Latest global economic forecast

6 May 2015 01:47 PM

NIESR’s global economic forecast

• Following growth of 3.4 per cent each year in 2012–14, the world economy will grow by 3.2 per cent in 2015 and 3.8 per cent in 2016.

• Growth has been slightly weaker than expected so far in 2015 and inflation remains well below target in almost all developed countries.

• But deflation does not appear to be embedded and low oil prices, combined with accommodative monetary policies, should provide a boost to growth in most oil importing countries

Recent data on economic activity have been relatively encouraging in the Euro Area and India, but disappointing in the United States, China and other emerging market economies. Oil prices have turned up but remain significantly below their levels of the previous four years. Inflation in the advanced economies remains below central bank targets, but there has been little sign of further declines in core inflation or of deflation becoming embedded. Market expectations of widening divergences in monetary policy among the advanced economies have resulted in a further widening of bond spreads and in exchange rate movements.

Global growth will be supported in the period ahead by low oil prices; continuing highly accommodative monetary conditions in the advanced economies; and recent exchange rate movements benefiting, in particular, the international competitiveness of the Euro Area. The pace of fiscal consolidation in the advanced economies has slowed. But economic recovery is still weighed down by legacies of the financial crisis, including high unemployment, high levels of private and public debt, weak banking systems, and by other structural problems.

Prospects in the Euro Area have improved; the ECB’s monetary policy, the euro’s depreciation, and lower oil prices are all expected to support demand and activity in the period ahead, while fiscal policies are expected to be broadly neutral, and the risks of deflation have lessened.

Nevertheless, economic conditions remain very weak in much of the Area, with unemployment extremely high and expected to decline only slowly.

Greece has undertaken an extraordinary adjustment since the crisis: between 2009 and 2014, the government’s primary fiscal balance was tightened by 11.7 percentage points of GDP. Output collapsed by 25 per cent and unemployment rose to 27.5 per cent; hence, the debt burden rose. Sustainable economic recovery is impossible without further international financial support and further reform of the economy. If an agreement is not reached in the next few weeks, there is a significant risk of a Greek default and a disorderly exit from the monetary union. Greece accounts for only about 2 per cent of Euro Area GDP, but there would be risks of contagion to the rest of the Area and to the euro itself.

Other financial risks relate to overvaluation in asset markets; market reactions to the expected rise in US short-term interest rates; the financial consequences of recent movements in oil prices and exchange rates; and, in the medium term, global imbalances, which were a major policy concern in the years before the crisis, but have generally narrowed substantially in its aftermath. Further euro depreciation could widen Germany’s already extraordinarily large surplus, while further dollar appreciation could push the US deficit to levels close to those seen before the crisis.

Notes:

The forecast for the world economy is published in the National Institute Economic Review no. 232 May 2015.  Details of NIESR’s previous global economic forecast can be found here.

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. The full report will also be available online on the NIESR website from Wednesday 6 May.

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

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./) at subscription@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.