WIREDGOV

NIESR’s global economic forecast

National Institute Economic Review No. 233 August 2015

• The world economy will grow by 3 per cent in 2015 – the slowest rate since the crisis – and 3.5 per cent in 2016.

• Emerging market economies have slowed, while recoveries remain hesitant in most developed countries.

• Growth may be boosted by delayed effects of lower oil prices, as well as by accommodative monetary policy and slower fiscal consolidation, but considerable risk remains.

• We still expect the US Federal Reserve to lead the turn in official policy rates in September, with the Bank of England following in February 2016.

We have downgraded our growth forecasts for North America and a number of emerging market economies in Asia and Latin America. While the Greek crisis has been the main preoccupation of eurozone policymakers, our growth forecast for the Euro Area has been lowered only slightly.

The threat of deflation in the advanced economies, which had been a particular concern in the Euro Area, has receded. Although still below central banks’ objectives, headline inflation in most major advanced economies has risen to positive levels, and it is expected to rise further in the coming months, assuming no further significant decline in oil prices.

The central banks of the Euro Area and Japan have continued their programmes of large-scale asset purchases, with their benchmark short-term interest rates set at or below zero. In the United States, Federal Reserve officials have indicated that the first increase in the target federal funds rate is likely before the end of 2015. Our forecast assumes one increase in 2015, taking place in September.

In financial markets, the most significant development since April has been a general rise in government bond yields across the advanced economies, most markedly in the Euro Area. Possible explanations include upward revisions in expectations for growth and inflation, and the correction of earlier overshoots on the downside.

In addition to the risks discussed in previous Reviews, this Review highlights two key risks, both to the short and medium term.

First, Greece. Our forecast assumes that the new programme will return the Greek economy to a path of moderate recovery and that the Euro Area will remain intact. However, this benign scenario relies on our assumption that large-sale debt relief will be forthcoming. More fundamentally, the Greek crisis has highlighted shortcomings of the Euro Area’s institutional arrangements, and revived doubts about whether Europe’s monetary union can succeed without deeper economic, fiscal, and political integration than is currently envisaged.

Second, China. Our forecast assumes a continuing, gradual slowing of growth as the economy makes a transition from a high-growth path to more moderate growth driven by consumption. Some recent developments have increased risks to this strategy. Consumer price inflation has slowed to 1.4 per cent, producer prices have been falling for more than three years; and the GDP deflator also fell in the first quarter. The authorities’ recent interventions in the equity market may not only discourage participation in the market, but also reduce confidence, more broadly, in the government’s market-oriented reform strategy.

Notes:

The forecast for the world economy is published in the National Institute Economic Review no. 233 August 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) 207 654 1923/ B.Hollingshead@niesr.ac.uk

To discuss the forecast or for interviews, please contact:

Simon Kirby on +44 (0) 207 654 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) 207 654 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./) atsubscription@sagepub.co.uk.

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