5th August 2015
The world economy is set to grow at the slowest rate since the crisis a think tank has forecast.
The National Institute of Economic and Social Research has predicted that the global economy will grow by 3% this year – down from the 3.2% it predicted in May – and by 3.5% in 2016.
It says that emerging market economies have slowed, while recoveries remain hesitant in most developed countries.
The NIESR believes growth may be boosted by delayed effects of lower oil prices, as well as by accommodative monetary policy and slower fiscal consolidation, but it argues that considerable risk remains.
It says: “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 think tank says the threat of deflation in the advanced economies, which had been a particular concern in the Euro area, has receded.
Although still below target, 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, it says.
The central banks of the Euro area and Japan have continued their programmes of large-scale asset purchases, or quantitative easing, and they have set benchmark interest rates 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. The NIESR’s forecast assumes one increase in 2015, taking place in September.
It says: “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.”
The think tank has highlighted two key risks to the global economy – Greece and China.
It says: “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.”
On China, it says: “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 %, 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.”
Meanwhile, in the UK, NIESR estimates that the economy will grow by 2.5% this year, and will remain close to this rate throughout the forecast period.
It says the recent increase in unemployment rate will be reversed in coming quarters and CPI inflation will remain below target until end of 2017.
It believes the Bank of England will begin to raise rates in early 2016 and says the key domestic unknown over the next few years remains the future path of productivity growth.