World Economic Prospects

Overview: Greece and China threaten world growthTwo significant threats loom over our already‐cautious world growth forecasts for 2015 and 2016: a Greek exit from the Eurozone and the slowdown in China. Although the basis of a deal between Greece and its creditors appears to be in place, we still view Greece's future in the euro as being on a knife‐edge given the onerous terms of the outline deal and various political obstacles. Any deal could quickly unravel, bringing back the threat of ‘Grexit’. Even in the event that a deal does stick, we expect world GDP growth of just 2.6% this year – slightly down from 2014 – and 3% next. If Grexit does occur, our modelling work suggests the extent of the negative impact would hang mostly on the degree of contagion to other countries. In a ‘limited contagion’ scenario with a relatively smooth Grexit, world growth would be just 0.2 pp lower in 2016 at 2.8% versus 3% in the baseline. In a ‘high contagion’ scenario with elevated financial stress in other Eurozone states, Eurozone GDP would contract in 2016 and world growth would decline to just 2.0%. Meanwhile, a sharp sell‐off in Chinese equities has increased concerns about financial stability and growth there. Equity ownership is still modest in China but is not negligible, and with the rally before the crash having been so debt‐fueled there are real risks to consumer and business confidence. The Chinese authorities have taken increasingly heavy‐handed actions over recent days to stabilise shares, with the result that the normal functioning of the market has been severely impaired. This raises serious questions about the reform process in China. Concerns over Greece and China have contributed to a rise in financial market risk measures and a decline in commodity prices in recent weeks, both of which are likely to further damage already sluggish emerging market growth. Overall, the risk of significant nearterm downgrades to our global forecasts has risen appreciably over the last month.