World Economic Prospects

Overview: ‘The China Syndrome’We have again cut our world GDP forecast this month, to 2.6%, which means growth will be unchanged from last year. In large part this reflects transitory weak performance in the US in Q1, which has led to our US growth forecast for 2015 being downgraded from 2.7% last month to 2.3%. However, other factors also appear to be behind the weaker global outlook. A particular concern is the slowdown in global manufacturing and the related weakening of investment growth in many countries. Recent months have seen a notable divergence between manufacturing and services indicators in the major economies. The services PMIs for the main economies suggest healthy growth, supported by buoyant asset prices and reasonably favourable labour markets. Meanwhile the global manufacturing PMI his slipped to just 51, indicating very slow growth. This in turn reflects a slowdown in world trade growth. We estimate world trade growth dropped to just 2.4% on the year in Q1 – the slowest pace since Q1 2013 and well below the long‐term average pace of around 5%. This looks to be linked to China. Chinese imports of manufactures dropped steeply in Q1 and this may well be a major factor in the recent marked weakening of capital goods orders in countries such as the US and Germany. China accounts for 10% of world trade and has accounted for 15–20% of world trade growth in recent years. Meanwhile, slower growth in China is also a negative influence on global commodity prices via China's massive shares in marginal demand (50% for oil from 2002–12) – and this is hitting emerging markets. Despite these deflationary trends, global bond yields have backed up in recent weeks with a recovery in world oil prices partly to blame. But the durability of this trend remains open to question – especially if the signs of weakness in global manufacturing start to spread to services as well.