Talking Economics: Global growth down again, but inflation pressures build
Schroders economists cut their global growth forecasts for 2015, while reflecting on concerns surrounding the Federal Reserve interest rate policy and how it might impact global investment.
17 June 2015
Global growth cut
We have cut our 2015 global growth forecast to 2.5% from 2.8%.
Lower growth has not led us to lower our inflation projections as oil prices have firmed and we see inflationary pressures building in the US where interest rates are expected to rise in September.
Elsewhere though monetary policy is set to remain loose, or ease further in the case of China.
Our updated scenario analysis reveals continued concerns about deflation, but an increasing focus on the risks around Federal Reserve (Fed) policy.
We have cut our 2015 forecast for global growth from 2.8% to 2.5%, primarily as a result of a downgrade to the US where the economy stalled in the first quarter.
We now expect growth of 2.4% in the US (3.2% previously). We have also downgraded Japan and the UK following a weaker-than-expected start to the year.
We have marginally upgraded the eurozone forecast whilst that for the emerging markets is little changed.
For 2016, global growth is forecast to pick up slightly to 2.9% led by better performance in the emerging markets and further recovery in the eurozone and Japan.
Inflation steady but low
Global inflation is expected to remain low in 2015 at 2.8%.
We still expect the Fed to raise rates this year and forecast the Fed funds rate to be 1% by end-2015 and then peak at 2.5% in 2016, in response to rising inflation that we expect to come about as a result of stabilising oil prices and an ageing economic cycle.
Elsewhere, we believe the Bank of Japan will keep the threat of more quantitative and qualitative easing on the table, but will let a weaker yen support the economy and refrain from further loosening.
Meanwhile, deflation concerns in the eurozone are likely to ease as the depressing effect of lower oil prices drops out of the index in combination with the weaker euro.
We expect the European Central Bank (ECB) to implement quantitative easing through to September 2016 and leave rates on hold, whilst for the UK, we now expect the first rate hike in February 2016.
China is expected to cut interest rates and the reserve requirement ratio further, and pursue other means of stimulating activity in selected sectors.
Scenarios: Fed tightening concerns
There are two new scenarios this quarter which reflect widespread concerns about Fed policy tightening.
"Fed behind the curve", sees the Fed leaving rates on hold until September 2016; then reacting more aggressively in response to higher inflation.
While this is reflationary in the short-term, growth will start to slow in response to tighter policy but inflation will react with a lag, so stagflation is the ultimate consequence of this scenario. The second new scenario,
"Tightening tantrum", sees global bond markets sell off as tightening begins in September, capital flows back into the US and the dollar strengthens.
In terms of the balance of risks, the scenarios are still tilted toward deflation with four ("Secular stagnation", "China hard landing", "Eurozone deflationary spiral" and "Tightening tantrum") producing weaker growth and lower inflation than in the baseline.
The combined probability of a deflationary outcome is now 20%, higher than last quarter.
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