World Economic Prospects

Abstract

Overview: The ECB acts…but growth forecasts edge down At the start of June the ECB announced a package of measures aimed at easing monetary conditions in the Eurozone – including negative interest rates on banks' excess reserves, a cut in the repo rate and new long‐term refinancing facilities. These moves were overdue in our view, with inflation hovering at just 0.5% and key countries such as France and Italy seeing zero or negative GDP growth in Q1. The overall pattern of ‘surprises’ in Eurozone economic data has become heavily skewed to the negative over recent weeks and we have modestly revised down our forecast for Eurozone GDP growth in 2014, from 1.2% to 1.1%. We have also cut growth forecasts for this year in the US and Japan. The reduction in US growth from 2.4% to 2.1% is mainly the result of GDP contracting in Q1, a development we continue to view as largely erratic. We expect a strong rebound in quarterly growth in the rest of 2014, helped by household consumption; this is supported by the latest payroll figures which again showed over 200,000 new jobs added in May. In Japan by contrast we think downside risks to consumer spending have risen; the first evidence of activity after the rise in the consumption tax on 1 April has started to come through and looks disappointing. The Bank of Japan is likely to delay any further monetary easing until late summer at the earliest, so we now see GDP growth at just 1.1% in 2014 and 2015 versus 1.3% in both years last time. Among the emergers, forecasts are relatively stable this month, barring a further cut in India after weak Q1 performance. But world GDP growth is now forecast at 2.7% for 2014 and 3.1% next, with these forecasts having edged lower since the start of the year. Sluggish world trade growth is a factor constraining the global recovery, with our forecast for world trade growth this year having fallen from 4.7% in February to 4% now. There have, however, been some positive signs in the latest indicators – including in Asia – supporting our view that trade growth will strengthen in the next 18 months.