Forecast update: Global tilt toward advanced economies
An acceleration in the advanced economies is offset by weaker growth in the emerging markets to leave our global growth forecast at 2.8% in 2015.Inflation in the advanced world is expected to record its lowest rate for five years in 2015, but picks up in 2016 as the impact of lower energy prices fades. We do not expect sustained deflation in the eurozone or in the wider global economy.
11 March 2015
An increase in our growth projection for the advanced economies is offset by a cut to the emerging markets’ outlook to leave our global forecast at 2.8% year on year (y/y) for 2015. The former are expected to pick up to 2.2% y/y this year (up 0.5% on 2014), with US growth expected to reach 3.2% y/y (previously 2.8%), the best performance since 2005. We have raised our forecasts for the eurozone and Japan by just under 0.5% for 2015 to 1.3% and 1.6% y/y respectively. However, emerging markets growth is expected to slow to 3.7% from 4.2%.
For 2016, US growth is expected to moderate as the boost from oil fades and higher interest rates and a stronger dollar begin to weigh on growth. However, the overall global growth forecast ticks up to 3% next year on further improvement in Europe and Japan as well as continued strength from India.
Low inflation keeps monetary policy loose
Our inflation forecasts have been cut in response to lower-than-expected outturns recently and further falls in energy prices. Global inflation is expected at 2.5% for 2015 (2.8% in 2014). The decline would have been greater but for a pickup in emerging market inflation from 5.1% to 5.9% (largely driven by an expected surge in Russian inflation). We expect a significant reduction for the advanced economies to 0.5% from 1.4%. Importantly, we see inflation picking up again in 2016, dispelling deflation fears, as the effect of lower oil prices fades.
In the meantime, low inflation can keep monetary policy on hold or loose. The exception, in our view, is still the US. The Federal Reserve (Fed) is still expected to look through the fall in headline inflation (a measure of the total amount of inflation in the economy which includes volatile components such food and energy prices) and focus the combination of a stable core rate of inflation (which excludes food and energy prices) and tightening labour market so as to raise rates in 2015. We expect the Fed funds rate to rise to 1.25% by end 2015 and then peak at 2.5% in 2016.
Scenarios: Still leaning towards deflation
We have refreshed our scenario analysis. Although the balance of risk still tilts toward deflation, the probability of that outcome is lower at 15%. We have removed "JPY collapses" (better growth means less pressure on the Bank of Japan to keep printing money), "capacity limits bite" (seems distant from a global perspective) and "productivity recovers" (US data suggests otherwise). In come "oil lower for longer" (oil price falls to, and stays at, $30 per barrel), "secular stagnation" (global activity grinds structurally lower) and "eurozone abandons austerity" (to head off a political backlash). The "eurozone deflation" scenario has become a more severe "eurozone deflationary spiral" (where the economy falls into a major slump from which it is hard to escape). Despite the recent ceasefire, the "Russian rumble" (where conflict in the Ukraine culminates in the cut off of energy supplies to Europe) remains one of the greater individual risks.
- Schroders Economics Team
- Monetary Policy
Important Information: The views and opinions contained herein are those of Schroders’ Investment team, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. This material is intended to be for information purposes only and is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. It is not intended to provide and should not be relied on for accounting, legal or tax advice, or investment recommendations. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. Past performance is not a reliable indicator of future results. The value of an investment can go down as well as up and is not guaranteed. All investments involve risks including the risk of possible loss of principal. Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy. Some information quoted was obtained from external sources we consider to be reliable. No responsibility can be accepted for errors of fact obtained from third parties, and this data may change with market conditions. This does not exclude any duty or liability that Schroders has to its customers under any regulatory system. Regions/ sectors shown for illustrative purposes only and should not be viewed as a recommendation to buy/sell. The opinions in this material include some forecasted views. We believe we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know. However, there is no guarantee than any forecasts or opinions will be realised. These views and opinions may change. UK: Schroder Investment Management Limited, 31 Gresham Street, London, EC2V 7QA, is authorised and regulated by the Financial Conduct Authority. For your security, communications may be taped or monitored. Further information about Schroders can be found at www.schroders.com US: Schroder Investment Management North America Inc. is an indirect wholly owned subsidiary of Schroders plc, a SEC registered investment adviser and is registered in Canada in the capacity of Portfolio Manager with the Securities Commission in Alberta, British Columbia, Manitoba, Nova Scotia, Ontario, Quebec and Saskatchewan providing asset management products and services to clients in Canada. 875 Third Avenue, New York, NY, 10022, (212) 641-3800. www.schroders.com/us