World Economic Prospects

Abstract

Overview: Drag from emergers pulls down world growth This month sees another downgrade to our world growth forecasts, to 2.5% for 2015 and 3.0% for 2016, from 2.6% and 3.1% last month. A key factor behind this downgrade is the weak performance of emerging markets. In Q1, we estimate that 17 large emergers cut 0.9 percentage points from annual world trade growth – a phenomenon not seen since the global financial crisis. China accounted for much of this, but imports were also weak in other emergers where lower commodity prices, high debt and structural weaknesses are all contributing to slower growth. Forecasts have been cut in several emerging Asian countries this month. As a result, we now forecast world trade growth at just 1.8% for 2015, a pace usually associated with global recessions. Trade growth is expected to remain below its long‐term average next year too, at 4.4%. Sluggish global demand has contributed to weaker US growth in the early part of 2015, with exports also probably suffering from the strong dollar – Eurozone and Japanese exports have held up better. US growth is still set to improve in H2 helped by a strong labour market, but our forecast for all of 2015 is for growth of just 2.1% (from 2.3% last month). The moderate pace of growth in major economies makes the global upswing more vulnerable to adverse shocks than in previous cycles, as does the increased weight of emergers in world GDP. Despite these risks upward pressure on global bond yields has continued. This reflects several factors including a correction from over‐bought levels – especially in the Eurozone where markets had been pricing in an excessively deflationary scenario. Indeed, Eurozone yields are now not only above pre‐QE levels but are also closing in on the levels seen last August when ECB president Draghi first flagged that QE was coming. This suggests that an ECB policy response is also a downside risks to global yields now, as well as slow world growth.