World Economic Prospects

•  The positive indications for growth in the advanced economies that we noted a month ago have continued to appear during recent weeks. •  In the US, the manufacturing and non‐manufacturing ISM surveys improved sharply in July. Revisions to past data mean our 2013 forecast has been edged down this month to 1.6%, but our 2014 forecast has been raised to 3.1%. •  Eurozone indicators meanwhile point to the region finally moving out of recession in Q2, probably growing by 0.1% on the quarter after six consecutive falls. Especially promising were the strong manufacturing orders data for June in Germany which may point to a revival of investment activity in the region. •  Incoming data for Japan and the UK have also been upbeat, leading to further upward revisions to our growth forecasts for both countries this month. •  The upturn in the advanced economies has occurred despite a weaker picture in the emerging economies – Chinese data remain lacklustre and this month sees further forecast downgrades in Brazil. Rather than world trade growth leading the upturn, improving domestic demand in the advanced economies – including investment – has been the key factor. •  This in large part reflects the impact of fiscal and monetary stimulus. But while recent data are promising, it is far from clear that the advanced economies have reached ‘escape velocity’ and that stimulus can therefore be pared back. •  In our view, it makes sense to err on the side of caution and maintain stimulus until recovery is clearly established. This implies caution on ‘tapering’ asset purchases in the US and some countries (e.g. Japan and some Eurozone states) perhaps reconsidering planned fiscal tightening. Recent ‘forward guidance’ by central banks in the UK and Eurozone, aimed at keeping a loose monetary stance, also makes sense.