The world economy is slowing and inflation is troublingly low. Meanwhile, central banks everywhere have are doing everything they can from a policy standpoint to keep things humming.
Morgan Stanley’s global economics research team summarises its view of the world economy in its just-published 35-page spring edition of its Global Macro Outlook report.
“With global growth showing renewed signs of a slowdown, the key macro debate is shifting (back) towards the trajectory of global growth and whether policy-makers will be able to deal effectively with the damaging inflation undershoot,” the economists wrote.
The developed markets (DM) and emerging markets (EM) are experiencing different things in terms of growth and inflation, and they’re policymakers are taking differing actions. Here’s Morgan Stanley’s summary of its views (verbatim):
Growth: Re-acceleration, led by DM: Taking on board a weaker 1Q15, we lower our 2015 global growth forecast from 3.5% to 3.4%. We expect growth to reaccelerate from 2Q15, as temporary disruptions in the US fade and as monetary easing and structural reforms in Europe and Japan begin to impact the real economy. We remain cautious on the outlook for EM as many economies deal with the structural challenges in transitioning to new, sustainable growth models and hence remain in the adjustment phase for a while longer.
Inflation: The turn of the global inflation cycle: DM headline deflation is proving transitory. Underlying inflation, notably via GDP deflators and wage increases, has remained robust in DM despite falling headline inflation. Hence, we expect DM headline inflation — the driver of global inflation — to move from ‘noflation’ towards central bank target ranges over the remainder of the forecast horizon. EM shows differentiated inflation trends. Commodity importers are stuck in lowflation, while commodity exporters struggle with adverse highflation.
Central banks: Patience and printing in DM, easing in EM and euro area fringe: Central banks are fighting lowflation head on. The ECB, the PBOC and 15 other central banks have eased monetary policy since the start of the year. Looking ahead, we expect the ECB and the BoJ to execute their ambitious QE programmes. The Fed and the BoE should be patient before tightening in late 2015 and early 2016, but a host of central banks in EM and at the fringes of the euro area will likely ease policy further.
The analysts briefly sum up their risks as well.
Key risks: Rising US rates, EU political backlash, China property: The key risk to the baseline stems from an earlier-than-expected rise in US interest rates, a surge in US bond yields and a stronger USD. Such moves could derail vulnerable EM economies. Global risk appetite could also be dented by: i) A political backlash in Europe, where exits from E(M)U cannot be ruled out; ii) A material correction in China’s property market; and iii) More generally, a loss of reform momentum across EM. Finally, DM wage growth and consumer spending might fail to accelerate despite strong labour markets due to structural shifts in labour relations.
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