Wednesday, May 27, 2015

Tweaking global growth

With first estimates of March 2015 quarter GDP data for many of the world’s major economies it’s timely to take a fresh look at the outlook for global growth.  The biggest tweaks are as follows:
  1. US GDP barely expanded in the first quarter of 2015 and will likely be revised down to a negative number with the release of the second estimate later this week.  There were many reasons for the weakness with some (weather, port strike) likely to be transitory while others (higher dollar) are likely to be a continued drag on growth.  The surprise was sharp increase in inventories over the quarter which will have a negative impact on activity growth over the next few months.  Inventories appear likely to be revised down in this week’s second estimate but for now it’s prudent to knock my calendar 2015 annual average forecast back from 3.0% to 2.6%.
  2. Recent activity data out of Japan has been mixed.  Our view has been that growth will remain only modest at best though Q1 GDP growth came in stronger than expected.  However, in similar fashion to the US, there was strong inventory investment over the quarter which seems likely to have a negative impact on growth in the period ahead.  Final demand (consumption) will get a small boost over the next couple of quarters but we expect growth to remain modest overall.  Expect growth of 0.8% this year, down from the earlier estimate of 1.0%.
  3. Euro zone GDP growth was a better than expected 0.4% qoq in Q1 although there were some surprises in the mix with Germany weaker than expected while France and Italy came in stronger than expected.  While France and Italy still worry me I’ve “banked” the upside surprise and nudged growth up a bit for Q2 and Q3, largely on the back of improved credit growth.  That is now expected to deliver 1.4% growth this year, up from the earlier estimate of 1.2%.
  4. Russia is still expected to be in deep recession this year.  That said Q1 data was a bit stronger than expected and interest rates have come down a bit more quickly than expected.  The higher oil price will also help take the rough edges off but Russia will continue to struggle while sanctions remain in place.  I’m now picking a recession of -3.5% this year, up from the previous estimate of -4.0%.
  5. I haven’t changed the forecasts for China, India and Brazil but in all three cases risks are biased to the downside.  The trend decline in activity data in China continues and we expect GDP growth of around 6.7% for the year to June but then for policy easing and stabilisation in the property market to provide some upside to growth into year-end.  So I’m sticking with calendar year annual average growth of 6.8% for now.  In India signs aren’t good for the monsoon season so the risk to expected 2015 growth of 8.0% is to the downside.  In Brazil, risks to our forecast of a mild recession of -0.5% are also to the downside given contractionary monetary and fiscal policy.

Adding that all up still gives a picture of modestly higher developed economy growth this year compared with last year while emerging market growth is expected to be lower.  Global growth is expected at 3.3% this year, a fraction lower than the 3.4% achieved in 2014.  Global growth then picks up to 3.8% next year with faster growth in both developed and emerging economies.  The good news for markets is that in every case, central banks are responding appropriately to their own unique set of circumstances.