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

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: 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: 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: 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 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 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 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

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.

     

Global economy robust to higher oil,but EM vulnerable

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

     

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 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.

     

Japan

An acceleration in global trade helped to boost Japanese GDP growth to 1.7% in 2017. But an expected slowdown in demand from China in 2018 means that the contribution from external trade will be lower this year. And while we expect growth to continue to become more broad‐based, with investment playing a prominent role, given the recent increase in protectionist tensions, we have revised down our forecast for GDP growth in 2018 to 1.5% (from 1.7% three months ago). With an expected slowdown in construction and a planned consumption tax hike in 2019, we forecast that GDP growth will ease further to 0.9% next year. The short‐term outlook is influenced by the following factors:

• Export growth easing over 2018 : exports grew by 6.6% y/y in yen terms in January–February 2018 combined, down from 13% growth in Q4 2017. While the slowdown was less marked in volume terms, with real exports up 5.2% y/y and imports 7.8% higher (in January–February), we see a smaller contribution to growth from net trade in 2018 than in 2017, as external demand cools. The recent easing in export growth is in line with our expectations following last year's acceleration. Our baseline is for trade momentum to ease through 2018 as Chinese import demand moderates. While US protectionist measures threaten the outlook, we believe that the overall impact of the likely US tariffs will be limited, as Japanese trade continues to shift towards Asia.
• Solid investment growth to continue : we expect the momentum behind business investment to remain solid in 2018, with growth of 2.9% little changed from the 3% recorded in 2017. Overall investment will be supported by strong corporate profits, construction for the 2020 Tokyo Olympics and high levels of confidence. Although dropping among large enterprises recently, overall business sentiment (and among SMEs) remains healthy and planned capex for fiscal year 2018 got off to a good start. Protectionism is also a downside risk to the investment outlook, but we believe that the actual impact on Japan will be limited.
• Weak wage growth to weigh on consumer demand : monthly data suggest that consumption has continued to edge higher this year. Moreover, rising employment in Q1 may provide additional upside momentum. However, despite a tight labour market, wage growth has been disappointing and we expect sluggish wage growth to constrain household demand and inflation going forward.

     

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.

     

Impact of EU exit on our UK industry forecasts

• We have lowered our forecast for UK economic growth following the vote to leave the EU on 23 June. GDP growth is now forecast at 1.1% in 2017 and 1.4% in 2018, and the medium‐term outlook has also been nudged down. We have also lowered our forecast for all of the main industrial sectors, with the biggest reductions in the long‐term forecasts for construction and manufacturing, although the weak pound could provide some short‐term boost to the latter.
• Our baseline forecast assumes that the government triggers Article 50 by the end of this year and that the UK leaves the EU by end‐2018. We assume that the government draws a red line under the freedom of movement and thus loses access to the single market. Trade relations revert to WTO rules.
• A number of factors determine the relative impact on each sector. First, in the short term, heightened uncertainty will hit business confidence, causing firms to delay capital spending. Second, less favourable trade relations with the EU could see export‐oriented sectors migrate production away from the UK. Finally, restrictions on migration will reduce the potential size of the labour force.
• Consequently, investment‐oriented sectors such as construction and machinery have seen some of the largest downgrades. Moreover, transport equipment is heavily exported to Europe, so increased trade barriers could see some production move out of the UK. Meanwhile, labour shortages could weaken growth prospects in labour‐dependent sectors. In addition, the vote has created uncertainties around the long‐term viability of London as Europe's major financial centre.
• The outlook for more consumer‐focused sectors is less downbeat, although an uptick in inflation may erode household purchasing power in the near‐term, and the multipliers from lower economic activity are likely to permanently reduce household incomes in the long term relative to our last baseline

     

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 Monthly

Overview: Financial turmoil will not derail expansion

• ? The further run of broadly positive economic news has been overshadowed by the recent financial market turmoil. We do not expect the latter to be the catalyst for any notable economic slowdown and have left our world GDP growth forecast for 2018 unchanged at 3.2%, which would be the strongest result since 2011, up from an estimated 3.0% in 2017.
• ? January survey data continued to strike a positive tone. Indeed, the global composite PMI rose to its highest level during the current upswing and points to a further acceleration in global GDP growth. Meanwhile, less timely world trade data showed strong growth in November after a weaker performance in September and October.
• ? Of course, these developments predate recent financial market developments. The key issue is whether the equity market sell‐off triggers significant spillovers to the wider economy. If the market reversal is to have notable repercussions, it will need to morph from a tantrum into a full‐blown crisis. For now, we still expect interest rates generally to edge higher, with three rate hikes still seen in the US this year.
• ? Despite the recent fall, equity prices are still up sharply compared with a few months ago and earnings growth remains solid. Against this backdrop, further weakness would probably require an additional trigger, such as a sustained rise in bond yields in response to a reassessment of the inflation and monetary policy outlook. Although inflation concerns have risen recently, our view remains that price pressures will rise only gradually in the advanced economies and that the upside risks to both inflation and bond yields remain well contained.
• ? The upshot is that recent events have not prompted us to reassess the outlook for this year or beyond. We continue to expect world GDP growth to pick up to 3.2% this year, reflecting strong growth in both the advanced economies and the emerging markets. And our forecast for 2019 is also unchanged at 2.9%. In turn, world trade growth remains quite strong, helped by the weaker US$, but is seen slowing to 5% this year from just over 6% in 2017, with a further modest easing to 4.3% in 2019.

     

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

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

     

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 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%.