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.