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

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: 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

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: 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: 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: Global growth in 2019 revised down again

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

     

World 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: 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.

     

Housing slump could cut world growth to decade‐low

• ? A combined slump in house prices and housing investment in the major economies could cut world growth to a 10‐year low of 2.2% by 2020 – and to below 2% if it also triggered a tightening in global credit conditions.
• ? In such a scenario, inflation would remain well below target in the main economies, and US Fed rates would be up to 100 basis points lower than in our baseline by 2021.
• ? Signs of a global house price downturn are already visible, with around a third of our sample of economies seeing falling prices and world residential investment starting to decline. High house price valuations add to the risk that this downturn will deepen in the coming quarters, hitting consumer spending.
• ? Using the Oxford Global Economic Model, we find that a 10% fall in house prices and an 8% fall in housing investment both cut growth by around 0.3%‐0.4% across regions. Adding a sharp Chinese downturn, such as that seen in 2015, has a large additional impact on growth in Asia .

     

World Economic Prospects Monthly

Overview: Reflation enthusiasm is tempered

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

     

World Economic Prospects Monthly

Overview: Growth resilient to protectionist concerns

• ? Despite the mounting threat of more protectionist trade measures, we expect the impact on global growth and trade to be mild. Given this, and the still fairly solid underlying economic picture, we have left our global GDP growth forecasts for 2018 and 2019 unchanged at 3.2% and 3.0% respectively.
• ? Although economic data in Q1 painted a pretty solid picture, there are signs that the global expansion may lose momentum in Q2. Most notably, the global PMI fell sharply in March, more than offsetting the gains of the previous three quarters or so. Some of the decline may reflect an over‐reaction to recent trade threats and could be reversed in April and despite the drop, the surveys still point to strong growth. But the fall highlights the risk that lingering trade tensions could damage confidence and prompt firms and consumers to delay investment and major spending plans.
• ? On a more positive note, China's economic growth picked up markedly in early 2018, which could provide a fillip to global trade growth in the near term. Given the betterthan‐expected start to the year, we have made no change to our 2018 China GDP growth forecast (of 6.4%) despite the probable negative effects of trade measures.
• ? Meanwhile, most advanced economies remain in the late expansionary stage of the cycle. And those that show signs of slowing, such as the Eurozone, are doing so from multi‐year highs. While we have nudged down our 2018 Eurozone GDP growth forecast slightly to 2.2%, the pace is expected to remain well above trend. We judge the impact of US tariffs and counter‐measures on the US economy to be subdued and have lowered our GDP growth forecasts for 2018 and 2019 by just 0.1pp.
• ? For now, we see further solid growth for the world economy this year even in the environment of rising protectionism. While there is a risk that a further escalation of trade tensions could trigger a sharper slowdown in global GDP growth, we still see the risks of a full‐blown and damaging trade war as limited and the chances of protectionism leading to recessions as smaller still.

     

World Economic Prospects

Overview: 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 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.

     

World Economic Prospects

Overview: 2016 – unhappy New Year?

• 2016 has got off to a shaky start, with sharp declines in global equity markets and renewed jitters about China and its currency. Recent asset market trends have prompted some observers to suggest a high risk of a global recession this year.
• A glance back at recent history suggests why. Since last May, global stocks and non‐fuel commodity prices have both dropped by 12–13%. Over the last forty years, such a combination in a similar time frame has usually been associated with recession.
• There have been exceptions to this pattern; there were similar sell‐offs in stocks and commodities in 2011, 1998 and 1984 without associated recessions. Notably though, in at least two of these cases, expansionary US policy helped reverse market movements – but US policy is now headed in the opposite direction.
• More heart can be taken from the relative resilience of real economy developments in many of the advanced economies over recent months. There are few signs, for instance of sharp declines in consumer or business confidence, or in property prices.
• Policy settings also remain expansionary in the Eurozone, Japan and China – where broad money and growth has moved higher in recent months.
• Industry remains the problem area, both for commodity price‐sensitive extractive sectors and manufacturing. The global manufacturing PMI continues to suggest very subdued output growth.
• Services output remains more robust, and should be supported during 2016 by tightening labour markets – December's strong US payrolls release was encouraging in this regard.
• But there are downside risks to services, too, should stock price declines hit consumer spending. Our Global Economic Model suggests a 15% fall in world stocks may cut global GDP by 0.4–0.7%.
• As a result, there is a real danger that our global growth forecast of 2.6% for 2016 proves too optimistic with growth instead slipping below last year's already‐modest 2.5% reading.

     

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.

     

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.

     

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.

     

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.