World Economic Prospects

Overview: Growth differentials to remain wide?Incoming information over the past month points to a still‐uneven global recovery, with considerable growth differentials across the world's largest economies. On the positive side, US survey data has been upbeat and consumer credit also seems to be picking up. We continue to expect the US economy to reach 3% annualised growth next year. US 2‐year yields have crept up over the last month reflecting the growth outlook and associated upside risks to interest rates. By contrast, the Eurozone recovery has again shown signs of faltering. GDP was flat in Q2 and evidence for Q3 shows only limited signs of improvement. With long‐term inflation expectations having also drifted lower the ECB surprised markets at the start of this month with a further cut in interest rates and plans to purchase asset‐backed securities (see special focus). ECB moves in recent months have now contributed to a significant decline in the euro – down 7% against the dollar since early May. This should help growth, but we have still edged down our GDP forecasts this month to 0.8% for 2014 and 1.5% for 2015. The Eurozone is still lagging the other advanced economies in terms of loosening credit constraints. Although the latest credit standards survey by the ECB showed a small net loosening this was the first (for firms) since 2007 – US and UK corporate credit standards have been loosening since 2012. Credit standards surveys also point to the risk of continued disappointment on emerging market growth. While advanced economy banks have mostly been loosening credit since 2012, emerging market banks have been tightening – especially in Asia. This may reflect a ‘hangover’ from the credit booms seen just after the global financial crisis. Our forecasts for the main emergers now look very mixed with a number of key countries – Brazil, Russia and Turkey – either in or flirting with recession. With China also growing much more slowly than a few years ago we expect emerging market GDP to rise by just 4.1% this year, the weakest year since 2002, with only a modest uptick to 4.5% next year. Global GDP growth is forecast at 2.6% in 2014 and 3% in 2015.