World Economic Prospects

Overview: World growth cut as financial woes persistThis month sees our world GDP forecast for 2016 cut to 2.3%, from 2.6% previously. Our new forecast implies this year will be the weakest for the world economy since 2009. Our 2016 growth forecast was over 3% in mid‐2015. But the economic backdrop has worsened markedly since, with steep drops in stock markets, slumping commodities and widening credit spreads. We flagged the risks from the financial market sell‐off last month and conditions have improved little since. Worse, there are some signs that weakness in the real economy may be broadening. This month's global downgrade partly reflects familiar factors such as worsening emerging markets: we now expect even deeper recessions in Brazil and Russia. The US forecast has also been downgraded again, to 2% from 2.4% last month. This in part reflects a soft Q4 GDP reading, one worrying detail of which was a weaker performance by consumer spending. Signs of a slowdown in services were also visible in the PMI surveys for January in the US and Eurozone. Partly as a result, our Eurozone growth forecast has been cut this month to 1.6% from 1.8%. With world industry already stagnant, signs of weakness spreading to services are unwelcome. We are particularly concerned that the financial market slump will create a negative global credit and confidence shock. Another concern is that the collapse in world stock prices is starting to have ‘negative wealth effects’. For most consumers, wealth effects are more likely to be generated by house price moves. In this respect, there is some room for optimism – house prices are still growing in most of the main economies. But housing is weakening in some emerging countries and world house and stock prices have tended to move together since 2007. Pressures on policymakers to act remain strong and are increasingly focused on using negative interest rates – as in Japan and Sweden in the last month.