World Economic Prospects

Overview: World forecasts slip as US disappointsOur world growth forecast for 2016 has edged down to 2.2% this month, from 2.3% in April, but growth is still seen at 2.7% in 2017. The most notable downgrade this month is in the US, where GDP is now expected to rise only 1.8% this year versus 2% last month. US growth has disappointed in early‐2016, with consumer spending less robust and a significant drag from net trade. We have also lowered our US rate hike forecast; the Fed funds rate is now seen at 2% at end‐2018, down from 2.5%. As a result, our near‐term path for the dollar has also been weakened. A weaker dollar and consequently stronger yen is the main factor behind this month's cut in our GDP forecast for Japan to just 0.1%. We also now expect Japan's consumption tax hike to be delayed from 2017 to 2019. The euro has also gained but the Eurozone looks quite resilient; growth hit a one‐year high of 0.6% on the quarter in Q1. But overall G7 growth for 2016 is now seen at just 1.4%, down from 1.7% last year. Growth in the advanced economies remains much less dynamic than before the global financial crisis. US growth in 2010–17 is expected to average only around 2% per year, with growth in the Eurozone and Japan at around 1%. With emerging market growth also slower, world growth appears mired at modest rates of 2–2.5% per year. This moderate baseline heightens the risk that economic, financial or political shocks could push the world towards recession. Financial conditions overall have improved since January/February but a number of indicators are still at risky levels. In particular, US high‐yield corporate spreads are wide and US banks' corporate credit standards tightened for a third straight quarter in Q2. Risks to our forecasts remain skewed to the downside. While we continue to believe recession will be avoided there is a considerable danger that world growth will drop further, towards the sub‐2% annualised pace seen in late 2012.