producing emerging markets (EM) benefitting from improved terms of trade, positive balance sheet and external liquidity effects and scope to ease local interest rates. Rising US yields would erode some of these gains in later years.
• ? The main initial losers would be advanced economies outside the US which would lose competitiveness. In the case of the Eurozone and Japan, undershoots of inflation targets would be likely. There could also be some other negative consequences such as stoking protectionism and creating financial bubbles in some EMs.

     

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 Monthly

Overview: A weaker dollar and slightly faster growth

• ? We have raised our world GDP growth forecasts this month, to 2.7% for 2017 and 3.0% in 2018 (from 2.6% and 2.9% previously). Similarly, we have lifted our inflation forecast for this year to 3.1%.
• ? Surveys continue to suggest buoyant global activity, driven by manufacturing in several countries. This, in turn, is helping pull world trade from its 2016 lows. However, this partially reflects factors such as stimulus measures in China, which is boosting construction and manufacturing and bolstering trade in the region, and also benefitting major capital goods exporters such as Germany and Japan.
• ? But there are reasons for caution given there are still underlying factors holding back demand and the likelihood that the fiscal stimulus promised by President Trump will not be as big as expected.
• ? The most important forecast change this month is that we see a weaker US dollar ahead as monetary policy tightening in the US has already been largely priced in. This means our EURUSD and GBPUSD forecasts are now $1.10 and $1.32 by year‐end, while the short‐term outlook for many EM currencies against the US$ has also firmed.
• ? We still expect the Fed to raise rates on another two occasions this year, followed by three hikes in 2018. However, we have brought forward by one quarter to Q4 2017 our forecast of when the Fed will begin to taper reinvestment of its portfolio holdings.
• ? Meanwhile, we think the ECB is still a long way from policy normalisation. We expect QE to be tapered from January until June 2018. Then, the ECB will consider lifting the deposit rate from its negative levels in the final part of 2018, and only in 2020 will it start raising the main refinancing rate.
• ? Emerging markets' prospects have improved amid a strong batch of high frequency indicators and a pick‐up in trade. Given low valuations, we see positive momentum for EM currencies and think that they may have entered a long cycle of strength.

     

World Economic Prospects

Overview: A world with higher inflation

• Our world GDP growth forecasts are unchanged this month, at 2.6% for 2017 and 2.9% in 2018. But we expect a sizeable increase in inflation, to 3.3% in 2017 from an estimated 2.8% in 2016, as the effect of higher oil prices feeds through.
• Global indicators continue to point to a pick‐up in activity towards the end of last year, driven by stronger manufacturing activity. The global manufacturing PMI rose to the highest level in almost three years in December, while the composite index – which includes services – was at a 13‐month high.
• World trade should be underpinned by stronger growth in the US (2.3% in 2017 and 2.5% in 2018), bolstered by the anticipated effects of President Trump's expansive fiscal policies. That said, uncertainties around our central forecast are unusually high given the high level of uncertainty surrounding the Trump administration. Encouragingly, there are increasing signs that the tighter labour market is leading to a pick‐up in wage inflation in the US, which will support consumers.
• Given these reflationary trends, we expect two increases in the Federal funds rate this year and US bond yields are likely to continue to rise. The widening of interest rate differentials between the US and the Eurozone will drive the euro down to parity with the US dollar by end‐2017 for the first time since 2002.
• We have revised our Brexit assumptions this month. We now assume that the two‐year period of exit negotiations is followed by a transitional arrangement lasting 2–3 years. This would provide breathing space to negotiate a free trade agreement with the EU.
• Emerging market growth on the whole will improve in 2017 but performance will differ across countries: Russia and Brazil will exit recession, but countries with weak balance of payments positions, high dollar debt and exposure to possible US protectionist actions will be at risk. In China, policymakers are moving to greater emphasis on reducing financial risks and less focus on the 6.5% GDP growth target for 2017. Continued action is also likely to dampen further depreciation of the CNY.

     

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.

     

World Economic Prospects

Overview: Global upswing delayed

• This month sees our global GDP growth forecast for 2015 revised down to 2.7%, implying no improvement from 2014. At the start of the year, we expected world growth for 2015 at 2.9%.
• A key factor behind the slippage in our global forecast has been a softening of activity in the US. The balance of economic surprises (actual data versus expected) has deteriorated sharply in recent months. As a result, we now expect US growth at 2.7% this year, compared to 3.3% at the start of 2015.
• We are wary of reading too much into the most recent data, as the US and other advanced economies also went through ‘soft patches’ at the starts of both 2013 and 2014, but recovered. Also, the balance of economic surprises for the G10 is only moderately negative – and is strongly positive for the Eurozone.
• One area of concern is sluggish US consumption recently – despite lower oil prices. But with labour market conditions favourable and disposable income growing solidly, we expect this to prove a blip. And the evidence from advanced economies as a whole suggests lower oil prices have boosted consumers.
• There are nevertheless genuine drags on global growth. The strong dollar appears to be weighing on US exports and investment, and curbing profits. It is also damaging growth in some emerging markets through its negative impact on commodity prices and capital flows and via balance sheet effects (raising the burden of dollar‐denominated debt).
• Meanwhile, this month also sees a fresh downgrade to our forecast for China – GDP is now expected to rise 6.6% this year versus 6.8% a month ago. This reflects weakness in a number of key indicators and also the likely impact of a squeeze on local government finances from the property sector slump.
• With the US and China representing a third of global GDP, slower growth there will also tend to retard world trade growth. We continue to expect world GDP growth to reach 3% in 2016, but 2015 now looks like being another year of sub‐par global growth.

     

Trump versus Reagan – the global dimension

• ? Could the Trump era resemble the 1980s? ‘Reaganomics’ boosted world growth – but not necessarily in the ways people think – and not for emerging markets (EMs), a larger part of today's world economy. Growth then was also aided by factors such as declining interest rates, which are missing today, and we doubt that deregulation will lead to a productivity surge. US asset prices, meanwhile, were depressed in 1981, unlike now, so the big gains of the 1980s are unlikely to be repeated. EM assets should do better than back then, though.
• ? Optimistic observers – and to some extent, markets – have been drawing parallels between the policy mixes of the Trump and Reagan administrations, and talking up the prospects of stronger global growth. But while the US did support world growth in the 1980s, this was arguably more due to Keynesian' demand‐side policies than supply‐side ones: Reagan's record on supply‐side policies was mixed.
• ? The US is still an important driver of global activity, but markets may be too optimistic about the effect of Trump's policies on world growth. Any Trump fiscal stimulus will occur against a much less favourable background than that of the 1980s, when US growth also benefitted from a variety of factors missing now.
• ? It is also unclear whether Trump's administration will tolerate large expansions of the current account and fiscal deficits as the ‘price’ for more growth. And we are sceptical about the prospects of big gains from deregulation: US economic dynamism has waned, but the policies so far proposed in this area look potentially misdirected.
• ? Over the coming years asset market performance is unlikely to mirror that of the 1980s: valuations suggest less room for dollar appreciation and stock market gains this time around. But emerging market (EM) assets may do better – the soaring dollar and high US rates that hit EMs in the 1980s are unlikely to be repeated. And our analysis suggests even modestly better US growth will support commodity prices and EM growth.

     

World Economic Prospects

Overview: Dollar surge brings mixed consequences

• The strengthening dollar is now becoming a significant factor for global growth and our forecasts. The tradeweighted dollar is up 2.5% over the last month and over 12% on a year ago.
• Driving the latest rise are growing expectations of US rate hikes while monetary policy in many other major economies is headed in the opposite direction.
• The beginning of ECB QE has prompted a further slide in bond yields and the euro – which at 1.06/US$ is on course to fulfill our forecast of near‐parity by year‐end. Weak data in Japan also raises the chance of a further expansion of QE there later this year.
• We remain relatively positive about the advanced economies: we forecast G7 GDP growth at 2.2% for 2015 and 2.3% next. This month we have revised up German growth for 2015 to 2.4% – a four‐year high.
• Robust US growth and a strong dollar are good news for the advanced economies. US import volume growth firmed to over 5% on the year in January, while the dollar surge potentially boosts the share of other advanced countries in this growing market.
• But for the emerging economies the picture is mixed. A stronger US may boost exports, but rising US rates are pulling capital away: there has been a slump in portfolio inflows into emergers in recent months. Emerging growth may also suffer from higher costs of dollar funding and a rising burden of dollar debt as currencies soften – the more so if US rates rise faster than markets expect.
• Moreover, emergers are also under pressure from a slowing China. Chinese import growth has been weak of late and commodity prices remain under downward pressure. A notable casualty has been Brazil, which we have downgraded again this month – GDP is expected to slump 1.1% this year.
• Emerging GDP growth overall is expected to slip to 3.7% this year, the lowest since 2009. And excluding China, emerging growth will be only 2.2% – the same as the G7 and the worst performance relative to the advanced economies since 1999.

     

World Economic Prospects Monthly

Overview: Global growth in 2019 revised down again

• ? In response to continued weakness in global trade and signs that the softness has spread to other sectors, we have cut our 2019 world GDP growth forecast to 2.5% from 2.7% last month (after 3.0% in 2018). But we see growth accelerating in H2 due to fiscal and monetary policy changes and as some temporary negative forces unwind. While revised fractionally lower, global growth is still expected to tick up to 2.7% in 2020 – but the risks lie to the downside.
• ? The latest tranche of trade data points to another poor quarter in Q1. While the weakness in Chinese trade is partly related to the impact of US tariffs, the causes of the trade slowdown are rather broader. Reflecting this, we have again lowered our world trade growth forecast – we now see it slowing from 4.8% in 2018 to just 2.5% in 2019, only a little above the previous low of about 2% in 2016.
• ? One source of comfort is that the February global services PMI rose to its highest level since November. But retail sales in the advanced economies as a whole have been weak recently and, while consumer confidence bounced in February, it has trended lower over recent months. Reflecting this, we have cut our global consumer spending forecast for this year.
• ? We expect ongoing policy loosening in China and dovish central banks – either in the form of delays to rate hikes and liquidity tightening or via renewed easing – to boost the global economy in H2 and beyond. Some recent temporary drags on growth (such as auto sector weakness) should also wane, providing further modest support.
• ? But the modest rise seen in GDP growth in 2020 exaggerates underlying dynamics due to sharp rebounds in a few crisis‐hit economies such as Turkey, Venezuela and Argentina. And downside risks for 2020 are probably larger than in 2019; benign financial conditions and the weaker US$ assumed in our baseline may not materialise, while the build‐up of debt in EMs could act as a larger‐than‐expected drag on growth.

     

World Economic Prospects Monthly

Overview: Reflation enthusiasm is tempered

• ? We have kept our world GDP growth forecasts unchanged this month, at 2.6% for 2017 and 2.9% in 2018. But our outlook for inflation has been lowered to 3.0% this year (from 3.3% last month) as inflation is close to a peak in several economies and oil prices have fallen recently.
• ? Global indicators continue to point to buoyant activity, driven by manufacturing. The global manufacturing PMI rose to its highest level in almost six years in February, which in turn is boosting world trade. Despite the exuberance shown by the surveys, we remain cautious. We continue to expect a slowdown in consumer spending as households are squeezed by higher prices.
• ? Although we still see GDP growth in the US accelerating this year, we have lowered our forecast to 2.1% as economic data have been weaker than expected at the start of the year. Large uncertainties around our central forecast persist given the unpredictability of President Trump's policies, and markets have tempered their initial enthusiasm regarding the success of ‘Trumponomics’.
• ? With the Federal Reserve now close to meeting its dual mandate, the pace of policy normalisation will accelerate. We now expect the Fed to raise interest rates this month and three times overall this year. This means that US bond yields are likely to continue to rise and the euro will remain under pressure due to the widening interest rate differential between the US and the Eurozone.
• ? The Eurozone economy remains resilient ahead of key elections in France, the Netherlands and Germany. Our view remains that populist fears are overstated and that Emmanuel Macron is still favourite to become the next French president.
• ? Many emerging markets have started 2017 with positive momentum, but caution remains the name of the game as the Fed prepares to raise rates faster than previously expected and the future of US trade policy remains uncertain.

     

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 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.

     

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.

     

World Economic Prospects

Overview: Oil price slump boosts growth forecasts

• Oil prices have fallen further over the past month, with Brent dropping below US$50 per barrel. Prices are now down over 50% from their June 2014 peak levels. We do not expect any significant supply response (either from Saudi Arabia or US shale producers) to come through until late this year so low prices will persist for some time.
• This is a positive development for world growth, though the impact will be uneven across countries. Based on our new oil price forecast of US$55/barrel for 2015, we estimate that the oil bill for ten leading industrial economies, (accounting for over 60% of world GDP) will be US$440 billion lower than it would have been based on our June 2014 oil forecasts.
• This is around 1% of their combined GDP, money potentially free to be spent on other goods and services, including those of their main trading partners.
• US consumer sentiment already shows signs of reacting positively and with other US consumer fundamentals also improving we have upgraded our 2015 GDP growth forecast to 3.3% from 3% last month.
• We have also upgraded our forecasts for other advanced economies such as the Eurozone and Japan, where lower prices should be a flip to hardpressed consumers in particular.
• For the emerging markets, the slide in oil has starkly different consequences for different countries. Oil producers will be losers, most strikingly Russia where we now see GDP down over 6% this year – with financial instability exacerbating the oil effect. But China and India should both gain.
• Lower oil prices will also ease the external pressures some emergers have felt in recent months – reducing the risk of further hikes in domestic interest rates resulting from inflation and currency pressures.
• We now see world growth at 2.9% in 2015, up a tenth from last month and an increase from 2.6% growth last year. This is our first upgrade to the global growth forecast since August 2014.

     

Weak world trade could spark competitive devaluations

• World trade growth has slowed sharply in 2015, with our forecast for growth just 1% for the year. High frequency indicators suggest a stagnant picture, with trade in key emerging markets (EM) especially weak. Import growth in the US and Eurozone remains positive and is holding up world trade, but there are downside risks here also. Very slow world trade growth risks incentivising competitive depreciations and depressing global bond yields.
• In August our OE export indicator fell to its lowest level since late‐2012 –; the point when the US announced ‘QE3’. Its weakness is corroborated by other indicators such as container trade and air freight.
• The main drag to world trade is from emerging markets, especially the BRIC‐4 whose import volumes contracted sharply in H1 2015, cutting more than 1 percentage point from annual growth in goods trade.
• US and European import growth looks stronger and should be supported in 2016 by firming GDP growth. This is an important support for world trade, but the latest data suggest some downside risks here also.
• The weaker world demand growth is then the more that trade will appear like a zero‐sum game where a country can benefit only at the expense of its competitors. This has potentially important implications for asset prices: in particular, countries may turn to competitive depreciation, adding further to global deflationary pressures and holding down global bond yields.

     

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.

     

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.

     

World Economic Prospects Monthly

Overview: Outlook bright despite fears of protectionism

• ? President Trump's decision to impose tariffs on some steel and aluminium imports has increased the downside risk of a surge in protectionist measures. But for now, our view is that the direct impact of the US move will be small. Our global GDP growth forecasts for 2018 is unchanged at 3.2% while we have nudged up 2019 from 2.9% to 3.0%.
• ? Available data suggest that the healthy pace of world GDP growth in Q4 has been maintained into Q1. The global composite PMI rose again in February, to its highest level in almost three and a half years. And in the first two months of the year, Chinese import growth remained solid, suggesting that, for now, it is still an important support for world trade. Although our advanced economy leading indicator has fallen back a touch since the turn of the year, it remains consistent with robust growth.
• ? Another plus is that the recent equity market sell‐off has not yet morphed into a fullblown correction. As with other ‘tantrums’ over recent years, we do not expect this to have any notable spill‐overs for growth.
• ? But the bigger concern is now the potential for a sharp increase in economic protectionism. While the imposition of tariffs on some US steel and aluminium imports will have repercussions for foreign producers and worsen US cost competitiveness, the sector is too small to have major knock‐on implications for global growth. The main worry is if this triggers retaliation that spins into a damaging trade war. Although this downside risk has grown, in our view it remains a tail risk. Neither the US nor its trading partners will benefit from a raft of tariffs being imposed. And the political gains for Trump may prove illusory if retaliatory measures disproportionately affect US regions where he and the Republican party are politically vulnerable.
• ? In all, our baseline view remains little changed and we still see another year of healthy GDP growth. Although downside risks to the outlook have risen since the start of the year, they are still lower than two or three years ago.