World Economic Prospects

•  Growth trends in the advanced economies remain encouraging overall. Monthly indicators such as the PMI surveys have remained robust, with the US nonmanufacturing PMI hitting an eight‐year high in August. This month sees modest forecast upgrades for the Eurozone, Japan and the UK. •  The improved growth outlook has, however, been accompanied by a further significant rise in bond yields, with US 10‐year yields approaching 3% for the first time since 2011 – up by 1.2% points since April. •  This surge in bond yields, linked to expectations of impending ‘tapering’ by the Fed (which we expect to be announced this month) has come despite attempts at ‘forward guidance’ by major central banks – US futures markets now see a first Fed hike by end‐2014 and hikes of over 1% by end‐2015. This contrasts with our forecast which sees only one rise by end‐2015. •  Could this rise in yields threaten the global recovery? There must be some risk, given the high levels of debt in some advanced economies. Notably, the sharp rise in bond yields from October 2010 to February 2011 was followed by weaker economic growth. •  On the other hand, the similar rise in yields seen in 2009 did not seem to derail growth then, and some economies (e.g. the US and UK) have made progress in deleveraging since then which may make them less vulnerable – although the Eurozone has not. •  Another negative outcome linked to rising advanced economy bond yields is the sharp drop in emerging currencies. This has forced some emergers into raising rates despite slowing economic growth. This month sees significant forecast downgrades in India and Russia – though China is looking more promising. •  The potential risks from weaker emerging economies and higher borrowing costs at home suggest that a cautious approach to policy tightening still makes sense for policymakers in the advanced economies.