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.
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.