In this month's Viewpoint: Global growth on track, but downside risks have increased, Rising risk of European deflation, China – Not such a happy New Year and Views at a glance.
25 March 2014
- Recent data suggests that the US economy will rebound in coming months following firmer readings for employment, retail sales and industrial production. Growth indicators for the UK, Eurozone and Japan remain firm, but the emerging markets continue to struggle. Our central view is on track, but our principal concern this month is that downside tail risks have increased.
- Eurozone deflation is one of our risk scenarios and one where the probability is increasing judging from the deflation vulnerability indicator (see chart). We fear that the European Central Bank (ECB) may be repeating the mistakes of the Bank of Japan in the 1990’s when the economy unexpectedly slipped into deflation. Downside risks could be compounded by the crisis in the Ukraine where there is a real threat of higher energy prices. We see the situation evolving into a prolonged stand-off with damaging effects on European business and consumer confidence and a drying up of foreign investment into Russia.
Rising risk of European deflation (page 7)
- Low inflation in the Eurozone is becoming a serious risk that could lead to outright deflation. We have recreated the IMF’s deflation vulnerability index which suggests that risk is now ‘high’ for the Eurozone in aggregate (chart).
- While our central view is that Europe will not experience a Japanese-style episode as recovery continues, we cannot ignore the warning signs that the risk of deflation is escalating. Deflation or even prolonged very low inflation could cause many governments’ balance sheets to become unsustainable. The tail risk is growing, but is the ECB paying attention?
China – Not such a happy New Year (page 13)
- The New Year hasn’t brought much in the way of cheer for China. Activity data points to an economic slowdown on most fronts which could prove challenging to a government trying to rebalance. We don’t expect a credit stimulus but China seems set for accelerated fiscal outlays.
Views at a glance (page 17 )
- A short summary of our macro views and the risks to the world economy.
Important Information: The views and opinions contained herein are those of the author(s) on this page, 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. To the extent that you are in North America, this content is issued by Schroder Investment Management North America Inc., an indirect wholly owned subsidiary of Schroders plc and SEC registered adviser providing asset management products and services to clients in the US and Canada. For all other users, this content is issued by Schroder Investment Management Limited, 31 Gresham Street, London, EC2V 7QA. Registered No. 1893220 England. Authorised and regulated by the Financial Conduct Authority.