WIREDGOV

NIESR’s global economic forecast

• Following growth of 3.4 per cent in 2014, the world economy will grow by 3.3 per cent in 2015 and 3.6 per cent in 2016.
• Growth was weaker than expected in late 2014 and inflation has fallen further below target in almost all developed countries;
• But a sustained lower oil price, if it does not exacerbate the threat of deflation, should provide a boost to growth in countries that are net oil importers and for the global economy.

Growth in the second half of 2014 has generally been weaker than expected, with the exception of the United States. Inflation in many cases has fallen further below central banks’ targets. These developments have led to additional policy actions in several economies to ease monetary conditions, including a welcome – indeed overdue – major expansion of asset purchases by the European Central Bank. There have been further marked declines in government bond yields, to record lows in some cases, and a significant general appreciation of the US dollar against other major currencies. A notable exception to this is Switzerland, where the Swiss National Bank removed the franc’s cap against the euro, resulting in a sharp appreciation.

Oil prices have declined by more than a half (in US dollar terms) since June 2014. Oil exporting countries will suffer and some could face financial stress, yet the impact should be beneficial for the world as a whole, spreading the benefits of increased supply and mitigating the effects of weaker demand. However, this will depend partly on the extent to which it has a prolonged downward effect on inflation. The priority for central banks in most advanced economies should be to ensure that the price decline does not exacerbate the problem of below-target inflation, with the associated threat of deflation. In some cases, this may mean further reductions in official interest rates; in others, in particular the Euro Area, there may be a need to strengthen unconventional measures.

The election in Greece has once again highlighted political risks. It would be sensible for Euro Area policymakers to recognise that some loosening of fiscal policy in Greece is imperative, economically as well as politically. Also, further restructuring of Greece’s debt is required, although this could be done by reducing its net present value (for example, by extending maturities) without reducing its face value. The new Greek government will need to make a credible commitment to fundamental reforms of the Greek state.

Continuing tepid expansion in the advanced economies in spite of the fall in oil prices, combined with substantial economic slack and low and declining rates of inflation, points to the continuing importance of promoting growth by boosting demand. Structural reforms that boost demand as well as supply can play an important role. These include: reforms that remove impediments to investment, business formation, and job creation and reforms that promote investment by raising expectations of future growth. At the same time, there is substantial potential for increased government investment, financed by borrowing, to boost both demand and potential output in many if not most advanced economies.

Notes:

The forecast for the world economy is published in the National Institute Economic Review no. 231 February 2015.  

For a full copy of the global economic forecast or to arrange interviews, please contact the NIESR Press Office: Brooke Hollingshead on +44 (0) 20 7654 1923/ B.Hollingshead@niesr.ac.uk

To discuss the forecast or for interviews, please contact:

Simon Kirby on +44 (0) 20 7654 1916 / s.kirby@niesr.ac.uk or
Jonathan Portes on +44 (0) 7766 441148 / j.portes@niesr.ac.uk or
Iana Liadze on +44 (0) 20 7654 1904 / i.liadze@niesr.ac.uk

Details of NIESR’s previous global economic forecast can be found here.

The National Institute Economic Review is the quarterly journal of the National Institute of Economic and Social Research (NIESR). Published in February, May, August and November, it is available from Sage Publications Ltd (http://ner.sagepub.com./) atsubscription@sagepub.co.uk.

Further details of NIESR’s activities can be seen on http://www.niesr.ac.uk or by contactingenquires@niesr.ac.uk or the Switchboard on +44 (0) 20 7222 7665.

For further information:

National Institute of Economic and Social Research
2 Dean Trench Street
Smith Square
London, SW1P 3HE