World Economic Prospects

Abstract

Overview: Global revisions to potential growth Our world GDP growth forecasts are unchanged this month at 2.2% for 2016, which would be the lowest since 2009, and 2.6% in 2017. Short‐term activity indicators have been mixed. The global PMI rose to an eight‐month high in September, but growth remains subdued compared with its long‐term average. In addition, other high‐frequency data such as the Citigroup economic surprise indices have been trending down since August. Indicators of international trade continue to show signs of weakness: the volume of world trade fell 1.1% on the year in July and was flat in the seven months to July. That said, the latest data for some countries show a pick‐up in trade volumes in August, particularly in Asia. The recent shift in monetary policy in Japan means that we now see yields on 10‐year Japanese bonds capped at 0% until 2020. We have lowered our forecast for GDP growth in the US in 2017 from 2.3% to 2% given weaker momentum in the private sector, particularly consumption and investment. Activity in the UK continues to surprise to the upside, therefore supporting our above‐consensus call on UK growth (1.9% this year and 1.2% in 2017). But sterling is bearing the brunt of the adjustment, falling to new lows against most major currencies. This has led us to revise our end‐year GBP forecasts to 1.25 to the US$ and 1.12 to the euro (from 1.28 and 1.19 last month). This month we have reviewed our long‐term forecasts. A weaker outlook for capital accumulation and productivity growth means the Eurozone and the UK have seen their potential growth cut by 0.2% a year over the next decade. In Japan, Abe's policies should alleviate the worst of the demographics slowdown, but this still results in potential growth of only 0.4% a year. Lower growth in the Eurozone and the UK has consequences for interest rates as well. We now do not expect the ECB to start raising the refinancing rate until early‐2020, and see it peaking at 2.75% in 2028 (versus 3% in 2025 previously). In the UK, the BoE terminal rate has been cut to 3.5% (from 3.75%). Also, our expected path for 10‐year bond yields has flattened significantly in most Eurozone countries.