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.