World Economic Prospects

Abstract

Economic OutlookVolume 38, Issue s8 p. 1-43 Articles World Economic Prospects First published: 28 August 2014 https://doi.org/10.1111/1468-0319.12112AboutPDF ToolsRequest permissionExport citationAdd to favoritesTrack citation ShareShare Give accessShare full text accessShare full-text accessPlease review our Terms and Conditions of Use and check box below to share full-text version of article.I have read and accept the Wiley Online Library Terms and Conditions of UseShareable LinkUse the link below to share a full-text version of this article with your friends and colleagues. Learn more.Copy URL Share a linkShare onFacebookTwitterLinkedInRedditWechat Abstract Overview: Market wobbles as wage growth stays subdued Global financial markets wobbled over the last month or so. Since early July, US equities have fallen around 3%, with some Eurozone indices down as much as 9%. Other risk assets have also seen notable corrections – including high-yield corporate bonds. Does this matter? The optimist would say ‘no’. First, the size of the correction is not very large, comparable to others seen over the last year (e.g. in February and Q3/Q4 of 2013) which were soon reversed. Second, negative wealth effects from the correction will mostly impact a limited stratum of the population with large amounts of financial assets and may not have a big impact on consumption. And housing wealth effects remain positive in the US, UK and many other countries, with prices still rising. But we cannot be entirely dismissive of the risks from the recent sell-off, especially if it extends further. This is due to the moderate nature of the global upswing – and especially the weakness of wage growth. Our forecast assumes wage growth strengthens across the advanced economies over the next 18 months but this has not happened yet. In the meantime, central banks are relying to a considerable extent on positive wealth effects to buoy consumer sentiment and spending. If wealth effects fade, the consumer upswing could be vulnerable. The US looks perhaps less at risk than a few months ago. Strong Q2 growth means we have upgraded our GDP forecasts this month and there were signs of firming wages in Q2 also. For the Eurozone, there is more cause for concern. Unemployment there remains high, wage growth is anaemic and house prices are still falling in many countries. GDP is likely to have contracted again in a number of key countries in Q2, and we have edged down our growth forecast for 2014 again this month. The Eurozone is also most at risk from other current risk factors, in particular the tensions in Ukraine. But while we now forecast contracting GDP in Russia this year, there have been moderate upgrades this month to our forecasts in China and India. Volume38, Issues8August 2014Pages 1-43 RelatedInformation