World Economic Prospects

Overview: Global growth and Fed hike forecasts cut backWe have cut our world growth forecasts this month to 2.5% for 2015 and 2.7% for 2016, from 2.6% and 2.8% respectively last month. For 2016, the forecast was at 3% as recently as June, so that there has been a significant downgrade in next year's outlook over the last few months. Developments in emerging markets (EM) have been central to recent global forecast downgrades. We now expect EM GDP growth of just 3.4% this year, down from 3.7% in June, while the 2016 forecast has slumped to 3.8% from 4.4% in June. This month sees forecasts cut in Brazil, Russia, India and Turkey. The downgrade in EM forecasts is supported by the pattern of incoming data: the Citigroup economic surprise index for emerging markets had shown signs of improvement in August but has slumped back into deeply negative territory. With our 2015 and 2016 forecasts now so close together the prospects for 2016 being a ‘take‐off’ year for the global recovery look meagre. Global GDP growth will be supported next year by improving trends in the US, Europe and Japan. These ‘old world’ markets are also more important for world trade than standard trade data suggest (see World Trade Research Briefing in this issue). But the capacity for these countries to carry world growth is limited by external headwinds. US export volumes fell 1.5% in August and German exports were also weak. Reflecting external drags, we have reduced our US growth estimate to 2.6% in 2016–17 – two tenths below last month. Against this background, we assume only two rate hikes in 2016 after the initial liftoff in December this year. We then assume three hikes in each of 2017–19. This very restrained pace of rate increases in the US is a recognition of the fact that external conditions are set to be unfavourable for a further year: after growth of less than 1% this year, we expect world trade to expand 3.6% next year, still well below its historic average pace of around 5%.