World Economic Prospects Monthly

Abstract

Overview: Downturn to spur monetary policy loosening ▀ The ongoing soft tone of the latest data confirms that the global economic slowdown continues, so the risk that this year will see the weakest GDP growth of the post‐crisis period is rising. But with policymakers now expected to turn dovish words into actions soon, we still think recession risks remain low. ▀ Timely global activity and trade indicators continue to point to near‐term weakness. In June, the global composite PMI was unchanged from May at a relatively subdued 51.2. While the services index rose slightly, this only reversed a fraction of the steep decline in the preceding two months. Meanwhile, the headline manufacturing index fell further below the 50 no‐change level and timely indicators of global trade growth point to further weakness ahead. ▀ We expect major central banks to loosen policy in response to this environment of ongoing economic weakness and still weak inflation. We now forecast two rate cuts by the Fed in Q3 2019 and another reduction in Q1 2020. Meanwhile, we anticipate a cut in the ECB deposit rate later this year and there is a strong possibility that ECB QE purchases will also be resumed. ▀ In the short term, the uncertain environment may mean that the period of US dollar strength continues. But the decline in relative interest rate differentials between the US and other economies, along with the sharp slowdown seen in US growth in 2020, may eventually help to weaken the US dollar, causing positive spill‐overs for global trade and emerging market financial balance sheets. Nonetheless, the gradual decline in the dollar anticipated in 2020 will not provide a major fillip to the global economy. ▀ Overall, for 2019 we have left our global GDP growth forecast unchanged at 2.7%. While we have nudged up our 2020 US GDP growth forecast in response to the likely policy loosening, the boost to global growth will be largely offset by downward revisions elsewhere. The modest acceleration in global GDP growth to 2.8% in 2020 and 2.9% in 2021 assumes that accommodative monetary policy remains in place.