World Economic Prospects

Overview: Emerging sell‐off to restrain global growth

• Emerging financial markets have come under renewed downward pressure since mid‐January, with evidence of a general retreat by investors.
• There have been significant currency depreciations in several countries, and interest rates have been forced up in Turkey, India, South Africa and Brazil – with further hikes likely. Emerging stocks have plunged.
• This has prompted a sequence of downgrades to our growth forecasts for the emergers. We now expect Indian growth to be 0.2% lower this year than previously, South African growth 0.6% lower and Turkish growth 1.3% lower. In China and Brazil, growth in 2015 has been cut by around 0.5%.
• Weaker emerging growth will also constrain activity in the advanced economies. Emerging markets account for a modest share of advanced economy exports, but their share in export growth is higher. For the Eurozone, heavily dependent on external demand, this share has been 30–40% since 2010.
• Meanwhile, European listed firms get almost 25% of their revenues from emergers, and US firms 15% (while exports to emergers are 10% and 5% of GDP respectively). There has also been a sharp rise in bank loans to emergers in recent years.
• The biggest risks for global growth relate to China, which dwarfs the other emergers, and where concerns about possible financial instability, especially linked to shadow banking, have risen this year.
• Thanks to robust growth in the US, Japan and the UK, we still expect global growth to pick up in 2014, but downside risks have risen over the past month. With the US Fed set to press on with ‘tapering’ asset purchases, driving up global long‐term interest rates, emergers face potential further pressures.
• US tapering will be only partially offset by more expansionary monetary policy in Japan. What could make a big difference, and reduce the downside risks from emerging weakness, would be aggressive expansion in the Eurozone. At present, however, this seems unlikely – despite lingering deflation risks.

     

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.

     

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.

     

World Economic Prospects

Overview: Global stimulus reinforced by ECB QE

• The ECB announced a QE programme in January involving buying some €60 billion of assets per month, of which around €40 billion are likely to be government bonds.
• As a result, despite the end of QE in the US, major central banks' ‘non‐standard’ policy support (asset purchases plus loans to banks) is set to be higher in 2015–16 than last year, supporting world growth.
• Moreover, major central banks' purchases of government bonds will by 2016 be close to the net issuance of bonds by governments – indirectly, full ‘monetisation’ of fiscal deficits is arriving.
• This prospect is likely to have been partly behind the further compression of bond yields this year, which remarkably has seen German 10‐year yields trade below those of Japan in recent weeks. And largescale bond purchases are likely to prevent any sharp uptick in yields over the next year at least.
• Other policy settings are also becoming more positive for global growth. We estimate that fiscal policy will be broadly neutral in the US and Eurozone this year – and also in Japan after the postponement of the second consumption tax rise. On top of this, the collapse in oil prices since mid‐2014 can be seen as equivalent to a substantial ‘tax cut’ for consumers in the major economies.
• Meanwhile, a stronger dollar will restrain US exports modestly, but the flipside will be an improved export outlook for the likes of Japan and the Eurozone. We now expect the euro to decline to near‐parity with the dollar by end‐2015 (from 1.13 now) while the yen/$ rate reaches 127 (from 119).
• The main drag to global growth continues to be the sluggish performance of the main emerging markets. Brazil is set to stagnate again this year while Chinese growth still seems to be slowing and there are serious problems in some oil exporters – both Russia and Venezuela are forecast to see GDP fall 6%. But there are some brighter spots – including an improved picture in India.

     

World Economic Prospects

Overview: US acceleration brings a positive start to 2014

• A series of positive data releases in the US has led us to revise upwards our growth forecasts for 2014. We now expect US GDP to rise by over 3% this year, compared to 2.7% forecast a month ago.
• A key factor changing the US outlook is a more confident consumer. In the three months to November, real consumption rose at an annualised pace of 5%, the strongest in four years. This has been partly financed by a reduced saving rate – but the saving rate has been much lower in the recent past and steady employment gains should support both income and consumer sentiment in the year ahead.
• Also supporting growth this year in the US and the broader global economy will be wealth gains. In recent years, global stock prices at the end of a given year have been a reasonable predictor of economic growth in the following year, and global equities were up over 20% on the year at the end of 2013.
• Nevertheless, the global growth outlook remains patchy. An optimistic picture in the US, UK and Japan contrasts with a rather mixed picture the Eurozone – where some economies are still contracting and where there is a risk of deflation.
• The picture is also subdued in the key emergers. In contrast to the developed economies, emerging market stocks are down 10% on the year as higher US yields draw capital away. Weak currencies, inflation and high interest rates are weighing on growth in markets such as India, Brazil and Turkey.
• These factors are likely to wane only slowly as the year proceeds and could even worsen if tapering in the US is faster than expected. A stronger US economy may not fully offset this – the US's strong competitive position could direct more of rising US demand to US products than in previous upturns.
• As a result, we expect emerging growth to firm only modestly this year, to 4.5% from 4.1% in 2013 – well below pre‐crisis levels of around 7%. Global growth too will remain below par at 2.9%, from 2.2% in 2013, but improving to over 3% next year.

     

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 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: 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: World growth cut as financial woes persist

• This month sees our world GDP forecast for 2016 cut to 2.3%, from 2.6% previously. Our new forecast implies this year will be the weakest for the world economy since 2009.
• Our 2016 growth forecast was over 3% in mid‐2015. But the economic backdrop has worsened markedly since, with steep drops in stock markets, slumping commodities and widening credit spreads.
• We flagged the risks from the financial market sell‐off last month and conditions have improved little since. Worse, there are some signs that weakness in the real economy may be broadening.
• This month's global downgrade partly reflects familiar factors such as worsening emerging markets: we now expect even deeper recessions in Brazil and Russia.
• The US forecast has also been downgraded again, to 2% from 2.4% last month. This in part reflects a soft Q4 GDP reading, one worrying detail of which was a weaker performance by consumer spending.
• Signs of a slowdown in services were also visible in the PMI surveys for January in the US and Eurozone. Partly as a result, our Eurozone growth forecast has been cut this month to 1.6% from 1.8%.
• With world industry already stagnant, signs of weakness spreading to services are unwelcome. We are particularly concerned that the financial market slump will create a negative global credit and confidence shock.
• Another concern is that the collapse in world stock prices is starting to have ‘negative wealth effects’. For most consumers, wealth effects are more likely to be generated by house price moves. In this respect, there is some room for optimism – house prices are still growing in most of the main economies.
• But housing is weakening in some emerging countries and world house and stock prices have tended to move together since 2007.
• Pressures on policymakers to act remain strong and are increasingly focused on using negative interest rates – as in Japan and Sweden in the last month.

     

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: 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: 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.

     

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 deflation – a genuine risk?

• The notable decline in inflation in the Eurozone, US and UK since mid-2013 has led to suggestions that a period of widespread price deflation across the major economies is a risk. Adding to these concerns has been the trajectory of producer prices – already declining in the Eurozone and China and showing very subdued growth elsewhere.
• Our global GDP forecasts do not, in isolation, point to a worldwide deflation risk. We expect growth at 2.8% this year and 3.2% next, little changed from last month.
• But the starting point for this growth matters, specifically the gap between actual and potential output last year. Even with reasonable growth, an initially large output gap would imply downward pressure on inflation over the next two years.
• Unfortunately, the size of the output gap is very uncertain. There is a wide range of estimates for the major economies, especially Japan. Part of the problem is that it is hard to know how much potential output was (or was not) permanently lost during the global financial crisis and recession.
• Assuming substantial permanent losses, output gaps might be relatively modest now, but a more optimistic view of the supply side of the economy would suggest output gaps could be quite large – and arguably this fits better with the recent evidence from inflation.
• Overall, while we see a genuine risk of deflation in the Eurozone (with around a 15% probability) we are more upbeat about the other major economies, where growth in the broad money supply and nominal GDP do not seem to be signaling deflation risks.
• But the difficulty of measuring ‘slack’ in the economy for us underlines the case for central banks to err on the side of caution when setting monetary policy, and either not tightening too soon or easing further. This month we have built in a further ECB rate cut to our Eurozone forecast. In Japan, we have revised down growth for 2014–15 with recent data strengthening the case for additional monetary easing this year.

     

Are emergers a threat to the global recovery?

Last year the emergers led the global recovery with the advanced economies lagging, but in recent months there has been a range of positive indicators across the advanced economies, most notably the PMI surveys, with the US non‐manufacturing index reaching an eight‐year high in August and the UK composite index recording its highest ever reading in the same month. By contrast, the indicators from emerging economies have been more mixed and while some of the Chinese data have been better in recent months, the PMI surveys point to stagnation or contraction across a number of other emergers. While emerging economies will continue to make a large contribution to world growth, the global upturn is now being driven by strengthening domestic demand in the advanced 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.

     

Soaring corporate debt is a risk to global growth

• ▀ Corporate borrowing is accelerating as a result of the coronavirus crisis. In part, this is a healthy development as firms look to ride out a period of low or even zero sales. But it also brings potential risks to growth, especially in the longer term, including via lengthy balance sheet restructuring that hurts investment and productivity growth.
• ▀ In the advanced economies, we estimate the aggregate corporate debt/GDP ratio could rise as much as 10ppts in 2020, to 95% of GDP - well above the 2009 peak. Debt service ratios may also rise into risky territory despite low interest rates. Risks look especially elevated in France and Canada.
• ▀ Evidence for both advanced and emerging economies suggests high corporate debt levels can damage growth. Highly indebted firms tend to invest less in both the near and medium terms, and some estimates suggest the rise in aggregate debt this year could cut GDP growth by up to 0.2% per year.
• ▀ The coronavirus crisis may also crystallise some pre-existing risks in corporate debt. Despite government assistance, defaults by low-rated firms have started to rise and commercial real estate prices are falling.
• ▀ Sectoral concentrations of risk may also be intensified and new ones created in industries hit hard by the virus like energy and consumer discretionary sectors.
• ▀ Emerging market corporate debt is also on the rise - sharply in some cases. In some economies, this mostly reflects exchange rate effects. But negative balance sheet effects of this kind are also a risk to growth.

     

Global growth to 2024: reversion to which mean?

• We expect global GDP growth to average 3.5% per year (at PPP exchange rates) over the next ten years. This is lower than the 3.8% recorded in 2000–14 though not dramatically so. There will be a modest recovery in advanced economy growth ‐ but not to pre‐crisis rates. Emerging market (EM) growth will slow but remain faster than growth in the advanced economies. And with EM's share in world GDP much increased from 10–15 years ago, EMs will continue to provide a large proportion of world growth.
• EM growth is expected to run at around 4.5% per year in 2015–24, well down on the 6% seen in 2000–14. This includes a slowdown from around 10% to 5–6% in China ‐ but China's share in world GDP has risen so much that China's contribution to world growth will remain very substantial.
• Advanced economies are forecast to grow by 1.9% per year in 2015–24, a big improvement from the 1% pace of 2007–14 (which was affected by the global financial crisis) but below the 1990–2014 average. Indeed, the gap between forecast G7 GDP and GDP extrapolated using pre‐crisis trends in potential output will remain large at 10–15% in 2015–24.
• Global growth will remain relatively strong compared to much longer‐term averages: growth from 1870–1950 was only around 2% per year. But a return to such low growth rates looks unlikely; China and India were a major drag on world growth until the 1980s but are now fast growing regions.
• Our forecast is relatively cautious about key growth factors; the contribution of productivity growth is expected to improve slightly, while those from capital accumulation and labour supply fall back. Demographics will be a more severe drag on growth from 2025–40. Overall, risks to our long‐term forecasts look to be skewed to the downside.

     

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.

     

Tighter labour markets to finally lift global wages

• Wage growth has been relatively slow since 2007 in advanced economies, but an upturn may be in sight. Slow productivity growth remains an issue but tighter labour markets make a positive response by wages to rising inflation more likely and there are signs that compositional and crisis‐related effects that dragged wage growth down are fading – though Japan may be an exception.
• Overall, our forecasts are for a moderate improvement in wage growth in the major economies in 2017–18, with the pace of growth rising by 0.5–1% per year relative to its 2016 level by 2018 – enough to keep consumer spending reasonably solid.
• Few countries have maintained their pre‐crisis pace of wage growth since 2007. In part this reflects a mixture of low inflation and weak productivity growth, but other factors have also been in play: in the US and Japan wage growth has run as much as 0.5–1% per year lower than conventional models would suggest.
• The link with productivity seems to have weakened since 2007 and Phillips curves – which relate wages to unemployment – have become flatter. A notable exception is Germany, where the labour market has behaved in a much more ‘normal’ fashion over recent years with wage growth responding to diminishing slack.
• ‘Compositional’ factors related to shifts in the structure of the workforce may have had an important influence in holding down wage growth, cutting it by as much as 2% per year in the US and 1% per year in the UK. There are some signs that the impact of these effects in the UK and US are fading, but not in Japan.
• The forecast rise in inflation over the next year as energy price base effects turn positive is a potential risk to real wages. But the decline in measures of labour market slack in the US, UK and Germany suggests wages are more likely to move up with inflation than was the case in 2010–11 when oil prices spiked and real wages fell.