Global Economic Growth Looks Uncertain

Progress in Brazil and Russia was previously expected to boost global growth but recent developments in Brazil and the oil price collapse greatly add to 2016 forecast uncertainties

Andy Brunner 21 January, 2016 | 12:18PM
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With recent downward revisions to fourth quarter GDP forecasts in a number of leading economies, 2015 is now set to record the slowest pace of global growth this cycle at 3.1%. Consensus forecasts show an improvement for 2016 but with world output predicted to be only a little stronger at 3.3%.

This suggests another year of fairly sluggish growth, however, with most of the developed countries growing at around trend pace, allied to a broadly similar emerging economies production to 2015.

The moderate improvement from developed markets is projected to come from a further strengthening of the recovery in the euro area and a rebound in Japan led by private sector demand. Both the US are UK are forecast to slow modestly, although latest US survey data from Bloomberg is more positive.

Emerging market growth is generally forecast to edge higher, despite the ongoing slowdown in China. Elsewhere in Asia, India the other major economy, is again expected to grow by around 7.5%, albeit with a volatile quarterly pattern, while nearly all other countries are forecast to advance from 2015’s disappointing levels.

Progress in Brazil and Russia was previously expected to support the improvement but recent developments in Brazil and the oil price collapse greatly add to 2016 forecast uncertainties. The recently published global PMIs again highlighted solid developed country expansions being offset by the ongoing slowdown in some leading emerging markets.

News from Across the Pond

Before commenting on the current year prospects for US GDP growth, of course, the 2015 outturn is not yet known as the Q4 report will not be published until January 29th. Economic data generally softened through the latter part of the year and Q4 forecasts have eased back as a result, to 0.8% according to the Atlanta Fed from nearly 2% just a month ago, while other estimates generally range between 1-1½%.

Negative contributions totalling 1% are expected from net exports and inventories but, perhaps more importantly, both the pace of consumer spending and business investment have eased. Having said that, personal consumption expenditure through the fourth quarter to the end of November, still grew at an annualised rate of 2.2%.

Employment, non-farm payrolls averaged 284,000 in the fourth quarter and income growth – wage and salary growth through November already up 4.1% on the third quarter – have held up well. The first sight of December data hardly helped, however, with much weaker than expected auto sales, while holiday season sales reports were mixed.

The New Year has also opened in the same somewhat disappointing vein with US PMIs from both Markit and ISM generally falling short of expectations. Uncertainty about the global outlook and its impact on the US has led many towards “a wait and see approach to spending decisions”, according to Markit. Additionally, the Chicago PMI indicated another leg down for manufacturers with the index falling 5.8 points to a near recession-like 42.9, the lowest since July 2009, relatively China appears to be booming. This is a highly volatile index, however, and such a weak reading would need to be confirmed.

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Andy Brunner

Andy Brunner  is Head of Investment Strategy, Morningstar UK