Global growth continues to underwhelm

The global economy continues to underperform and risks remain skewed to the downside.

22nd August 2016

Continue to the other two articles in this edition of the Global Outlook...

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The global economy continues to underperform and risks remain skewed to the downside. World real GDP is forecast to grow by a moderate 2.5% p.a. in 2016, marking the fifth consecutive year of sub-3% p.a. in the global economy. The outlook for 2017 has also been revised lower, with the negative impact of Brexit expected to peak over the next twelve months. Overall, we expect Brexit to detract around 0.25-0.5% pts off global growth over the next year, with much of the impact concentrated in the UK and Europe. In the absence of any further financial market dislocation or wider political instability, the impact of Brexit in the US and Asia is expected to be relatively muted.

With global growth continuing to underwhelm, OECD output gaps remain relatively wide for this stage of the cycle (see chart) and inflationary pressures remain quiescent. Central banks globally are continuing to ease policy to stimulate inflation, with the UK, Japan, Australia and New Zealand all easing monetary policy further over the past month. Unsurprisingly, the economic outlook for the UK remains highly uncertain. Most forecasters have lowered their UK GDP growth forecasts; the consensus is for UK growth to slow to around 1.5% in 2016 and 0.7% in 2017. Economic uncertainty is expected to persist for at least two years, which will weigh on business and household confidence, reduce corporate investment and employment growth and slow consumer spending. In addition, tighter lending conditions have increased the risk of a correction in the housing market, particularly in London where affordability is stretched.

In the face of these challenges, the Bank of England delivered a substantial support package in early August, including a 25bp rate cut, an additional £60billion in QE and a new Term Funding Scheme for banks.

The outlook for the Eurozone has also weakened following Brexit. Eurozone exports to the UK are likely to suffer from weaker UK growth and the stronger currency. Further policy support seems likely if the ECB is to fulfil its pledge to ensure price and financial stability.

In Asia, the Japanese government has once again postponed the next scheduled increase in the consumption tax until October 2019 and announced additional fiscal stimulus measures. The new fiscal stimulus package is expected to boost Japanese growth by 0.6% in 2017. Further QE by the Bank of Japan may also be needed if growth continues to falter.

In the US, employment growth has continued to impress in recent months; non-farm payrolls in July increased by 255,000 and the unemployment rate was unchanged at 4.9%. Continued employment gains are now translating into a stronger consumer spending and a sustained recovery in housing activity. Nonetheless, with the US election now approaching we still think a further rise in US rates is unlikely until 2017.

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