House view Q4 2015
It is becoming a habit. 2015 has been another year of modest growth downgrades across the world. The changes to forecasts have not been dramatic, with the IMF (most recently) reducing their forecast for global growth this year to 3.1% (from 3.3%) and to 3.6% next year (from 3.8%). Moreover, the number itself of between 3% and 4% in both years is perfectly satisfactory by historical standards. The issue is rather that financial markets and commentators keep expecting – or at least hoping – that growth will accelerate back towards trend or above, especially in the developed world. And they keep being disappointed. Despite the lowest level of interest rates ever and enormous doses of unconventional monetary policy medicine, the world economy seems reluctant or unable to respond as it used to. We would argue that the economic patient had been extremely, even critically, ill and that a slow recovery was always on the cards.
The other notable feature of this recovery has been that inflation has remained extremely low – indeed has inched lower still in recent months. The IMF forecasts just 0.3% for 2015 and 1.2% in 2016 in the advanced nations. At the start of the year, these numbers were 1.0% and 1.5% respectively. Although it is almost certain that there is still spare capacity in several countries (and on an overall basis), the major reason that CPI inflation is so close to zero (or below it) is the collapse in oil prices and the related tumbles in food and other commodity prices. If these now stabilise, as seems reasonable, headline rates will rise towards the higher core rates that range between 0.7% and 1.8%. Inflation is undeniably and genuinely low; but a strong case can be made that much is due to recent price level adjustments. We should not be complacent about the deflationary threat, but it does not appear an imminent danger.