Economic & Strategy Viewpoint
This month our economists focus on the inflationary headwind to the global recovery, become cautiously more optimistic on Europe, and explain their more positive view on emerging markets.
World economic recovery faces inflation headwind (page 2)
- The world economy has started 2017 with strong momentum, with business surveys signalling robust growth. We have nudged our forecast higher as a result, but remain sceptical as to whether current strength will be sustained further out. The drivers behind the recovery are set to fade as the inventory cycle turns and rising inflation erodes purchasing power and spending.
- Looking into 2018 the growth forecast is unchanged as upgrades to the BRIC economies, Japan and the UK are offset by a downgrade to the US. The latter reflects a scaling back of fiscal stimulus in the US in light of Republican plans for tax reform and signs that the president will use his political capital to pursue other issues.
- Our scenario analysis shows that the risks around the baseline are slightly more balanced, but are still skewed toward stagflation with rising protectionism the highest probability alternative.
European forecast update: cautiously more optimistic (page 8)
- Despite recent GDP growth figures surprising to the downside, we have revised up eurozone growth in reaction to strong signals from leading private business surveys. The forecast for inflation has also been revised higher, but mostly due to higher oil prices rather than underlying inflation. The European Central Bank is expected to slowly taper its quantitative easing programme over 2018, but it may be too soon for a rise in interest rates.
- The UK forecast has also been revised higher as the economy continues to outperform post-Brexit forecasts. Households are the main source of strength as businesses have cut back investment and hiring as expected. The chancellor will unveil the Budget in March, while Article 50 is expected to be triggered, starting the formal negotiation process for the UK to leave the EU.
EM: Not Trumped yet (page 16)
- We are broadly more positive on the emerging markets outlook, with the US likely to prove more supportive for global growth. Recovery continues in Brazil and Russia, and India seems to have suffered less than the market feared from demonetisation. Chinese policy, meanwhile, looks unlikely to deliver upsets.
Views at a glance (page 22)
- A short summary of our main macro views and where we see the risks to the world economy.
The full Viewpoint is available as a PDF at the link below.