Markets calming but cyclical headwinds strengthening

We expect the global economy to record a moderate expansion in 2016 but the downside risks have increased. 

6th April 2016

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

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Global real estate returns have been recovering for the last six years. Have they now passed their peak? Cynthia Parpa, Director, Research and Analysis, Global, shares her views. Click here to read more.

Global industrial: out of the shed and into the spotlight.

Global industrial and logistics property recorded a great 2015. What are the sector's key themes for 2016 and beyond? Brian Biggs, Research Analyst, Global, shares his insights. Click here to read more.

We are becoming more concerned about the global outlook. While our best guess is that the global economy will record another moderate expansion of around 2.7% p.a. in 2016, the downside risks have increased.

In a worrying sign, the OECD’s leading indicator of economic growth (which leads real GDP by around six to nine months) has continued trending lower in both advanced economies and emerging markets (Chart).  Both indices ended last year below their long-run trend, and recent activity indicators suggest that the pace of growth has remained sub-par in Q1 2016.  One of the major reasons for sluggish global growth is the continued deceleration in emerging markets. Growth in emerging markets slowed to 3.8% p.a. in 2015, led by a weaker China. China’s growth rate is expected to moderate to 6.25% in 2016, from 6.9% in 2015. This slowdown highlights the diminished role of China as a source for global growth. It also reinforces our concern that the single largest immediate threat to the global economy is a hard landing in China. 

While a major slowdown is unlikely, the latest activity indicators have continued to disappoint, suggesting that Chinese policy-makers will need to provide additional stimulus to support growth.

Elsewhere, growth in many OECD countries remains stuck below 2% p.a. While unemployment rates have continued to trend lower, much of the jobs growth since the crisis has been concentrated in low-paid and part-time work. As a result, underemployment remains high and wage growth is restrained for this stage of the cycle, ensuring that inflation remains below target in most advanced economies. Global investment activity also remains conspicuously weak, hamstrung by the uncertain long-term outlook. In this environment, consumer spending remains the main short-term engine for growth, supported by falling energy prices and record low interest rates.

Within advanced economies, the Anglophone economies (UK, US, Canada and Australia) have generally fared better than the Eurozone and Japan. The US is still the main safety net for the world economy, and much depends on how it fares in 2016. Overall, we expect US growth to be positive but underwhelming this year, supported by a cautious Federal Reserve taking a slower approach to tightening. But downside risks facing the US economy have also increased.  In Europe, the ECB has expanded its QE programme and pulled the benchmark rate deeper into negative territory. This, the ECB hopes, will fight off deflation and support the Eurozone’s incipient recovery.  In the UK, campaigning over the EU referendum (to be held 23 June) has now begun in earnest. Uncertainty over the future relationship between the UK and the rest of the EU is starting to appear in asset markets, with sterling weakening significantly. We anticipate more volatility in asset markets and slowing investment ahead of the referendum.

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