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: Market falls overstate loss of momentum

• ? Financial market moves in recent months suggest that there is increasing concern about a substantial global growth slowdown or even a recession. But we continue to see this as an over‐reaction to the weakening economic data; while the downside risks to the global GDP growth outlook have clearly risen, our baseline forecast for 2019 is little changed at 2.7%, down from 3% in 2018.
• ? Recent economic news confirms that the Q3 economic soft patch appears to have spilled over into Q4, particularly in the industrial sector which has seen a broad‐based loss of momentum in many economies coinciding with a further slowdown in global trade growth. But while surveys of service sector activity have also moderated, the falls have been rather less abrupt, suggesting that overall global GDP growth is slowing albeit not alarmingly so.
• ? On balance, we think that the weaker data do not provide compelling evidence that global growth is slowing more sharply than our December forecast. Although the financial market sell‐off and associated tightening in financial conditions will impinge on growth, this may at least be partly offset by weaker inflation in response to lower oil prices, now seen at US$61pb in 2019. This, combined with the continued strength of labour markets and the likelihood of further moderate wage growth, points to a further period of solid household spending growth.
• ? Nonetheless, the risk of a sharper slowdown has risen. Cyclical risks have increased over the past couple of years as spare capacity has diminished. And uncertainty over the economic and financial market impact of the unwinding of central balance sheets have added to the risk of policy mistakes.
• ? Although our central view is that the recent financial market correction will not morph into something rather nastier, further sustained weakness (particularly if accompanied by dollar strength) would have more significant implications for activity and could see world growth falling below the 2016 post‐crisis low of 2.4%.

     

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: 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: 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.

     

Over the cliff edge and on to the rocks below

• ? If Brexit negotiations were to break down, the UK would face a significant increase in trade disruption from March 2019, even if it were able to put some basic trading arrangements in place. In a scenario where key sectors face extra friction, we find that the level of UK GDP would be 2.0% – or £16bn in cash terms – lower at the end of 2020 compared with our baseline. The impact on the remaining EU countries, including Ireland, would be much smaller .
• ? This article focuses on what a cliff‐edge Brexit means for trade costs and prices. This is only part of the equation – such a scenario would also influence supply chains and migration, while there is also potential for policymakers to mitigate some of the negative effects via looser policy.
• ? The notion that the UK could simply walk away from Brexit negotiations and rely on WTO rules to trade with the world is deeply flawed. The UK would need to re‐establish more than 750 very complex international arrangements just to maintain the status quo. We expect only the most critical issues – such as air travel – to be resolved by March 2019. Exporters also face a substantial increase in non‐tariff barriers.
• ? A breakdown in talks would also see both sides levying tariffs on imports from each other from March 2019, raising the cost of importing UK goods into the EU by 3.5% and by 3.1% for goods imported into the UK from the EU. For the UK, this will apply to roughly 60% of its goods exports and imports, but for all EU countries except Ireland the share would be less than 10%.
• ? The additional trade frictions would knock around 1pp a year off UK GDP growth in 2019 and 2020, resulting in a period of very weak growth. And the risks to this scenario are skewed to the downside – a slump in confidence or failure to establish the necessary customs infrastructure in time could easily generate a worse outcome

     

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.

     

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.

     

World Economic Prospects

Overview: Markets rally but risks still to the downside

• Our growth forecast for 2016 is steady this month at 2.3% but the forecast for 2017 has been cut again, to 2.7% from 2.9%.
• The near‐term growth outlook has been supported by a decent rally in financial markets. Since mid‐February, world stocks have gained around 8%, US high yield spreads have narrowed around 140 basis points and a number of key commodity prices – including oil – have also risen.
• Another supportive trend is still‐healthy consumer demand in advanced economies including the US and Eurozone. Although there has been some slippage in consumer confidence, it has been modest compared to either 2012–13 or 2008–09.
• So overall, the global economy still looks likely to avoid recession and strengthen a touch next year. But risks to the outlook remain skewed to the downside.
• Despite the recent market rally, world stocks still remain below their levels at end‐2015 and well below last May's peak. Financial conditions more broadly also remain significantly tighter than in mid‐2015, and inflation expectations somewhat lower.
• And there are still negative signals from incoming data. The global manufacturing PMI for February showed output flat while the services PMI showed only very modest growth – both were at their lowest since late 2012.
• Economic surprise indices for both the G10 and emerging markets also remain in negative territory, and our world trade indicator suggests no improvement from the dismal recent trends.
• Notable growth downgrades this month include Germany, Japan, the UK, Canada and Brazil.
• In our view, policymakers still have scope to improve the outlook. The latest ECB moves – more negative rates and more QE – will help a little. Widening of QE to corporate bonds also hints that more radical policy options are coming into view. But policies such as central bank equity purchases or money‐financed fiscal expansions will probably require global growth to weaken further before they become likely.

     

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: World growth still seen at just 2.5% in 2020

• ▀ Although recent developments suggest that the risks of an escalation in US-China trade tensions have eased, we doubt this will deliver a significant boost to the global economy. We still expect world GDP growth of just 2.5% this year, the weakest since the global financial crisis, after an estimated 2.6% in 2019. But the risks around the forecast now seem less skewed to the downside.
• ▀ While our view remains that global GDP growth is likely to have softened further around the turn of the year, the decline remains gradual. And latest survey-based measures of activity and sentiment show tentative signs that prospects are beginning to improve, consistent with our long-standing view that the low point for global growth will be in Q1 2020.
• ▀ Just as importantly, the likelihood of the US and China formally signing off a phase one trade deal in mid-January has reduced the chances of a further flare-up in trade tensions between the two economies. However, this has to some degree been offset by the troubling events recently unfolding between the US and Iran.
• ▀ We remain sceptical that the global economy is set for a major growth boost. Any healing in US-China relations may quickly be unwound and a full reversal of the tariffs already implemented remains a distant prospect. Furthermore, some of the associated growth boost is likely to be offset by less policy support. As a result, we have raised our 2020 GDP growth by just 0.1pp in the US but by a more significant 0.3pp in China.
• ▀ Meanwhile, although the ongoing and broad-based monetary policy loosening in both AEs and EMs should start to feed through to growth this year, we doubt this will be a game-changer. Not only is policy loosening at a global level set to be fairly muted, limited spare capacity, the rising stock of global debt and elevated asset prices are likely to reduce the positive impulse from policymakers' actions.

     

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 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 Monthly

Overview: Coronavirus to cut global growth to new lows

• ▀ The rapid spread of coronavirus will weaken China's GDP growth sharply in the short term, causing disruption for the rest of the world. We now expect global GDP growth to slow to just 1.9% y/y in Q1 this year and have lowered our forecast for 2020 as a whole from 2.5% to 2.3%, down from 2.6% in 2019.
• ▀ Prior to the coronavirus outbreak, there had been signs that the worst was over for both world trade and the manufacturing sector. However, this tentative optimism has been dashed by the current disruption.
• ▀ While the near-term impact of the virus is uncertain, the disruption to China will clearly be significant in Q1 – we expect Chinese GDP growth to plunge to just 3.8% y/y. Even though growth there will rebound in Q2 and Q3, it will take time for the loss in activity to be fully recovered and we now expect GDP growth of just 5.4% for 2020 as a whole, a downward revision of 0.6pp from last month.
• ▀ Weaker Chinese imports and tourism and disruption to global supply chains will take a toll on the rest of the world, particularly in the Asia-Pacific region. And the shock will exacerbate the ongoing slowdown in the US and may result in the eurozone barely expanding for a second quarter running in Q1.
• ▀ Weaker oil demand in the short term has prompted us to lower our Brent oil price forecast. We have cut our projection for growth in crude demand in 2020 by 0.2m b/d to 0.9 mb/d and now forecast Brent crude will average $62.4pb in 2020, down from about $65pb in our January forecast.
• ▀ Quarterly global growth is likely to strengthen a little in H2 this year as the disruption fades and firms make up for the lost output earlier in the year and the effect of China's policy response starts to feed through. But for 2020 overall, global growth is now likely to be just 2.3%, 0.2pp weaker than previously assumed as a result of the epidemic.

     

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.

     

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.

     

World trade forecasts upgraded,but headwinds from Asia

• ? Most leading indicators of world trade point to growth remaining robust in the next few months, but there are some headwinds, especially from Asia. Overall, we expect trade growth to decelerate this year, yet the outlook has improved since August. We see world trade rising by 6.1% in 2017 and by 4.8% this year, up from our previous forecasts of 5.7% and 3.8%, respectively .
• ? The latest trade volume data for the major economies support our forecasts, as does our survey‐based export indicator, which leads trade by around three months. This indicator and the main measure of global freight volumes are consistent with world trade continuing to grow by around 6% y/y in the near term.
• ? World trade growth is likely to be supported by emerging markets (EMs), which made a large contribution to the trade recovery last year. Another factor that may be supportive – especially for EMs – is the slippage in the US dollar last year, as there is some evidence of a negative correlation between dollar strength and world trade.
• ? The recovery of demand in the Eurozone and expected fiscal stimulus in the US add to the positive constellation of factors supporting world trade growth. Business sentiment indicators remain positive and imply upside risks to our forecasts. Yet it is not obvious that they have a strong leading relationship with trade – and the statistical relationship has become weaker since 2007–2009. This reinforces our view that there has been a structural change in the relationship between world trade and world GDP.
• ? The main near‐term downside risks to world trade come from Asia. Freight indicators for Shanghai and Hong Kong have slowed markedly, as have semiconductor billings. Although Chinese activity indicators have also moderated, China's trade volume growth remains surprisingly strong.

     

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.

     

The paradox of rising wage growth and falling inflation

• ? Strong labour markets and rising wages in advanced economies stand in sharp contrast to recent declines in economists’ inflation forecasts and market expectations. In our view, though, these developments are not necessarily contradictory. Even if wage growth edges higher, we think demand factors will limit any pick‐up in prices. Instead, we expect firms’ margins will be squeezed.
• ? Although the labour share has risen more sharply than we had expected over the past couple of years, we are sceptical that this will translate into substantially stronger underlying inflation. Not only has the rise been small, it has been employment rather than wages that has surprised to the upside. The strength of employment is probably more about firms’ production preferences than workers’ capitalising on a stronger negotiating position.
• ? True, wages adjusted for productivity now look high by historical standards. But neither theory or empirical evidence suggests that this must inevitably lead to stronger CPI inflation in the short‐term. Our forecast for flat wage growth in 2019 and the absence of strong cost pressures elsewhere are also a comfort.
• ? Inflation tends to be more responsive to demand indicators – and the recent GDP growth soft patch suggests any further pick‐up in underlying inflation pressures will be limited (see Chart below).
• ? More generally, we think that the consensus view on inflation for the key advanced economies is high. Market‐based inflation expectations are typically lower than our own, which may reflect the perception that inflation risks are skewed to the downside. Positive economic surprises could lead downside risks to narrow, but ageing expansions and secular stagnation worries suggest this is unlikely, limiting any future pick‐up in bond yields.