TalkingEconomics: Forecast update - Strong dollar and cheap oil favour advanced over emerging
We have cut our 2015 global growth expectations and reduced our inflation forecast for the advanced economies. Next year we still see a modest pickup in activity as the world economy responds to lower oil prices, looser fiscal policy and a stabilisation in the emerging economies.
An end to austerity
We have trimmed our global growth forecast to 2.4% for 2015 (previously 2.5%) as a result of modest downgrades to the advanced and emerging markets. Low oil prices will help support developed world consumption but will weigh on emerging markets.
This is because the emerging world has a greater dependence on energy production and government subsidies, for example, make for a less effective pass-through of reduced energy costs to households and business.
For 2016, we expect global growth of 2.9%. In the advanced world, an end to austerity in most of the G20 economies is supportive while signs of stability in Russia and Brazil should result in a better year for the BRICs (although we still forecast a deceleration in China in 2016).
Inflation is expected to remain low in 2015, but downward revisions to advanced economy inflation are offset by upward revisions in the emerging economies.
Currency weakness and a lack of pass-through from lower energy costs account for the disappointing performance in the emerging world. The combination of lower growth and higher inflation means that the outlook for emerging economies has taken a turn in a stagflationary direction.
Fed to move in September
We still expect the US Federal Reserve (Fed) to raise rates in September 2015. We forecast the Fed funds rate to increase to 0.75% by end-2015 and 2% by end-2016 (previously 1% and 2.5% respectively).
We see rates rising at every other meeting to coincide with press conferences, in order to acknowledge the rise in the US dollar and fall in commodity prices - factors which depress the near-term inflation outlook.
We look for the European Central Bank (ECB) to implement quantitative easing (QE) through to September 2016 and leave rates on hold.
For the UK, we now expect the first rate hike in May 2016 as we expect inflation to stay below 1% in the first quarter of next year.
In Japan, the Bank of Japan (BoJ) will keep the threat of more quantitative and qualitative easing (QQE) on the table, but is now likely to let the weaker yen support the economy and refrain from further loosening.
China is expected to cut interest rates and the reserve requirement ratio (RRR) further and pursue other means of stimulating activity in selected sectors.
The balance of risks is still tilted toward a deflationary outcome of weaker growth and inflation with the “China hard landing” seen as the highest probability.
The probability of a reflationary outcome has declined as we have placed less weight on the “Fed behind the curve” scenario: we see delay by the Fed as less likely given recent policy statements.
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