Economic and Strategy Viewpoint

February 2014

In this month's Viewpoint: Global recovery to shrug off bad weather, Europe: Deflation fears to trigger ECB action, BRICs: Central banks must be cruel to be kind and Views at a glance.

28/02/2014

Keith Wade

Keith Wade

Chief Economist & Strategist

Azad Zangana

Azad Zangana

Senior European Economist and Strategist

Craig Botham

Craig Botham

Emerging Markets Economist

Global recovery to shrug off bad weather (page 2)
• Despite the recent wobble in the world economy and a further downgrade to the emerging economies, we continue to forecast a year of recovery in 2014. We attribute much of the recent weakness in US activity to adverse weather, although recognise that there is also an inventory correction weighing on activity. Growth should pick up in the second quarter and we expect the Fed to continue with the taper and actually raise rates in the third quarter of next year. Meanwhile, the ECB and BoJ are expected to ease further to support activity and inflation, whilst the Bank of England remains on hold through the forecast. 
• The risks to our forecasts are still tilted toward deflation although there is an increased probability of a stronger reflationary outcome if animal spirits return to the G7. On the downside, our greatest concern is a hard landing in China emanating from the financial sector. Such an outcome would hit the rest of the emerging markets, particularly the commodity producers. 

Europe: Deflation fears to trigger ECB action (page 6)
• Eurozone GDP growth is recovering as expected with no change to our 2014 and 2015 forecast. German growth has been downgraded due to its export exposure to emerging markets, while better results from the periphery prompt an upgrade. The inflation forecast has been lowered, and should prompt the ECB to cut rates in the near term. Meanwhile, UK inflation has also been downgraded, while growth has been upgraded, although a slowdown in activity is still forecast going forward.

BRICs: Central banks must be cruel to be kind (page 10)
• We have downgraded the growth outlook for the BRICs and EM in the face of tighter monetary policy, and a range of country specific concerns. Central banks are increasingly finding they must be cruel to be kind, and tame inflation even at the cost of lower growth.   

Views at a glance (page 15)
• A short summary of our main macro views and where we see the risks to the world economy.