Recovery stable despite heightened uncertainty

The world economy appears to be stabilising after a turbulent start to the year. 

19th May 2016

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The global economy remains stuck in low gear, moving forward at a moderate pace but highly vulnerable to setbacks and shocks.  This weak performance is reflected in official forecasts from the IMF being revised between 10 and 20 bps lower (3.2% p.a. in 2016 and 3.5% p.a. in 2017) and central banks keeping interest rates at record lows.

The US remains the leading light in the global economy.  While real GDP growth moderated over the past six months, solid growth is expected over the remainder of the year.  Recent employment data confirm the Federal Reserve’s view that the US job market remains healthy.  Employment gains have averaged around 220,000 per month over the past six months and the unemployment rate stood at 5.0% in April.  Nevertheless, the Fed has shifted the expected pace of tightening down a gear based on concerns over jobs quality, wage growth, and material external risks.  Provided the labour market remains strong, we think the Fed is likely to once again begin cautiously increasing interest rates in coming months.

In China, while there are positive signs of renewed momentum, the level of risk remains elevated. Chinese real GDP growth was 6.7% y-o-y in Q1, slightly above expectations, and recent data suggests an improvement in industrial production activity. These signs of stabilisation suggest that policy stimulus is working.  Nonetheless, there are growing concerns about the health of the financial system.

China’s total debt as a share of GDP is relatively high for emerging markets, with a substantial amount of corporate debt (Chart).  The fear is that these are quasi-government debts, either because they are debts of state-owned enterprises or loans from state-owned banks.  Any high-profile corporate default could have a negative impact on growth and confidence in emerging markets.

In Europe, although the foundations for growth remain fairly firm (helped by low energy prices and continued monetary stimulus), the political risks facing the region remain challenging.  These include the rekindling refugee crisis as the weather warms, the impending referendum on the UK’s EU membership, and fraught negotiations over the terms of Greece’s debt deal (again).  The good news is these risks have yet to hurt economic growth in any substantial way, with real GDP growth in the Eurozone expected to improve to 1.6% in 2016 and 1.8% in 2017.

In the UK, the outlook for growth remains clouded by the impending Brexit vote.  Most recent data suggest that the UK is more likely to remain in the EU than vote to leave, although polls have been narrowing.  Telephone and internet polls estimate current sentiment is about 53%-47% in favour of remaining, while implied probabilities from betting odds stand at around 75%-25% in favour of remaining.

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